ITEM 1. BUSINESS
Private Securities Litigation Reform Act Safe Harbor Statement
When used in this Annual Report on Form 10-K and in other public statements by the Company and Company officers, the words "expect," "estimate", "project", "intend" and similar expressions are intended to identify forward-looking statements regarding events and financial trends which may affect the Company's future operating results and financial condition. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial condition to differ materially. Such factors include, among others: (i) the intense competition and the bidding process in which the Company competes, (ii) the risk that management will not be able to sell the assets identified in its business plan with the time frame required or for the amounts estimated, (iii) that the Company will have sufficient capital to fund operations in the time necessary to effect such sales, (iv) the Company's ability to obtain financing on satisfactory terms for its projects and the degree to which the Company is leveraged, (v) the timing of completion of projects, (vi) factors associated with the strength of the dollar compared to the currencies in the countries in which the Company operates, (vii) the sensitivity of the Company's business to general economic/environmental conditions, (viii) changes in accounting principles, policies, or guidelines, and (ix) other economic, competitive, governmental and technological factors affecting the Company's operations, markets, projects, products and prices. Additional factors are described in this Annual Report on Form 10-K and in the Company's other public reports filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
INTRODUCTION
The New World Power Corporation (the "Company") produces and sells electric power generated from renewable resources, including wind, sun and water, and develops renewable power generating projects. The Company also assembles and sells renewable power generating systems, including stand-alone systems for individuals, villages, and industrial and scientific applications.
The Company's operations are conducted through subsidiaries which are organized into four segments: grid power production, grid power services, wireless power sales and other products and services. The grid power production division develops, owns and operates wind farms and hydroelectric facilities which produce electricity (kilowatt hours) for sale to electric utilities. Several of the Company's wind projects were sold in early 1997. The grid power services division was discontinued and sold during 1995. The wireless power division assembles, distributes and sells integrated renewable power generating systems for commercial and industrial use where no service from an electric utility is available or in areas where purchasing electricity is not economical. In addition, the wireless power division includes village power which develops, owns and operates integrated renewable power generating systems which produce kilowatt hours for sale to small, electric utilities which are generally diesel-powered and removed from the main grid. A majority of the Company's wireless division was sold during 1996. The other products and services division manufactures and develops wind turbines and related products. Supplementary industry segment information may be found in the notes and schedules to the Company's Consolidated Financial Statements.
Due to cash used in operating and investing activities as well as unforeseen delays in two of its major projects (China and Texas), in late 1995, the Company experienced severe liquidity and cash flow problems. This necessitated, in early 1996, a revision of the business plan for the Company calling for certain core and non-core asset sales, significant overhead and other cost reductions, and a restructuring of the Company's secured debt with its two principal lenders after events of default.
In the first quarter of 1996, the Board of Directors thoroughly evaluated the Company's business, projects and personnel to refocus the Company in areas which would solve short and long term liquidity problems and optimize economic return. As a result of this evaluation, significant changes where made in terms of project priority. In concert with its revised business plan, and to further alleviate cash flow pressure, the Company substantially reduced administrative and overhead expenses through downsizing of its corporate staff and international offices to bare minimums necessary to sustain project operations and development.
The Company has proceeded with its primary course of action of asset sales with full cooperation of the principal lenders and as per its covenants under the restructured loan agreements with said principal secured lenders. Short-term capital needs to fund the Company's operations during 1996, were made available from an escrow account held by one of the principal lenders. The Company marketed units that were developed and operating to pay down the restructured debt and provide capital to fund new development activities. The Company, in 1996, sold its wireless assets, in a less than favorable market environment given the time constraints put on those sales by the secured lenders.
In early 1997, the Company sold two of its windfarms in the United Kingdom and its investment in an Irish windfarm. Proceeds from those sales were used to payoff one of the Company's secured lenders while paying down a portion of the indebtedness to the other secured lender.
Nonetheless, the financial statements for December 31, 1996 have been prepared assuming that the Company will continue as a going concern. However, the uncertainty associated with the above events raises substantial doubts about the Company's abilities to continue as a going concern.
For a discussion of the development of the Company see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."
GRID POWER PRODUCTION DIVISION
Power Production
The following tables set forth the projects, greater than 1 MW in generating capacity, acquired or developed by the Company and currently in operation, those under construction, those in development, and the status of the project as of the filing of this report. Projects in operation are those where construction and financing have been completed and are operational. The Company has sold some of these projects during 1996 and early 1997. Projects in development are those in which the Company has a letter of intent or other firm understanding with the site owner or the joint venture partners, or has been awarded a bid and is in the process of negotiating the basic contracts.
The Company generally develops new generating capacity only when it has a commitment from a specific power purchaser, and, therefore, the capacity of each project is usually committed only to a specified power purchaser. Completion of projects under construction, any pending acquisition or project in development is subject to the Company's obtaining suitable financing. There can be no assurance that such financing will be obtained or that the Company will be able to fund any project development activities in 1997.
- -------------------- * The "approximate capacity" of projects in development reflects the estimated total capacity of the sites which is capable of being completed within the next four years.
Projects in Operation
General. At any point during the fiscal year, the Company owned or leased the following renewable energy generating facilities. As noted above, certain of these projects were sold in 1996 or are held for sale in 1997. Each facility is located on a site which is owned or leased on a long-term basis by a project subsidiary. The facilities produce electricity which is sold to utilities and other power consumers under long-term power sales contracts.
U.S. Facilities
Painted Hills Wind Farm. The Company's eight wind turbines aggregating approximately 1.0 megawatt ("MW") of capacity at the Painted Hills Wind Farm in the San Gorgonio Pass near Palm Springs, California were all sold in February 1996.
Los Vaqueros Wind Farm. The Company owns and operates 38 wind turbines and the related electrical infrastructure and leases 101 acres at its Los Vaqueros Wind Farm in the Altamont Pass in California. The Los Vaqueros windfarm was sold in August 1996.
Wolverine Hydroelectric Facilities. The Company owns four hydroelectric facilities on the Tittabawassee River near Midland, Michigan. The facilities were constructed between 1923 and 1925. One of the facilities was substantially rebuilt in 1945. The others contain original turbine-generators and power plant equipment. The facilities have a combined generating capacity of approximately 10.5 MW. The power is sold to Consumers Power Company ("Consumers") pursuant to a power purchase agreement which expires in May 2013, but provides for renegotiation of the energy and capacity prices every ten years commencing in 1996. The Company's current ten-year moving average hydroelectric production rate for these facilities is approximately 37.7 million kilowatt hours ("kW") per year. License applications for the facilities are currently pending before the Federal Energy Regulatory Commission (the "FERC"), and the Company does not know when the licenses will be granted. Although it is not possible to predict what conditions will be imposed by the FERC, the Company believes that the FERC will require a change in the method of operation within the next three to five years so as to release a minimum daily flow of water.
Altamont Wind Farm. The Company is currently holding for sale the Wind Farm of approximately 250 first generation wind turbines at the Altamont Wind Farm due to low avoided cost tariffs in the PG&E territory. The Company operated the site in 1996 to mitigate some of the fixed costs at the wind farm. The power generated by these turbines is sold to PG&E pursuant to the Company's Standard Offer No. 1 ("SO1") Contract pursuant to which PG&E is obligated to purchase annually 150 MW of electricity. The SO1 Contracts provide for a price which is based upon the utility's short-term avoided cost of energy and the avoided capital cost (the cost of generating equipment). The Company had plans to retrofit the site as soon as the rate based on avoided cost of energy increased.
Makani Uwila Wind Farm. The Company owned through December 31, 1996 the Makani Uwila Wind Farm located at Kahuku on the north shore of Oahu in Hawaii. The wind farm has a capacity of approximately 8.0 MW. The electricity from this wind farm was sold to The Hawaiian Electric Company, Inc. ("HECO") pursuant to an existing power purchase contract. The Company was negotiating an amendment to its power purchase contract with HECO. Soon after the negotiations had commenced, the Company's cash flow shortages as well as other external factors, resulted in the Wind Farm being offered for sale. In January 1997, the land owner, Campbell Estates, foreclosed on the property and put the site up for bid.
San Jacinto Wind Farm. The Company owns an approximately 50% interest in San Jacinto Power Company, Inc. ("San Jacinto Power"), a joint venture between the Company and Nevada Energy Company, Inc. The 50% interest is for sale.
U.K. Facilities
The following three wind farms represent the entire portfolio of sites located in the United Kingdom. All three projects were offered for sale throughout 1996. The Company received two bonafide offers and elected to sell two of the facilities to a U. K. based wind farm developer RES, Ltd. Due to mechanical problems associated with the Caton Moor facility, RES final offer was for Dyffryn Brodyn and Four Burrows only. The Company elected to accept the RES offer and retain ownership of Caton Moor. All debt on Caton Moor was fully paid and the Company continues owning 100% of Caton Moor.
Dyffryn Brodyn Wind Farm. The Company owned and operated a 5.6 MW wind farm on a 166 acre site near Whitland, Dyfed, Wales throughout 1996 and into early 1997 when it was sold. The power generated at the wind farm is sold pursuant to a 1991 renewable non-fossil fuel obligation power purchase agreement with the Non-Fossil Fuel Purchasing Agency Limited ("NFPA") and South Wales Electricity plc ("SWALEC"). The fixed, premium price period of the contract expires in December 1998.
Caton Moor Wind Farm. The Company owns and operates a 3 MW wind farm at Caton Moor, Lancashire in northwest England. The power generated at the wind farm is sold pursuant to a 1991 renewable non-fossil fuel obligation power purchase agreement with NFPA and NORWEB plc. The fixed, premium price period of the contract expires in December 1998.
Four Burrows Wind Farm. The Company owned and operated a 4.5 MW wind farm located at Four Burrows, near Truro, Cornwall, England throughout 1996 and into early 1997 when it was sold. The power generated at the wind farm will be sold pursuant to a 1991 renewable non-fossil fuel obligation power purchase agreement with NFPA and South West Electricity plc. The fixed, premium price period of the contract expires in December 1998.
Other Facilities
Bellacorick Wind Farm. The Company, during 1996, owned approximately 87.5% of the ordinary shares of Renewable Energy Ireland Limited, the owner and operator of Ireland's first wind farm, which is located in Bellacorick, Ireland. The Wind Farm was offered for sale in 1996. In early 1997, the Company sold its interest in REIL.
For the two United Kingdom sales and the REIL sale, see the Subsequent Events footnote in the audited financial statements.
Projects Under Construction
Andersen Falls Hydroelectric Facility. The Company owns 60% of Andersen ("Project Company") which has entered into a concession contract with Energia Rio Negro Socieded del Estado ("ERSE"), the state utility of the State of Rio Negro, Argentina, to design, reconstruct, operate and maintain a hydroelectric facility to be located at Andersen Falls, State of Rio Negro, Argentina. In connection with the proposal to construct this facility, the Project Company posted a performance bond for $1 million, which was guaranteed on a joint and several basis by the Project partners and the Company. Because of the Company's limited capital resources, there is a risk that the Company will have to pay under the terms of this performance bond. However, the facility was abandoned in 1996 and the bond obligations are currently unclear. The Company continues to seek a buyer for its interest, or a portion thereof, in this project.
