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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12527
BAYCORP