Dona Julia Hydroelectric Facility. The Company, on behalf of a Costa Rican company in which it has a minority interest, developed a hydroelectric facility located in Heredia, Costa Rica. The project is expected to have a capacity of 16 MW of electricity, all of which is to be sold to the Costa Rican state utility ICE under a 15-year power purchase contract. The Company has sold its interest in the project for approximately $600,000, $400,000 which it received in 1996 and the balance will be forthcoming in 1997.
Fujian I, China. In May 1995, the Company signed an agreement with China Chang Jiang Energy Corporation ("CCJEC") to acquire an interest in Fujian Chang Ping Hydro Project Company. Fujian Chang Ping Hydro Project Company is constructing the 39 MW Fujian Nan Ping Xiayang Hydro Power Plant on the upper Ming River in Xiayang, Fujian Province, People's Republic of China. The project was originally expected to be operational by September 1997, but as a result of significant flooding at the construction site, the operating date has been postponed until the end of 1998.
Subsequent to the Company's initial investment, concern arose as to whether adequate approvals had been obtained, under Chinese law, for the acceptance of New World Power Corporation shares as payment for the Company's interest in Fujian. The Company and CCJEC renegotiated the agreement resulting in a 12% ownership in Fujian. Due to uncertainties involving, among other things, significant project construction delays and Fujian's lack of liquidity, the Company has recorded an other than temporary decline at December 31, 1995, to adjust the carrying value of its investment to the estimated net realizable value of the Company's continuing 12% interest in Fujian. Continued delays in 1996 and lack of capital for the project resulted in the Company writing off its investment in CCJEC. The impact of this writedown is included as part of the impairment charge in the accompanying Consolidated Statement of Operations at December 31, 1996 and 1995 (see Note 3 and 10).
Projects In Development
The Company is currently undertaking to develop the following projects. Unless otherwise stated below, development of each of these projects is subject to obtaining suitable financing. There can be no assurance that such financing will be obtained. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of the financing of development projects.
Eolos I. The Company has secured the development rights to approximately 37,500 acres of land for the development of a wind farm in the La Ventosa region of the State of Oaxaca, Mexico. Power from this first phase 20 MW development will be sold to, CFE, the Mexican federal electric utility. The power purchase agreements are in the preliminary stages of negotiation and are subject to approval by the federal Ministry of Energy. This project is expected to be developed through a Mexican company in which the Company will have a minority interest.
Lerma Hydroelectric Facility. The Company, through Entec S.A. de C.V., has a contract with the Mexican Federal District Water Commission to develop an 8.5 MW hydroelectric facility powered by the flow of water from an aqueduct which supplies part of the drinking water needs of Mexico City. Entec will be paid for the electricity generated by the project by the Federal District Water Commission under a long-term power purchase agreement. Entec is in negotiations for sale of its interest in this facility.
Big Spring Wind Farm. The Company, through its limited partnership New World Power Texas Renewable Energy Limited Partnership, has entered into a 15-year power purchase agreement with Texas Utilities Electric Company ("TU Electric") to purchase power from a 40 MW wind farm which is to be built near Big Spring, Texas. The agreement has been approved by the Public Utility Commission of Texas. As of March 1997, the land lease and royalty agreement terms have been set, and the tax abatement proposal has been accepted. Remaining site development work is only in the areas of archeological surveys. The Company is presently evaluating the potential use of newer generation of the wind turbine technology in view of improving the economics of the project. As part of the definitive Joint Venture Agreement entered into by the Company and DB Power, Inc. (a wholly owned subsidiary of Dominion Bridge Corporation), 50% of the interest in the Texas Project was transferred to DB Power, Inc.
Tierras Morenas Wind Farm. The Company had been undertaking, through a Costa Rican subsidiary in which it has a 35% minority interest, to develop a wind farm to be located in Tierras Morenas near Lake Arenal, Costa Rica. The project is expected to have a capacity of 20 MW of electricity, all of which is to be sold to the Costa Rican state utility ICE under a 15-year power purchase contract. In May, 1996 the Company's Costa Rican 65% majority partner in the project entered into negotiations with a U.S. alternative energy development company and sold its majority interest.
Carrickabrock Wind Farm. The Company, through a joint venture with Bord Na Mona, was seeking to develop a 15 MW wind farm in the County of Tipperary, Ireland, to be owned and operated by the joint venture. An unfavorable outcome to the resiting efforts forced the Company to abandon the project.
Drumlough Hill Wind Farm. The Company has entered into a joint venture with Bord Na Mona to develop a 5 MW wind farm at Drumlough Hill, Innishowen, County Donegal, Ireland. The joint venture, in which the Company will have a 50% interest, will sell electricity to the ESB, the government-owned electric utility of Ireland, under a 15-year power purchase agreement awarded through an Irish AER bid process. The joint venture has been unable to secure the essential site rights from a third party that are necessary to complete the project. Inability to obtain these rights could force the Company to abandon the project.
Other Projects. The Company is currently in the preliminary stages of developing additional wind farms. These are Woodstock, MN, Bozcaada, Turkey, and Manatoulin Island. The Company can not predict whether any of these will ever be further developed or constructed.
Seasonality of Revenues
Wind farm revenues are seasonal, with the wind season in North American locations typically running from March to November. The European wind season typically runs from October to March. Hydroelectric production is also seasonal with spring, fall and winter providing proportionally higher revenues than the summer. Both wind power and hydroelectric production can also vary from year to year based on variations in meteorological conditions.
Strategic Alliances
In June 1994, the Company entered into a 15-year business alliance agreement with Westinghouse Electric Corporation ("Westinghouse"). Westinghouse owns 790,000 shares (7.6%) of the Company's Common Stock. The alliance has not been as beneficial as both parties originally envisioned and, accordingly, the Company and Westinghouse have suspended joint pursuit of opportunities pursuant to this agreement.
In October 1994, the Company entered into a joint venture contract with China Chang Jiang Energy Corporation (Group) ("CCJEC") and Metropolitan Enterprise Corporation ("MEC"). CCJEC is a manufacturer of electric generating equipment and owns and operates numerous hydroelectric facilities, not only in China but in the Philippines and other countries in Asia. The joint venture contract is for a period of twenty-five years after the date of issuance of the business license for the joint venture company. The parties have agreed to deal exclusively with one another during the term of such contract in connection with the development of wind, solar and hydroelectric power generating projects in the PRC, and in the manufacturing and distribution in the PRC of renewable power generating products developed by the Company. Any pursuit of opportunities under this agreement is subject to successful renegotiation of the Company's investment position in the Fujian project.
The Company, effective as of October 31, 1996 entered into a joint venture agreement with Dominion Bridge Corporation (Dominion Bridge) to jointly develop selected projects in its inventory. These projects include further development of wind opportunities in North America. Pursuant to the agreement, Dominion Bridge may invest up to $2.5 million in the projects in exchange for 50% of the Company's interest in such projects.
In addition, the Company has given an option to convert Dominion Bridge interest in the joint venture into its common stock. In the event that all such interest was earned and converted, Dominion Bridge's ownership of the Company would reach 41% of the common stock.
Finally, effective August 5, 1996, the Company has entered into a management services contract with Dominion Bridge, whereby one of its vice presidents, Vitold Jordan, was appointed to the position of Interim CEO of the Company and Nicholas Matiossian, COO of Dominion Bridge is acting as a senior advisor to the Company. Pursuant to the Management services contract, Dominion can receive, at the election of the Company, a portion of its management fee in shares of common stock.
GRID POWER SERVICES DIVISION
During 1995, as a result of continued losses and erosion of its customer base, the Company discontinued its production services operations in California. The operations, which constituted the Grid Power Services segment, were sold in December 1995.
WIRELESS POWER DIVISION
The Company's Wireless Power Division sells and assembles solar systems. These solar systems are powered by photovoltaic panels. Photovoltaic panels are composed of silicon, semi conductor material applied in various forms including wafers or films, to a flat panel. The photovoltaic panel directly converts sunlight to electric current.
The Company, for most of 1996, was involved in assembling and selling two basic types of systems using photovoltaic panels. "Photovoltaic Systems" are those in which the sole form of power production is solar energy; these systems range from a basic panel and controller to varied applications involving lighting, water pumping and more sophisticated packages. Integrated Renewable Power Generating Systems are those which also use photovoltaic power for a portion of their power generation, but additionally incorporate other forms of renewable generation like wind and battery power. These systems are typically complex and much more expensive than the Company's Photovoltaic Systems.
The Company distributes its Photovoltaic Systems through three partially-owned subsidiaries and distributes its Integrated Renewable Power Generating Systems through a wholly-owned subsidiary.
Photovoltaic Systems
Photovoltaic Systems are solar power systems assembled and sold by the Company through its partially-owned subsidiaries. Photovoltaic Systems use photovoltaic power to produce electricity, and range from simple panel applications to more sophisticated, expensive packages.
The Company distributes its Photovoltaic Systems through Photocomm, Inc. ("Photocomm"), Solartec, Inc. ("Solartec") and Entec ("Entec"), all partially-owned subsidiaries. The Company sold both Photocomm and Solartec in 1996 in order to fulfill a portion of its obligations to its lenders and concentrate on its core development business. The Company continues to review its options regarding liquidation or abandonment of its investment in Entec, which is experiencing significant financial hardship.
At December 31, 1995, the Company owned 6,612,447 shares (representing approximately 48.8%) of the issued and outstanding voting stock of Photocomm which is a publicly traded company engaged in the development, manufacture and marketing of photovoltaic systems and related products. The Company had an option to purchase an additional 1,500,000 shares at $3.00 per share expired at December 31, 1996. The Company is also a party to an agreement with other shareholders of Photocomm under which, the Company is assured of the election of three of Photocomm's seven directors. The Company also owns 51% of the issued and outstanding capital stock of Solartec, an Argentine corporation which is a fabricator and distributor of photovoltaic products in Argentina, and 50% of the issued and outstanding stock of Entec, a power developer in Mexico. During the fourth quarter of 1996, the Company concluded the sale of the Photocomm shares together with its interest in Solartec for a consideration of $12.5 million. The proceeds from the sale were used to reduce the Company's obligations under the 8% Convertible Subordinate Notes.
Integrated Renewable Power Generating Systems
The Company designs, manufactures, assembles and installs Integrated Renewable Power Generating Systems, including remote site and stand-alone electric generating systems, for a wide variety of applications. Remote site and stand-alone generating systems are generally complex, integrate many forms of available power generation including not only photovoltaic power but also wind is utilized for electric power generation at remote locations that are not connected to an electric power grid.
The Company's Integrated Renewable Power Generating Systems are distributed through its 100%-owned subsidiary New World Vermont, located in Waitsfield, Vermont.
The Company has installed remote site and stand-alone generating systems for commercial and residential customers in over 30 countries and on all 7 continents. These systems provide power where reliability is crucial and power is a necessary commodity that was not previously available. The primary applications in the commercial sector are telecommunications, navigational aids, offshore platforms, area lighting and SCADA power equipment. In addition, the Company provides larger systems where renewable energy sources augment the energy provided through the utility grid which would normally be purchased from local utilities.
Village Power
The Company, through early 1996, developed, owned and operated integrated generating systems, powered by renewable and traditional sources, which produce kilowatt hours for sale to small electric utilities removed from the main grid. These systems use proprietary software for integration and control and utilize indigenous renewable resources, augmented by batteries, to replace existing base-load diesel generators, which are then converted into backup power sources. This division was closed during early 1996, and the entire investment was written off in 1996.
Wireless Backlog
As of December 31, 1996, the Company had a backlog of existing purchase orders and government contracts, which it believes to be firm, for products and development services representing approximately $2.2 million in revenues. This compares to a backlog of approximately $688,000 as of December 31, 1995. Management expects that a majority of the current backlog will be filled in fiscal 1997. The current backlog is not necessarily indicative of the backlog, if any, in future periods.
Concentration
Sales of the Company's generating systems to customers outside of the continental United States accounted for approximately 20% of product sales for the last fiscal year. These sales are accomplished through the Company's own sales force. In view of the diverse locations of the Company's foreign customers, the Company does not believe there are any special risks attributable to foreign sales beyond the normal business risks of sales abroad.
Key Suppliers
The Company's manufacturing operations require a number of mechanical, electrical and electronic components and raw materials. The Company has multiple commercial sources of supplies for most components and raw materials that it uses.
Manufacturing Regulation
The Company's manufacturing facilities are subject to numerous laws and regulations designed to protect the environment. In management's opinion, compliance with these laws and regulations has not had and will not have a material effect on the capital expenditures, earnings or competitive position of the Company.
OTHER PRODUCTS AND SERVICES DIVISION
The Company currently manufactures a full line of wind turbines including 1 kW, 3 kW, 12 kW and 100 kW machines, all in limited quantities, and is developing a prototype for a 250 kW turbine. The Company maintains a continuing development program for new turbines and related products and for continued engineering of its existing products to improve efficiency and reliability. Development has been concentrated on wind turbine machine design (including blade design) and electronic system design. The Company's predecessor began developing wind turbine technology in the mid-1970s.
Pursuant to government contracts and initiatives issued by the Department of Energy ("DOE"), and through various agencies via the Small Business Innovative Research Program, the Company and its predecessor have engaged in advanced turbine design studies since the late 1970s. These conceptual design studies involve practical improvements, including advancing the state-of-the-art for wind farms and the development of a 100 kW polar turbine for extremely cold temperature applications.
The Company is currently a sub-contractor with the National Renewable Energy Laboratory ("NREL") to develop "Advanced Wind Turbines" under a series of contracts. The first contract calls for development of the "Near Term Turbine," and is designed to produce hardware for sales and distribution in 1998. This contract is aimed at the development of an advanced, commercial-scale wind turbine to be manufactured in the United States. This turbine is designed for use in large-scale wind farm developments and other similar applications. The first Advanced Wind Turbine which the Company is developing will have a nameplate capacity of 250 kW with blades of 82 feet in diameter. The first prototype began operation in the San Gorgonio Pass in the spring of 1994. Continued improvements and redesign aimed at cost cutting is ongoing at this time. The information and technology advances developed by the Company in connection with the 250 kW Advanced Wind Turbine will be available for use by the Company in all of its products. Three patents related to the aileron control system were issued by the U.S. Patent and Trademark Office during late 1995 and early 1996.
The Company owns several patents and patent applications relating to wind turbine technology. Although these patents and patent applications have value to the Company, they are not considered to be of material importance to its business as a whole. The Company's patents will expire during the period from 1997 to 2014.
The Technology Company is also involved with the development and deployment of large tracking PV array structures, grid connected PV applications and standalone wind/PV village power systems. Multiple projects are on-going at this time and the technology and experience can be used by the Company in the pursuit of it's business objectives.
DOMESTIC GOVERNMENT INCENTIVES
Federal Incentives. The Federal government encourages the use of renewable energy resources through various financial and other incentives. The most recent incentives at the Federal level were included in the Energy Policy Act of 1992. The purposes of the Act include the promotion of (i) increases in the production and utilization of energy from renewable energy resources; (ii) further advances of renewable energy technologies; and (iii) exports of renewable energy technologies and services.
The Federal Energy Regulatory Commission ("FERC") has authority under the Energy Policy Act, in certain circumstances, to order any transmitting utility to provide transmission service to independent power producers for the purpose of selling electricity at wholesale. If adequate transmission capacity is unavailable, the transmitting utility may be required to enlarge its facilities. The FERC may not issue such an order if providing transmission service would impair the reliability of the interconnected system, or if the utility cannot obtain approval for new facilities that are necessary to provide the service. These provisions could benefit the Company and other independent (non-utility) power producers by facilitating access to utility transmission systems and thus the transmission and sale of electrical power to purchasers other than the local electric utility. With improved transmission access, the number of potential customers for power produced by the Company's facilities will be significantly increased.
Under the Clean Air Act Amendments of 1991, the Environmental Protection Agency ("EPA") has established sulfur dioxide ("SO2") emission levels for each utility system that must be met by the year 2000, as well as specific emission levels for certain coal-fired plants that must be met by 1995. In order to facilitate the transition to these new emission levels, a trading mechanism has been created so that SO2 allowances can be traded. The result of these regulatory initiatives is that wind energy is valuable to utilities since wind generated electricity reduces fossil fuel generation by the utilities and increases emission allowances which can be sold in the market.
State Incentives. Under the Energy Policy Act, states must work with regulated public utilities to develop an integrated resource plan which implicitly includes development of renewable energy resources, such as wind and solar power. Even prior to enactment of the Energy Policy Act, a number of States had undertaken to develop renewable energy policies and initiatives in response to increasing pressure from environmental groups which have focused on the air and water pollution associated with the development of new fossil fuel generating facilities.
REGULATION
The Company is subject to federal and state energy laws and regulations and federal, state and local environmental laws and regulations in connection with the development and operation of its generating facilities.
Domestic Regulation
Federal Regulation. Pursuant to authority granted to the FERC under PURPA, the FERC has promulgated regulations which generally exempt small power production facilities with capacities of less than 30 MW from the provisions of the Federal Power Act ("FPA") (except for licensing requirements applicable to hydroelectric projects and certain other matters), the Public Utility Holding Company Act ("PUHCA"), and state laws respecting rates and financial and organizational regulation of electric utilities. All of the Company's hydroelectric and wind power generating facilities are believed to be entitled to the full range of regulatory exemptions available under PURPA. The Wolverine Hydroelectric Facilities are subject to licensing regulation pursuant to the Federal Power Act.
The Energy Policy Act amended PUHCA to allow independent power producers, under certain circumstances, to own and operate eligible facilities not exempted by PURPA in the United States or foreign countries without subjecting these producers to registration or regulation under PUHCA and without jeopardizing the qualifying status of their existing exempt projects. A company exclusively in the business of owning or operating generating facilities and selling electricity at wholesale or retail in a foreign country is also eligible for this exemption, as long as neither the company nor its subsidiaries sell electricity retail within the United States. These provisions are expected to enhance the development of facilities not exempted by PURPA in the United States which do not have to meet the fuel, production and ownership requirements of PURPA, as well as the development of foreign generating companies. The Energy Policy Act could benefit the Company by expanding its ability to own and operate facilities not exempted by
PURPA but may also result in increased competition by allowing utilities and other independent power producers to develop such facilities which are not subject to the constraints of PUHCA.
In the absence of exemptions from the regulations discussed above, the activities of the Company would be subject to a pervasive framework of federal and state regulation applicable to public utilities, including regulation of power sales prices, encumbrances of property, accounting practices and all other activities deemed necessary and convenient in the regulation of public utilities. Should this occur, the Company could be subject to regulation as a public utility holding company under PUHCA, which would have a material adverse effect on the Company's business. The Company intends to conduct its operations so that it continues to qualify for the applicable exemptions under PUHCA and has no reason to believe that these exemptions will be changed by legislative or regulatory action. Congress now has under consideration legislation that would reduce or eliminate the PUCHA restrictions.
State Regulation. State public utility commissions ("PUCs") have broad authority to regulate both the price and financial performance of electric utilities. Since a power sales contract will become a part of a utility's cost structure (and therefore is generally reflected in its rates), power sales contracts between an independent power producer, such as the Company, and a regulated utility, some PUC's assert and exercise the right to approve these contracts at the outset.
Local Permits. County governments in California and other states require wind farm operators to apply for and obtain permits before erecting and installing wind turbine generators. Applications may be considered at a public hearing. The permits generally terminate after a fixed period of time, twenty years from the date of approval in California, although the permits are revocable for cause. Permits frequently contain numerous conditions, including safety setback requirements, noise setback requirements, environmental requirements and annual reporting requirements. The Company believes that it has or will be able to obtain and renew all necessary permits subject to any requirements relating to the siting and operation of each individual wind farm.
Environmental Regulation. The Company is subject to environmental laws and regulation at the federal, state and local levels in connection with the development, ownership and operation of its electrical generating facilities. The laws and regulations applicable to the Company primarily involve environmental concerns associated with the siting of wind power generating facilities such as noise, visibility of wind turbines and threats to endangered or migratory birds or wildlife. Many of such laws and regulations require that wind turbines be located in remote areas or shielded from view, that turbines not be located in flyways or in areas where endangered species might be threatened, or that other mitigating actions be implemented. The Company believes that its existing electric generating facilities are in compliance with such environmental laws and regulations. If such laws and regulations are altered, however, and the Company's facilities are not grandfathered, the Company may be required to incur significant expenses to comply with such laws and regulations. Furthermore, the existence of certain environmental laws and regulations may have an adverse effect on the Company's ability to find suitable sites for new renewable energy generating facilities, although generally speaking suitable wind resource areas are not near residential areas.
International Regulation
The Company only engages in business in countries that have statutes which permit the private production and sale of electricity. All the countries in which the Company is currently doing business have such laws. Certain countries have restrictions on the percentage of a stock a foreign corporation may own of a domestic corporation and certain countries require permission of the government to own more than a designated percentage of stock in a domestic corporation. The Company complies with all such requirements.
The Company believes that the countries in which it is seeking to do business are encouraging independent power producers to supply the electrical power needs their growing economies face. The relatively short time periods for construction as well as the modular nature of wind farms permit the Company to comply with construction and environmental regulations in a more expeditious fashion and with lower construction risks than power produced through traditional thermal methodologies.
COMPETITION
Revenue derived from the Company's existing electrical generating facilities is sold under long-term power contracts, therefore competition is not a significant business risk. New utility power sales contracts are, however, generally subject to an arduous, expensive and competitive process. Many states require power sales contracts to be awarded by competitive bidding, and the Company competes with other independent power producers, subsidiaries of fuel supply companies, engineering companies, equipment manufacturers and affiliates of other industrial companies in the process. In addition, a number of regulated utilities have created subsidiaries, utility affiliates, which compete with independents such as the Company.
Competition for acquisitions of existing wind farms and development of new ones may significantly reduce the Company's opportunity to acquire or develop any such wind farms. Most of the other companies in the wind power generation industry are larger and have more financial resources than the Company. Furthermore, other large, well-capitalized entities from outside the wind power generation industry may choose to enter the industry, creating the potential for significant additional competition.
The markets for the Company's wireless power products are highly competitive. The Company faces a number of competitors in this market, some of which may have significantly greater financial resources than the Company.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries employed approximately 30 people.
ITEM 2.
ITEM 2. PROPERTIES
ADMINISTRATIVE
The Company, at December 31, 1996, leased office space for executive and administrative functions at various locations around the country.
GRID POWER
The Company, at December 31, 1996, leased or owned the following:
Wolverine. The Company owns approximately 4,000 acres of land, most of which is under water, in Gladwin and Midland counties in Michigan. The Company's dikes, dams, spillways and power plants are located on this property. Operating and maintenance personnel are based in a 1,000 square foot Company-owned building and a 5,000 square foot maintenance and storage facility in Edenville, Michigan.
Altamont Wind Farm. The Altamont Wind Farm is located on approximately 4,000 acres of leased land in the Altamont Pass, California. The Company owns approximately 305 miles of power lines, one substation and a 5,000 square foot maintenance building on the property.
Dyffryn Brodyn Wind Farm. The Dyffryn Brodyn Wind Farm is located on approximately 166 acres of leased land near Whitland, Dyfed, Wales. (Sold in 1997)
Caton Moor Wind Farm. The Caton Moor Wind Farm is located on approximately 100 acres of leased land in Caton Moor, Lancashire, England.
Bellacorick Wind Farm. The Bellacorick Wind Farm is located on approximately 300 acres of leased land in Bellacorick, Ireland. (Sold in 1997)
Four Burrows Wind Farm. The Four Burrows Wind Farm is located on approximately 500 acres of leased land in Truro, Cornwall, England. (Sold in 1997)
OTHER PRODUCTS AND SERVICES
The Company's manufacturing facilities for renewable power generating systems, including its design and system assembly departments, are housed in a 7,200 square foot Company-owned facility in Waitsfield, Vermont.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 30, 1995, Kenetech Windpower, Inc. ("Kenetech") filed a patent infringement suit in the United States District Court for the Northern District of California against the Company and Enercon GmbH ("Enercon") relating to the proposed use of Enercon E-40 wind turbines at the Company's planned wind power generating facility in Big Spring, Texas. The suit alleges that the use of the Enercon turbines in the United States would violate certain Kenetech patents and seeks an injunction and unspecified damages. The Company reviewed the Kenetech patents in detail and thoroughly investigated the Enercon technology well before the suit was filed and, based on such reviews and investigations, believes that neither the Enercon turbine nor its mode of operation infringes on any claim of any of Kenetech's patents. In January 1996 the Court granted the Company's motion and dismissed Kenetech's claim for relief based on actual patent infringement.
Kenetech has also initiated proceedings against the Company and Enercon before the International Trade Commission. On May 31, 1996, an Administrative Law Judge of the U.S. International Trade Commission rendered an Initial Determination decision in which he held that the Commission has subject matter jurisdiction over the Company and its co- respondent, Enercon, in Investigation No. 337-TA-376 because the Company has purchased for importation, and Enercon has sold to the Company for importation, certain wind turbines, the use of which in the United States would infringe one claim of one Kenetech patent. This Initial Determination is subject to review by the Commission, which must be requested on or before June 13, 1996, and to further appeal thereafter.
The Company and Enercon have requested review by the Commission. The Company believes that both Kenetech suits are without merit. The Company intends to vigorously contest them. There can be no assurance, however, that the Company will prevail in its defense.
On November 12, 1996, Dwight Kuhns, brother of the former Chairman of the Board, commenced an action against New World Power Corporation in the Superior Court, Alameda County, California. This action is based upon a consulting agreement that Mr. Kuhns had entered into with the Company at the start of January, 1996. The action seeks unspecified damages and alleges the Company failed to pay Mr. Kuhns amounts believed to be due under his consulting agreement. That agreement provided for a stated monthly fee and additional incentive fees should Mr. Kuhns effect savings in closing and/or selling certain assets and business units of the Company. The Company intends to vigorously contest the action and believes the suit is without merit. There can be no assurance, however, that the Company will prevail in its defense.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on October 21, 1996. The October 21, 1996 meeting was adjourned to October 31, 1996 as a quorum was not reached. At the further session on October 31, 1996, the following actions were taken:
1) The following slate of directors were elected to serve on the Board of Directors until the 1997 Annual Meeting of Stockholders and until their respective successors are duly elected and qualify or until an earlier resignation or removal.
Gerald R. Cummins Robert W. MacDonald Nazir Memon, M.D. Herbert L. Oakes, Jr. Gerard Prevost
(FOR - 6,072,832; WITHHELD - 718,161)
2) Approval of the one-for-five reverse stock split.
(FOR - 6,244,656; OPPOSED - 398,564; ABSTAINED - 147,773)
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There was no established public trading market for the Company's Common Stock prior to October 23, 1992. Since that date, the Common Stock has been quoted on the National Association of Securities Dealers Automated Quotation ("NASDAQ") System under the symbol NWPC. On March 23, 1994, the Common Stock was approved for listing on the NASDAQ National Market System. In November, 1996, the common stock was deleted from the National Market System and was approved for listing on the NASDAQ Small Cap Market System. The following table sets forth the high and low closing prices for the Common Stock as reported by NASDAQ during the periods shown below.
* Price adjustments have been made to reflect the 1 for 5 reverse stock split. The effective date of the reverse stock split is November 4, 1996.
The foregoing represents inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of April 11, 1997, there were approximately 367 holders of record of Common Stock.
The Company has not paid any cash dividends on its Common Stock since its incorporation in June 1989. The Company is currently prohibited from declaring or paying any cash dividends on the Common Stock under the Company's loan restructuring agreements entered into early 1996. In addition, the Company's United Kingdom project subsidiaries including Bellacorick and Wolverine subsidiary are prohibited from declaring or paying dividends and making cash advances or loans to the parent Company pursuant to loan documents entered into by the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to the Company's statements of operations for the year ended December 31, 1996 are based upon the internal unaudited financial statements of the Company. The Company has been unable to complete its audit for the year ended December 31, 1996 due to financial problems and the resignation of its previous auditors. The unaudited financial statement information contained herein is subject to adjustment during the audit. The 1995 and 1994 and its balance sheets as of December 31, 1996, 1995 and 1994 and September 30, 1993 and 1992 are derived from the Company's audited Consolidated Financial Statements. The Company's statements of operations for the year ended December 31, 1996, 1995 and 1994, the three month period ended December 31, 1993 and the year ended September 30, 1993, and such balance sheets as of December 31, 1995 and 1994, and the auditors' report thereon with exception of the 1996 results, are included elsewhere in this report. Such data should be read in conjunction with the Company's Consolidated Financial Statements, the related notes and the independent auditors' reports and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
*Audit to be completed shortly, financial information subject to change.
*Audit to be completed shortly, financial information subject to change.
**Adjustment made to reflect 1 for 5 reverse stock split.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is engaged in the production and sale of electric power generated from renewable sources and, to a lesser extent, the sale of products related to the renewable energy industry. The Company focuses on the acquisition and development of renewable power generating facilities from wind, solar and hydroelectric sources.
Business Environment
The Company adopted a new business strategy and plan which was approved by the Board of Directors in January of 1996. After abandoning its previous strategy of aggressive expansion through acquisition of existing renewable energy projects and the development of new projects throughout the world, the Company embarked on a 1996 campaign to sell assets to satisfy its debt obligations. Partly in connection with the prior strategy of acquisitions, the Company issued approximately $15 million of debt.
In the latter part of 1995, liquidity became extremely constrained and it became apparent to management that operating cash flow would not be sufficient for the Company to meet its debt service payments due in the early part of 1996. As a result, the Board of Directors appointed a new Interim Chief Executive Officer and management developed a revised business strategy with the objectives to reduce debt, increase equity and alleviate the Company's short-term liquidity problems and improve long-term liquidity. Key elements of the revised business plan include:
-- The Company is focusing on a selected, limited number of development projects.
-- The Company is selling off certain of its existing hydroelectric and wind projects currently under development or construction.
-- The Company used the proceeds from the sale its ownership interests to meet its current and other debt service requirements.
-- The Company did not pursue any new wind farm development projects in the United States. This element of the business plan does not affect projects for which the Company has completed the bidding process or has been selected through a competitive process to operate a wind farm.
-- The Company sold a majority of its wireless business including its Photocomm subsidiary.
-- The Company reduced administrative staff.
Management believes that its revised business plan will achieve the Company's objectives of reducing debt, increasing equity and improving both short-term and long-term liquidity. However there are numerous risks and uncertainties surrounding management plans, principally the risk that management will not be able to sell investments identified in its business plan within the time frame required by the restructured loan agreement, or for the amounts estimated by management. If management is not successful in implementing this plan, it is possible that the Company will not continue as a going concern.
Shortly after management approved the revised business plan, the Company defaulted on several of its debt obligations and restructured those obligations with its lenders. Part of the terms of the restructured loans included a release of up to $3.3 million cash collateral held by the lender, additional collateral, additional finance charges and the requirement that the Company raise $10 million in net proceeds from the sale of assets or securities by July 31, 1996 and raise an additional $17 million in net proceeds from the sale of assets or securities by November 30, 1996. Further, a significant portion of the proceeds from the sale of assets or securities will be placed in a sinking fund for the purpose of debt retirement.
Throughout 1996 and into early 1997, management continues to operate under constrained liquidity and operating cash flow. As of April 20, 1997 the Company has completed the sales of Photocomm and Solartec interests, two UK windfarms and the Irish windfarm. Proceeds from asset sales of approximately $19 million were used to reduce the Company's obligations to Fleming and Sundial debt holders and to pay the expenses associated with the sale. As of April 20, 1997 approximately $4.5 million of debt obligation remains in favor of Fleming while the Sundial debt holders have been paid in full.
In 1996, the Company made its interest payments, due January 31, 1996 and July 31, 1996, on its Secured Subordinated Notes in the form of additional notes and warrants rather that cash as permitted under the restructured loan agreements. Those interest notes as well as the interest payment due January 31, 1997 were paid by the Company from proceeds of asset sales.
Brief History
The Company was formed in 1989 through the acquisition of hydroelectric facilities in Michigan and a wind farm in the Altamont Pass in California. The Company expanded into renewable energy technology through its 1991 acquisition of Northern Power Systems, Inc., a manufacturer of wind turbines and remote site and stand-alone renewable power generating systems. In 1992, the Company acquired Field Service Maintenance & Supply, Inc. in Palm Springs, California (subsequently renamed "Grid Power Services Division"), which provides engineering, installation and operation services to owners of wind turbines and related equipment. See "Discontinued Operations" in Notes to Financial Statements.
The Company continued to expand in 1993 through the acquisition and development of several wind farms; the acquisition of 49% of Entec S.A. de C.V., a Mexican corporation engaged in the rural electrification industry; and the acquisition of 29% of Photocomm, Inc., a manufacturer and distributor of solar electric systems and related products. In 1994, the Company increased its ownership in Photocomm to a majority of its voting stock and increased its ownership in Entec to approximately 50%, while also purchasing 51% of Solartec S.A., the solar products distributor in Argentina. During 1995, the Company's ownership in Photocomm decreased to below 50% of the outstanding stock.
In 1994 the Company signed a business alliance with Westinghouse to jointly develop, market, construct and own renewable power projects, such as utility-scale wind farms, off-grid generating systems and wireless photovoltaic systems as well as jointly market the Company's renewable power projects and products. Westinghouse will also have the option to participate with the Company in renewable power projects. The alliance has not been as beneficial as both parties originally visioned and, accordingly, the Company and Westinghouse are discussing the mutual cessation of the business relationship.. During 1994, the Company entered into a joint venture with China Chang Jiang Energy Company Ltd. to develop renewable energy projects in China.
The Company completed construction in December 1994 of the Dyffryn Brodyn and Caton Moor wind farms in the United Kingdom which have a combined capacity of 8.6 MW, and completed in March 1995 the Four Burrows wind farm in the United Kingdom which has a capacity of 4.5 MW. Also, the Company was selected in 1994 by Texas Utilities to develop a 40 MW wind power facility in Big Spring, Texas, and commenced the development of a 16 MW hydroelectric facility in Costa Rica.
In January 1995, the Company acquired approximately 87% of the stock of an Irish wind farm having a capacity of 6.4 MW. Also, during 1995, the Company commenced development of a 16 MW hydroelectric facility and commenced development of a 22 MW wind power facility both in Costa Rica. In addition, the Company purchased a 12% equity interest in the 39 MW hydroelectric facility located in the Fujian province of China.
During 1996, the Company embarked upon a new business plan that required, among other things, the sale of many of the Company's assets to repay its principal lenders. In 1996, the Company entered into an agreement to sell its interest in the 16 MW hydroelectric facility in Costa Rica. That sale is expected to close in early 1997. In addition, the Company closed on the sale of its investments in Los Vaqueros, Solartec, New World Power do Brazil and Photocomm during 1996 for gross proceeds of approximately $12.6 million. All proceeds were paid to the secured lenders.
In early 1997, the Company closed on the sale of two of its windfarms in the United Kingdom and the sale of its investments in the windfarm in Ireland. Proceeds form the sale of approximately $6.6 million were repaid to the principal secured lenders. With the sales completed in Ireland and the United Kingdom, two of the Company's three secured lenders have been repaid in full.
OTHER RISKS
Increasing Competition and Regulatory Developments Affecting the Domestic Electric Utility Industry
The electric utility industry in the United States is in the midst of a transition to a more competitive wholesale power market in which numerous states are considering granting independent power producers direct access to retail customers. This transition is being implemented by changes in regulations and policies of the FERC and state utility commissions. Congress is considering the termination of power purchase mandates under PURPA and FERC has acted to negate some state approved power contracts. Due to the increasing competition and regulatory uncertainty in the domestic markets coupled with the downward pressure on the price utilities will pay for electric power based upon their avoided cost, management believes that the most attractive opportunities for independent power development in the immediate future are outside of the United States.
Risks of International Project Development Activities
Participation in the development and acquisition of foreign facilities may expose the Company to the effects of potentially adverse economic, political and labor developments, including political instability, nationalization of assets, local inflation, and currency fluctuations and restrictions. The Company will attempt to minimize these risks through various measures but there can be no assurance that it will be able to successfully reduce or eliminate them. In addition, the application of foreign environmental, tax and labor laws to the operations of foreign facilities may adversely affect any foreign facility earnings of the Company.
General Risks of Project Acquisition and Development
The Company's acquisition and development projects are subject to normal development risks, including locating suitable sites, negotiation of definitive agreements, obtaining favorable power purchase contracts, final permitting, the availability of financing on acceptable terms, and construction risks. The Company is currently engaged in the process of developing and acquiring renewable power generating facilities in foreign countries.
The Company expects that many of its power production projects will be outside the United States, and will be subject to all of the factors above.
Resource Variability
The Company's wind and hydroelectric generating facilities are located at sites where, based on the average wind speed and water flow gathered over an extended period, the Company has determined that there are favorable energy resources available. Operating results, however, can vary significantly from year to year and from the historical average.
Renewable energy resources also vary from place to place during the same season of each year. The Company's existing domestic wind farms are located primarily in California where the strongest winds occur during the spring and summer. The Company began operation of its wind farms in the United Kingdom in December 1994. The wind is generally strongest in the United Kingdom during the fall and winter. As a result of the increasing geographic diversity of the Company's power production operations, power production revenue of the Company is more balanced throughout the year than in prior years.
Inflation
The electricity produced by the Company's power production facilities is sold under long-term fixed rate power sales contracts. The effects of inflation on the Company's income are partially offset by periodic adjustments to the rates set forth in the contracts which give effect, in part, to changes in operating and capital costs incurred by the utilities as a result of inflation. Because the majority of operating expenses related to power production are relatively stable, management does not feel any special concern about the long-term impact of inflation in the United States or the United Kingdom. Local inflation in countries the Company does business can vary widely, in particular Mexico and Costa Rica have experienced historical high inflation.
RESULTS OF OPERATIONS
General
The results of operations for 1995 compared to 1994 reflect significant fluctuations resulting from the methods of accounting used for the Company's investment in Photocomm. During the year ended December 31, 1994, the Company acquired additional shares of common stock and other securities of Photocomm and the Company had control of over 51% of Photocomm's voting stock at December 31, 1994. Accordingly, the Company consolidated Photocomm into its financial statements for the year ended December 31, 1994.
The summarized balance sheet and statement of operations information for Photocomm of December 31, 1995 and 1994 is as follows:
At December 31, 1995, the Company owns 6,612,447 shares of Photocomm, representing less than 50% of the voting shares of Photocomm. The decrease in the Company's ownership percentage from December 31, 1994 results principally from various Photocomm equity transactions in which the Company did not participate. As a result of the Company no longer
having a controlling interest in Photocomm, the investment in Photocomm is accounted for under the equity method for the years ended December 31, 1995 and 1996.
Management's Discussion and Analysis on 1996 results will be included upon completion of the audit.
Revenues
Revenues decreased $6.5 million (29%) during 1995 compared to 1994. The deconsolidation of Photocomm was attributable for $15.7 million of the decrease. This decrease was partially offset by a $3.0 million increase in Solartec revenues resulting from the first full year of consolidation of Solartec. Additionally, Grid Power reported a $4.6 million increase in revenues, resulting primarily from the acquisition of REIL (Bellacorick Wind Farm) and the first full year of operations for the U.K. windfarms. See further discussion under Item 1 and Segment Analysis.
Cost of Operations
Cost of operations decreased $4.1 million (24%) during 1995 as compared to 1994. Deconsolidation of Photocomm was attributable for $11.9 million of the fluctuation. This decrease was partially offset by an increase of $2 million reported by Solartec resulting from the first full year of consolidation. Additionally, the acquisition of Bellacorick and the first full year of operations for the Company's U.K. wind farms resulted in increased cost of operations during 1995.
Research and Development Expense
Research and development expenses increased $88,000 during 1995 over 1994 related primarily to the Company's research into developing a new high capacity advanced wind turbine.
Project Development Expenses
Development of a power production facility requires extensive preparatory work that includes identifying and acquiring the rights to suitable wind or hydroelectric sites, obtaining an economically viable power purchase contract, fulfilling all legal requirements and obtaining financing for the project on favorable terms. All of this precedes equipment selection, contract negotiation and actual construction.
Project development expenses increased by $2.3 million (113%) during 1995 over 1994 which was primarily attributable to the Company's investigation into potential projects in China and, to a lesser extent, various domestic projects and Chile and Argentina.
Selling, general and administrative
Selling, general and administrative expenses decreased $1.6 million (17%) primarily due to the deconsolidation of Photocomm ($3.3 million). This decrease was partially offset by Solartec which reported an increase of $.6 million and the acquisition of Bellacorick and the first full year of operations for the U.K. wind farms which will attribute for $.3 million in aggregate. Corporate selling, general and administrative expenses decreased $.4 million while Other Products and Services increased $.3 million.
Impairment Charge
In 1995, the Company recorded an impairment charge of $24.4 million. The impairment charge was reflected as a reduction of the following financial statement captions:
As previously described, the Company has undertaken a business plan to sell certain of its assets and investments and to abandon various development projects. The following investments have been written-down, as applicable, to their estimated fair value at December 31, 1995. The aggregate carrying value of assets held for sale as of December 31, 1995 is approximately $25.6 million and includes:
Photocomm Makani Uwila Wind Farm United Kingdom Wind Farms Arcadian Wind Farm Tierras Morenas, Development Project Los Vaqueros Solartec S.A. San Jacinto Dona Julia, Development Project Bellacorick Andersen Falls Painted Hills Wind Farm
In determining the amount of impairment charge for assets held for sale, the Company's policy is to compared the carrying value of its assets and investments to the estimated fair value. In determining fair value, the Company used market values for publicly traded investments (i.e., Photocomm), or correspondence with potential buyers as an indication of market value. In circumstances where the Company's negotiations to sell assets and investments have not included correspondence with potential buyers in sufficient detail to indicate a market value, the Company has used the projected future cash flows from these investments and assets. These projected cash flows have been discounted at rates commensurate with the risk of the respective investment, and generally range from rates of 16% to 21%.
The Company has estimated the December 31, 1995 impairment charge based upon the best information available to management. It is at least reasonably possible that actual losses may be materially higher or lower than the amounts recognized following execution of management's plans, based on the actual agreements the Company negotiates with potential buyers, etc.
Equity loss of non-consolidated affiliates. The increase of $3,287,441 to $4,199,184 relates primarily to the equity loss of $4,331,000 related to the Company's New World Entec S.A. investment. See further discussion in Item 1 and Segment Analysis.
Operating Loss
Operating loss increased $30.9 million to $37.8 million including an impairment charge of approximately $24.4 million. Exclusive of the impairment charge, the 1995 operating loss increased $6.5 million. The increase in equity loss of non-consolidated affiliates of $3.3 million was primarily attributable to the equity loss in Entec and increased project development expense.
Other Income (Expense)
Interest expense increased by $2.0 million during 1995 which was attributable to approximately $15 million of debt the Company issued during the year as well as to the first full year of consolidation of the U.K. windfarms and the acquisition of Bellacorick.
Impact of Foreign Operations Currency Translation
The Company continues to pursue overseas development opportunities, and is affected by changes to the net investment value of its activities as the functional currency denominated financial statements of its foreign subsidiaries are translated into U.S. dollars for purposes of consolidation.
In the year ended December 31, 1996, 1995 and 1994, the Company recognized in the stockholders' equity section of the balance sheet currency translation adjustments of approximately $19,626, $778,838 and $646,580, respectively, related primarily to the United Kingdom, Ireland and Mexico. The currency has remained stable in those other countries where the Company has significant local currency denominated investments.
Segment Analysis
Grid Power Production
Revenue. Power production revenue is dependent upon the Company's installed capacity, the availability of the renewable resources used to produce the power, and the rate at which the produced electricity is sold.
Grid Power Production revenue increased by $4.6 million (147%) during 1995 over 1994. The increase in revenues is attributed to the first full year of operation of the U.K. wind farms as well as the acquisition of the Bellacorick.
Power production revenue increased in 1994 by $742,000 (31%) compared to Fiscal 1993. Wind speeds at the Company's wind farms increased to more normal levels during 1994, while water flow at its Michigan hydroelectric facilities was much lower in 1994 than in the prior fiscal year. This increase principally reflect the increase in revenue attributable to the increase from one wind farm in service in fiscal 1993 to six in service in 1994.
Operating (Loss) Profits. Segment operating loss increased $26.5 million including a $20.9 million impairment charge. Additionally, in 1995, the Company recorded approximately $4.5 million related to the Company's Mexican operation. The change is further impacted by $2.0 million of project development expenses related to China, the U.K. and Chile, partially offset by operating profits of the Company's U.K. and Irish wind farms. See geographic discussion below.
Segment operating profits decreased $1.2 million during 1994 from 1993, primarily attributable to the operating results of the Arcadian wind farm and Makani wind farm.
Wireless Power Sales
Revenue. Revenue from Wireless power decreased by $10.2 million (54%) from 1994. The decrease in revenues is attributable primarily to the de-consolidation of Photocomm ($15.7 million). This decrease was partially offset by Solartec which reported an increase of $3.0 million due to the first full year of operation under the Company's control for both subsidiaries. An additional $900,000 was generated by the Company's new Santa Fe Argentina project.
The Company increased revenues in 1994 over fiscal 1993 by $17.4 million, which included $11.9 million from Photocomm, which was consolidated for the first time.
Operating Income (Loss). Operating income (loss) decreased $1.8 million during 1995 including an impairment charge of $2.3 million. Excluding the impairment charge, the operating income increased $500,000. The increase was primarily attributable to Solartec ($383,000). The remaining increase was primarily attributable to the Company's NPS subsidiary.
Operating income increased $564,000 during 1994 over fiscal 1993 which was substantially attributable to the inclusion of Photocomm in the Company's results for the first time.
Geographic
Due to poor business conditions in Mexico and the poor financial performance of Entec, the Company recorded a loss of $4.3 million and approximately $950,000 for Entec in 1995 and 1994, respectively. Prior to 1994, $113,385 in losses were recorded. The Company, in late 1995, recognized that Entec would not generate profits and began negotiations for a new partner which would provide the Company with the capability to retain its rights and develop wind projects in Mexico. In early 1996, a preliminary agreement was reached providing for the formation of a new company which will be owned 42% by the Company. As part of their agreement, the new company assumed a $1.5 million loan (repayment contingent on future profits) from New World to Entec in exchange for the rights to develop wind projects. The new company will be managed by the Mexican partners. As a result of the above, in 1995, the Company wrote off its remaining investment in Entec ($131,000) as well as the remaining balance of its loan receivable from Entec ($3,700,000) during 1995. Management believes that there is significant long term potential for development of independent power production facilities in Mexico. Demand for electrical power is substantially in excess of the current capacity in Mexico, and that country's need for clean power is especially pressing.
In May of 1995, the Company entered into a Share Transfer Agreement with China Chang Jiang Electric Company (CCJEC) which provided for CCJEC to transfer 40% of its shares in the Fujian Chang Ping Hydro Project Company Ltd. to the Company in exchange for Rmb 120,720,000 (approximately $15 million). This transfer would represent 40% ownership of Fujian by the Company. The total consideration is payable in three trauches of 30%, 30% and 40% and the Company may contribute 50% of its consideration in the form of New World Power Corporation shares of common stock. In August 1995, the Company contributed $8.4 million (the first two trauches), half in cash and half in New World Power Corporation stock. The final trauch of cash and shares was held in escrow, the cash included in the balance sheet as "Restricted Cash.".
Late in the fourth quarter of 1995, the Company was experiencing cash flow problems and, at the same time, the Fujian project was experiencing delays in construction resulting from unusual flooding of the construction area. At the Board of Directors of CCJEC meeting held January 31, 1996, a formal plan was adopted to complete the project in early 1998. As a result of the delay in completion and other events, the Company has recorded a charge against the Company's investment in China. The impairment charge, included within the grid power production, approximately $6,400,000, was recorded in December 1995. See Note 4 to the Consolidated Financial Statements.
Subsequently, in July 1996, the Company was entered into a modified joint venture agreement with CCJEC, consenting to retraction of the NWPC share contribution into the projects capitalization. As a result the common shares previously converted to CCJEC were canceled prior to the Company's Annual Meeting.
In January 1997, the Company was advised of the Board resolution of the Fujian Chang Ping Hydro Project Company Ltd. calling for conversion of the Company's project entity equity holding into project company debt. The Company is contesting such proposal while attempting to arrive at a mutually beneficial business solution.
Notwithstanding, as of December 31, 1996 the remaining investment of $3.5 million was written down to zero on the Company's books.
LIQUIDITY AND CAPITAL RESOURCES
In December 1995, The New World Power Company Ltd. sold 0% Senior Secured Note due March 31, 1996 in the original amount of $550,000 to Sundial International Fund LTD., a significant stockholder in the Company. The proceeds of the Note were used as working capital. Subsequent to December 31, 1995, the due date of the Note was extended and the Note was exchanged for a new Note due on or before December 1, 1996.
On December 1, 1995, in accordance with the terms of Series B Preferred, the Company transferred and endorsed to Sundial International Fund Ltd. a First Mortgage Note collateralized by the property of Wolverine Power Company in the principal amount of $3,615,370 along with the Mortgage and Security Agreements in exchange for its Class B Preferred Stock. The Note is payable together with interest at the LIBOR+2% points in full on December 31, 1997. Principal and interest are due in seven quarterly installments of principal (each equal to five percent of the principal balance). The Note was restructured subsequent to December 31, 1995 and is now due in four payments due December 1, 1996, March 1, 1997, June 1, 1997 and July 31, 1997.
On August 15, 1995, the Company entered into an agreement to issue $15,750,000 of its 8% Convertible Subordinated Notes due July 31, 2000 and warrants to purchase up to 787,500 shares of its common stock pursuant to the terms of the Note and Warrant Purchase Agreement. The notes are payable semi-annually on January 31 and July 31 of each year commencing on January 31, 1996. The proceeds of the notes were used as follows: $6,500,000 for a 24% interest in the Fujian Chang Ping Hydro Power Company, Ltd. (of which $3,300,000 was held in escrow and later (1996) used for working capital), $2,200,000 for loan repayment to Sundial International Fund Ltd., $1,000,000 to repay loan to stockholder, $397,490 to pay construction costs in Costa Rica, $128,665 for legal fees and $5,523,845 for general working capital.
In February 1995, the Company completed the sale of 1,500,000 units of common stock and 3,000,000 common stock purchase warrants and received net proceeds of $8,259,279.
In 1995 and 1994, the Company completed project financings for the Dyffryn Brodyn, Caton Moor and Four Burrows wind farms in the United Kingdom. The net proceeds from these loans was $3,440,221 in 1995 and $6,150,450 in 1994 which was used to complete the construction of those wind farms. The loan agreements for these loans require repayment over a four year period and contain various covenants restricting the use of project revenue during this period. This revenue must be applied first to fund a reserve account in an amount equal to debt service payable during the next six months. Amounts available after the payment of debt service and normal operating expenses of the respective wind farms and other costs, provided in the loan agreement are available for semi-annual distributions to the Company, subject to certain restrictions.
During 1996, the Company restructured its debt agreements with two lenders that restrict upstreaming of available amount to the parent Company.
Throughout 1996 and into early 1997, management continues to operate under constrained liquidity and operating cash flow. As of April 15, 1997 the Company has completed the sales of Photocomm and Solartec interests, two UK windfarms and the Irish windfarm. Proceeds from asset sales of approximately $19 million were used to reduce the Company's obligations to Fleming and Sundial debt holders and to pay the expenses associated with the sale. As of April 16, 1997 approximately $4.5 million of debt obligation remains in favor of Fleming while the Sundial debt holders have been paid in full.
In 1996, the Company made its interest payments, due January 31, 1996 and July 31, 1996, on its Secured Subordinated Notes in the form of additional notes and warrants rather that cash as permitted under the restructured loan agreements. Those interest notes as well as the interest payment due January 31, 1997 were paid by the Company from proceeds of asset sales.
During 1996, the Company embarked upon a new business plan that required, among other things, the sale of many of the Company's assets to repay its principal lenders. In 1996, the Company entered into an agreement to sell its interest in the 16 MW hydroelectric facility in Costa Rica. That sale is expected to close in early 1997. In addition, the Company closed on the sale of its investments in Los Vaqueros, Solartec, New World Power do Brazil and Photocomm during 1996 for gross proceeds of approximately $12.6 million. All proceeds were paid to the secured lenders.
In early 1997, the Company closed on the sale of two of its windfarms in the United Kingdom and the sale of its investments in the windfarm in Ireland. Proceeds form the sale of approximately $6.6 million were repaid to the principal secured lenders. With the sales completed in Ireland and the United Kingdom, two of the Company's three secured lenders have been repaid in full.
The Company received net proceeds of $27,198,146 in 1994 from the sale of common stock and common stock purchase warrants and options, and received an additional $5,880,400 during the three-month transition period following the end of the Company's prior fiscal year on September 30, 1993. In December 1994, the Company received net proceeds of $2,037,200 from the sale by its English subsidiary of a $2.2 million exchangeable guaranteed secured promissory note.
At December 31, 1995, the Company had a working capital deficit of $16,762,000. The deficit in working capital is the result of inclusion of certain debt obligations on which the Company defaulted subsequent to December 31, 1995 and for which the Company's restructured debt agreements require certain levels of assets sales to be completed by certain dates. Uncertainties exist as to whether the aforementioned provisions can be met. Net working capital at December 31, 1994, was $2,535,034, giving a current ratio of 1.20. As of September 30, 1993, net working capital was $3,386,343 yielding a current ratio of 1.48.
During 1995, net cash flows used in operating activities was $4,794,191 compared to net cash flows used in operating activities of $2,940,379 during 1994.
In 1995 and 1994, $16,679,309 and $31,971,650 was used in investing activities, principally for property plant and equipment, and the acquisition of the interest in Solartec and the additional stock in Photocomm. These amounts were significant increases over the previous years.
In 1995, $18,027,183 was provided by financing activities primarily from the net proceeds from the issuance of common stock and the net increase in long-term debt. In 1994, $35,726,352 was provided by financing activities. In addition to the proceeds from the equity offerings, the Company received net proceeds of $6,150,450 in 1994 from project financings of its two United Kingdom wind farms. Lesser amounts were provided in the two previous fiscal years.
The data for 1995 is affected by the consolidation of Solartec and 1994 is affected by the consolidation of Photocomm and Solartec, which significantly increased inventory, accounts receivable and accounts payable over 1993 financial information. Entec, which is 50% owned by the Company is reducing the size of its rural electrification business and focusing on project development, and the production services group is moving to a support role for the Company's project development. Losses experienced by Entec exceeded management's expectations, and the Company reduced its project development efforts at Entec during 1995. Entec continues to experience significant financial hardship, which results in concerns as to its ability to continue as a going concern. As the Company has no ability to continue to fund the operating losses of Entec, management wrote-off its remaining investment in, and advances to, Entec as of December 31, 1995.
The Company expects to need financing for the construction of wind farm and hydroelectric facilities in 1996, which will require project equity and debt financing. The Company plans to raise substantially all of the financing for these projects from external sources, through equity syndications and non-recourse debt financing based at the operating subsidiary level. There can be no assurance, however, that the Company will succeed in obtaining such financing. If the Company's operating subsidiaries do not have access to capital markets on a substantially non-recourse basis, the Company itself may have to make larger equity investments in or provide more financial support for its projects, however, there is uncertainty as to the ability of the Company to make such investments, if needed. If the Company was unable to finance a project on a non-recourse basis, its ability to obtain other types of debt financing may be adversely affected by the Company's history of operating losses. If adequate financing were not available it would be likely to adversely affect the future of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Accountants, consolidated financial statements and financial statement schedules that are listed in the Index to Consolidated Financial Statements and Financial Statements Schedule on page will be filed by the Company upon completion of the audit.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants required to be reported herein, except as set forth below:
During the Company's two most recent fiscal years and in the fiscal period subsequent to the Company's most recent fiscal year end, there were no "reportable events" as defined in subparagraph (a)(1)(v) of Item 304 of Regulation S-K.
During the Company's 1993 and 1994 fiscal years and through October 30, 1995, the Company has not consulted with Price Waterhouse on items which (1) were or should have been subject to SAS 50 or (2) concerned the subject matter of a disagreement or reportable event with the former auditors, as described in Regulation S-K, Item 304(a)(2). In September 1996, Price Waterhouse resigned as the Company's auditors. No disagreements with them caused their resignation.
In March 1997, the Company's Board of Directors authorized a resolution appointing Lazar, Levine & Company as the auditors for the year ended December 31, 1996. During the two most recent fiscal years and through March 1997, the Company has not consulted with Lazar, Levine & Company on items which (1) were or should have been subject to SAS 50 or (2) concerned the subject matter of a disagreement or reportable event with the former auditors, as described in Regulation S-K, Item 304(a)(2).
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following sets forth certain information with respect to the Directors of the Company:
EXECUTIVE OFFICERS
The following table contains the name, position and age of the executive officer of the Company who is not director.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth, for the fiscal years indicated, all compensation awarded to, earned by or paid to (I) the former chief executive officer ("CEO") of the Company (Mr. John D. Kuhns, the Chairman of the Board of the Company) and (ii) the four most highly compensated executive officers of the Company other than the CEO whose salary and bonus exceeded $100,000 with respect to the fiscal year ended December 31, 1996 and who were employed by the Company during the fiscal year ended December 31, 1996 (together with the CEO, the "Named Executive Officers").
Summary Compensation Table
(1) The options listed expired unexercised upon the named individual's termination of employment with the Company.
(2) All of Mr. John Kuhns' compensation from the Company was paid in the form of management fees to a company controlled by Mr. John Kuhns. This arrangement was established prior to the Company's first underwritten public offering. Effective August 1, 1995, the Company terminated the related management agreements and entered into an employment agreement with Mr. Kuhns. See "John D. Kuhns Employment Agreement."
(3) Mr. John Kuhns resigned as Chief Executive Officer of the Company on April 11, 1996.
Option Grants Table. The following table sets forth certain information regarding stock option grants made to each of the Named Executive Officers during the fiscal year ended December 31, 1996.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth certain information concerning unexercised stock options held by the Named Executive Officers as of December 31, 1995.
(1) On December 29, 1996, the last reported sales price of the Company's Common Stock as reported on the NASDAQ Small Cap was $.31
Long-Term Incentive and Pension Plans.
In April 1993, the Company adopted the 1993 Stock Incentive Plan (the "1993 Plan") which was approved by the Company's stockholders in May 1993. The 1993 Plan replaced the Company's previous stock option plan, the 1989 Stock Incentive Plan (the "1989 Plan"), except as to options outstanding under the 1989 Plan. Under the 1993 Plan, the Company may reward to employees, directors and consultants of the Company and its subsidiaries incentive and non- qualified stock options, stock appreciation rights, restricted stock grants, performance awards and any combination of any or all of such awards. The Board of Directors has delegated its powers under the 1993 Plan to the Company's Compensation Committee. Awards may not be granted under the 1993 Plan after December 31, 2003. An aggregate of 500,000 shares of Common Stock may be issued under the 1993 Plan, except that any shares as to which awards granted under the 1989 Plan may lapse, expire or be canceled be available for issuance under the 1993 Plan. If any awards expire or terminate for any reason, the shares subject to such awards are again available for future awards under the 1993 Plan. Awards are not transferable except by will or the laws of descent and distribution. Whether an award may be exercised after termination of employment is determined by such Committee, subject to certain limitations.
Employment Agreements.
Mr. John D. Kuhns was employed as Chief Executive Officer of the Company and Chairman of the Board prior to April 11, 1996 and until October 1996 served only as Chairman of the Board.
Mr. Kuhns was compensated for his services as Chairman pursuant to an employment agreement dated as of August 1, 1995 which has been amended on two occasions. The initial Employment Agreement hired Mr. Kuhns to serve as Chief Executive Officer for a five year term continuing through July 31, 2000, subject to renewal unless terminated by either party. The Employment Agreement provided Mr. Kuhns customary benefits and expense reimbursements and contained customary confidentiality and noncompetition covenants. The initial Employment Agreement further provided that as a "severance benefit" Mr. Kuhns might receive, upon certain conditions, three years base salary and that, upon termination, Mr. Kuhns had an option to purchase, and the Company had an option to sell to him, the building and improvements that comprise its executive offices in Lime Rock, Connecticut (the "Farmhouse Property") at a purchase price equal to the Company's then depreciated cost basis. Effective March 1, 1996, Mr. Kuhns entered into Amendment No. 1 to the Employment Agreement ("Amendment No. 1") which provided that until such time as the Company paid in full its 8% Convertible Subordinated Notes, his base salary would be at the annual rate of $220,000 and that the Company would use its best efforts to sell shares of common stock to provide additional compensation, not to exceed $12,000 per month. Amendment No. 1 further provided that Mr. Kuhns would receive a bonus based upon a percentage of value received from the Company from the sale of a certain of its assets, provided that his annual compensation from all sources shall not exceed $480,000. In this amendment Mr. Kuhns also agreed to accept in lieu of any severance benefit or other unpaid compensation due upon termination, the Farmhouse Property. The amendment further provided that the Company shall set aside 3,250 shares of common stock per month for Mr. Kuhns, for
twelve months, commencing March 1, 1996, for delivery on January 31, 1997, or, for shares accruing after that date, on January 31, 1998. Effective March 1, 1996 Mr. Kuhns entered into Amendment No. 2 to his Employment Agreement with the Company ("Amendment No. 2"), which superseded and replaced Amendment No. 1. Pursuant to Amendment No. 2, Mr. Kuhns resigned as Chief Executive Officer and agreed to serve as Chairman of the Company through October 1996. Mr. Kuhns' base compensation under Amendment No. 2 is at the rate of $18,000 per month with additional compensation at $12,000 per month and a bonus derived from the sale of certain assets. The other compensation and severance benefits remain substantially the same as in Amendment No. 1. Pursuant to Mr. Kuhn's decision to not to seek reelection at the Company's Annual Meeting has employment agreement was terminated as of October 21, 1996 and as a result the Farmhouse property was transferred to Mr. Kuhns as the termination benefit. Accordingly the Company wrote off the net book value of the leasehold improvements and furniture and fixtures of approximately $1.5 million during the year ended December 31, 1996.
Board of Directors Report on Executive Compensation.
This report, prepared by the Company's Board of Directors, addresses the Company's compensation policies with respect to its executive officers for the fiscal year ended December 31, 1996.
Salary. The Compensation Committee is responsible for determining the salaries of all executive officers of the Company. Salaries paid to executive officers reflect their responsibilities, diligence and determination in working toward the achievement of established corporate objectives. Management compensation guidelines were established by the Compensation Committee in consultation with independent advisors with experience in the field.
Stock Incentives. The Compensation Committee has full power, discretion and authority in administering the Company's 1993 Stock Incentive Plan. The Committee believes that stock ownership by employees, including officers, of the Company, is important as a means of rewarding outstanding performance and promoting the achievement of long-term corporate goals by giving those persons a greater proprietary interest in the Company. No options were granted to officers or employees of the Company in 1996.
Comparative Stock Performance Graph
The graph shown below sets forth the cumulative stockholder return of the Company's Common Stock from October 23, 1992, through the last trading day of 1996. Although the Company's Common Stock was first registered under Section 12 of the Securities Exchange Act of 1934, as amended, on January 25, 1990, there was no established public trading market for the Common Stock prior to October 23, 1992. This graph assumes an investment of $100 on October 23, 1992, in (i) the Company's Common Stock, (ii) the Center for Research in Security Prices ("CRSP") Total Return Index for the NASDAQ Stock Market (U.S.) and (iii) a composite peer group composed of the following companies in the independent power business: AES Corporation, Destec Energy, Inc., Magma Power Company (acquired by California Energy Company March 20, 1995), O'Brien Environmental Energy Inc., OESI Power Corporation, Ogden Projects, Inc. (acquired by Ogden Corp. January 16, 1995), and Thermo Power Corporation (collectively, the "Peer Group"). The graph assumes dividends, if any, were reinvested. The comparisons in this graph are required by the Securities and Exchange
Commission and therefore are not intended to forecast or be indicative of possible future performance of the Company's Common Stock.
TOTAL SHAREHOLDER RETURNS - DIVIDENDS REINVESTED
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of the Common Stock of the Company outstanding as at March 31, 1997, by (i) each person known by the Company to be the beneficial owner of more than five percent of the Common Stock, (ii) each director, (iii) each of the Named Executive Officers and (iv) by all directors and executive officers of the Company as a group. Unless otherwise indicated, each stockholder has sole voting power and sole dispositive power with respect to the indicated shares.
* less than one percent.
**Adjusted to reflect the 1 for 5 reverse stock split
(1) Each director and executive officer has sole voting power and sole investment power with respect to all shares beneficially owned by him, unless otherwise indicated.
(2) Based upon 2,321,367 shares of Common Stock outstanding on April 11, 1997.
(3) Based upon a Statement on Schedule 13D Amendment No. 1 filed with the Securities and Exchange Commission ("SEC") on February 6, 1996 by Foreign & Colonial Management Limited ("F&C"). Includes 272,000 shares issuable upon exercise of currently exercisable warrants.
(4) Based upon a Statement on Schedule 13D Amendment No. 1 filed with the SEC on February 21, 1995 by Sundial International Fund Limited ("Sundial"). Includes 989,918 shares issuable upon exercise of currently exercisable warrants and 583,000 shares plus 200,000 warrants issuable upon the exchange of a promissory note issued by a subsidiary of the Company. Does not give effect to the Restructuring Agreement discussed under Item 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1995, The New World Power Company Ltd. sold 0% Senior Secured Note due March 31, 1996 in the original amount of $550,000 to Sundial International Fund LTD., a significant stockholder in the Company. The proceeds of the Note were used as working capital. The note was reimbursed in full in February 11, 1997.
On December 1, 1995, the Company transferred and endorsed to Sundial International Fund Ltd. a First Mortgage Note in the principal amount of $3,615,370 along with the Mortgage and Security Agreements in exchange for its Class B Preferred Stock. The Note was payable together with interest at the LIBOR+4% points in full on December 1, 1996. Principal and interest are due in seven quarterly installments of principal (each equal to five percent of the principal balance). The Note was restructured subsequent to December 31, 1995 and is now due in four payments due December 1, 1996, March 1, 1997, June 1, 1997 and July 31, 1997.
In June 1994, the Company entered into a 15-year business alliance agreement with Westinghouse Electric Corporation ("Westinghouse"), a beneficial owner of more than five percent of the Company's Common Stock, jointly to develop, market, construct and own renewable power projects, such as utility-scale wind farms, off-grid generating systems and wireless photovoltaic systems. Under the agreement, the Company and Westinghouse will have the option to participate with the Company in renewable power projects. In consideration of Westinghouse's obligations under the agreement, the Company agreed to issue to Westinghouse up to 459,770 shares of the Company's Common Stock, in installments, over a four-year period (of which shares were to be but have not been issued) and an Incentive Warrant which will enable Westinghouse to purchase up to 819,778 shares of the Company's Common Stock, based upon certain operating revenue targets for the Company. The Company and Westinghouse are currently discussing the mutual cessation of the business relationship.
In October 1994, the Company and Robert R. Kauffman, then a director of the Company, entered into a short-term voting agreement pursuant to which Mr. Kauffman agreed to vote certain shares of Photocomm preferred stock owned by him in the same manner as the Company votes its shares of Photocomm common stock. The voting rights of Photocomm preferred stock subject to the agreement were equivalent to the voting rights of 503,052 shares of Photocomm common stock and represented approximately 3.8% of the total voting power of Photocomm's capital stock. The voting agreement terminated by its terms in 1995.
In February 1995, the Company issued a warrant to purchase 150,000 units of the Company to Oakes, Fitzwilliams & Co. S.A. ("OFLSA"), a company controlled by Herbert L. Oakes, Jr., in its capacity as the placement agent in connection with the placement of 1,500,000 units in an offering to offshore investors. Each unit consists of one share of Common Stock and two warrants, each to purchase one share of Common Stock at an initial exercise price of $7.50 per share. The warrant entitles OFLSA to purchase the units at $7.20 per unit and expires on January 14, 2000. The Company also paid to OFLSA a fee of $720,000 in connection with the offering which was subsequently used by OFLSA to purchase an additional 120,000 units from the Company.
In connection with this offering, certain entities affiliated with F&C purchased an aggregate of 325,000 units at $6.00 per unit plus the surrender of a prior warrant to purchase one share of Common Stock at an initial exercise price of $15.00 per share. In addition, certain entities affiliated with GIL purchased an aggregate of 255,000 units of $6.00 per unit plus the surrender of a prior warrant to purchase one share of Common Stock at an initial exercise price of $15.00 per share.
The directors of the Company entered into an agreement to vote the shares issued to them by the Company for services rendered to the Company, including shares purchased under options granted under the 1993 Stock Incentive Plan. The agreement provides that the shares will be voted in the manner that John D. Kuhns directs and have granted Mr. Kuhns an irrevocable proxy in connection with such voting agreement. In addition, the agreement grants to the Company a right of first refusal and a purchase option prior to any transfer of such shares and upon termination of employment or service on the Board.
As previously discussed under Liquidity and Capital Resources, the Company entered into an agreement (the "Fleming Agreement") to issue $15,750,000 of its 8% Convertible Subordinated Notes due July 31, 2000 and warrants to purchase up to 787,500 shares of its common stock pursuant to the terms of the Note and Warrant Purchase Agreement. In connection therewith, the Company granted a security interest in all the shares of common stock (both owned beneficially or of record) of New World China Company Limited and Photocomm. The Company also granted certain demand and registration rights. Approximately $2,622,000 of the 8% Convertible Subordinated Notes were issued to OFLSA.
On December 28, 1995, the Company repaid its obligations to Sundial International under its 0% Exchangeable Senior Secured Guaranteed Notes due December 28, 1995 in the original principal amount of $2.2 million. Upon repayment of this note, Sundial International released from escrow 2.9 million shares of pledged Photocomm common stock which shares were then pledged and delivered to Robert Fleming & Co., Ltd. as agent for the Fleming Purchasers.
On May 31, 1996, the Company entered into a Forbearance, Warrant Exchange, Note Conversion and Amendatory Agreement (the "Sundial Amendment Agreement"), dated as of March 1, 1996, among the Sundial International Fund Limited ("Sundial"), the Company, The New World Power Company Limited ("NWP Ltd."), and Wolverine Power Corporation ("Wolverine") regarding the Company's 0% Senior Secured Note in the amount of $550,000, dated December 20, 1995 and due March 31, 1996 issued by NWP Ltd. to Sundial (the "Senior Secured Note") and the Wolverine Power Corporation First Mortgage Note in the outstanding principal amount as of March 1, 1996 of $3,434,692, dated December 31, 1992, issued by Wolverine to the Company and assigned by the Company to Sundial (the "Wolverine Note" and together with the Senior Secured Note, the "Notes"). Pursuant to the terms of the Sundial Amendment Agreement, the maturity of the Senior Secured Note was extended to December 1, 1996 and the maturities of certain installments of the Wolverine Note were extended. Also pursuant to the Sundial Amendment Agreement certain warrants of which Sundial is the owner or the agent for the owners have been re-priced from exercise prices ranging from $37.50 to
$75.00 per share to an exercise of $8.75 per share. Also pursuant to the Sundial Amendment Agreement, Sundial has been given an option to exchange the Notes for certain Exchange Notes to be issued by the Company. The company is required also to effect certain asset sales and offer to redeem the Notes with the proceeds from such sales. Sundial also received additional security from the Company and the right to nominate one member of the Board of Directors in connection with the Sundial Amendment Agreement.
The Company also entered into Amendment No. 3 to Note and Warrant Purchase Agreement, and Modification of Letter Agreement, dated as of March 1, 1996 by and between NWP Corp. and each of the Purchasers thereto whereby the Company and the Purchasers agreed to modify certain of the terms of the Note and Warrant Purchase Agreement, dated as August 15, 1995, amended by Amendment No. 1 to Note and Warrant Purchase Agreement dated as of October 13, 1995 by and between the Company and the Purchasers and by Amendment No. 2 to Note and Warrant Purchase Agreement ("Amendment No. 2") dated as February 29, 1996 by and between the Company and the Purchasers.
On June 11, 1996, the Company and Oakes, Fitzwilliams & Co. S.A. ("OFLSA") executed a financial advisory services letter agreement ("Financial Advisory Services Agreement") pursuant to which the Company agreed that for (1) services rendered during 1995 and 1996 relating to the restructuring of the Company's management and capitalization ("Restructuring Services") and (2) services to be rendered in connection with the anticipated negotiations with Dominion Bridge Corporation ("Dominion") or other entity ("Financial Advisory Services") that: (a) OFLSA is be issued 240,000 shares of the Company's Common Stock (in lieu of $125,000 in cash), (b) OFLSA would be paid its expenses already incurred, some of which have been submitted to the Company but not paid, in the approximate amount of $85,000 and (c) the warrants to purchase shares of Common Stock of the Company received in the past of OFLSA as compensation would be exchanged for New Warrants, and (d) at the closing of a transaction with Dominion, the Company will pay to OFLSA a cash fee in an amount equal to 2.5% of the value of the total consideration of the Transaction and reimburse OFLSA its reasonable out-of-pocket expenses not incurred in the normal course of business.
Effective as of February 29, 1996, the Company entered into Amendment No. Two (the "Amendment") to the Fleming Agreement. Pursuant to the terms of the Amendment, the maturity of the 8% Notes was accelerated to July 31, 1997, with interest payments permitted in pay-in-kind securities prior to the interest payment due January 31, 1997. Also pursuant to the Amendment the warrants originally issued under the Fleming Agreement were repriced from an exercise price of $7.50 per share to an exercise of $1.75 per share. Also pursuant to the Amendment, the Company is required to effect certain asset sales and offer to redeem the 8% Notes with the proceeds from such sales. The Noteholders also received additional security from the Company in connection with the Amendment in exchange for allowing the Company to access the $3.3 million held in escrow as collateral, subject to certain restrictions.
George P. Petrenko is an employee of Glass & Associates, Inc. ("Glass"). The Company has entered into a Consulting Agreement with Glass dated February 7, 1996, pursuant to which Glass provides management consultation services at an hourly rate for George Petrenko and one or more additional Glass employees. The Consulting Agreement was amended effective April 15, 1996 to provided for the services of Mr. Petrenko and another Glass employee at the rate of $10,000 a week, plus out-of-pocket expenses. Under the revised agreement, Glass may receive a bonus based upon the percentage of the net proceeds that the Company receives from the sale of certain assets. The Company has paid Glass the sum of $310,086 through August 2, 1996. This Agreement was terminated on August 2, 1996. In addition, Glass initiated an action against the Company alleging the Company failed to make certain bonus payments due to Glass for asset sales. The Company and Glass reached a settlement in which Glass would receive $17,500 in cash and 25,000 shares of the Company's stock in exchange for full and complete mutual releases.
Effective January 1, 1996, the Company entered into a Consulting Agreement with Condor Management Associates, Inc. ("Condor"), a corporation owned by Dwight Kuhns, the brother of John D. Kuhns. The Consulting Agreement provides for monthly compensation to Condor to supervise the shutdown and sale of the Company's wind farms in California and Hawaii. The Consulting Agreement further provides for commissions upon the sale of certain assets and upon the favorable conclusion of negotiations with creditors of the Company's California and Hawaii operations. Certain of these commissions may be paid in shares of the Company's stock. The Consulting Agreement is terminable on thirty days notice. The Company has paid Condor $113,750 through August 15, 1996. As noted above, Dwight Kuhns has commenced litigation against the Company with respect to an alleged breach of the agreement.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 and regulations of the Securities Exchange Commission thereunder require the Company's executive officers and directors and persons who own more than ten percent of the Company's stock, as well as certain affiliates of such persons, to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission and the National Association of Securities Dealers. Executive officers, directors and persons owning more than ten percent of the Company's stock are required by the Securities and Exchange Commission regulations to furnish he Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of Forms 3, 4 and 5 and amendments thereto received by the Company and written representations that no other reports were required for those persons, the company believes that, during the fiscal year ended December 31, 1995, all filing requirements applicable to its executive officers, directors and owners or more than ten percent of the Company's stock were complied with.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The Report of Independent Accountants and consolidated financial statements listed in the Index to Consolidated Financial Statements and Financial Statement Schedule will be filed by the Company as soon as they are completed. The Report of Independent Accountants and the consolidated Financial Statements are not being filed at this time as the auditors have not completed their work as of the date of this filing. The Company has been unable to complete its audit for the year ended December 31, 1996 due to financial problems and the resignation of its previous auditors. In addition, the Company completed two asset sales in early 1997 (the latest being April 20, 1997) which significantly effect the disclosure requirements by the Company in its December 31, 1996 financial statements. The Company believes it is making every effort to file these reports by April 30, 1997.
(a)(3) Exhibits
- ------------------- The consents of the predecessor auditors will be provided in Form 10-K/A to be filed shortly by the Company.
* Incorporated by reference.
(b) Reports on Form 8-K/A
One current report on Form 8-K dated October 28, 1996 was filed during the quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE NEW WORLD POWER CORPORATION
Dated: April 30, 1997
By: /s/ Vitold Jordan ------------------------------- Vitold Jordan Interim Chief Executive Officer
By: /s/ Frederic A. Mayer ------------------------------- Frederic A. Mayer Acting Chief Financial and Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.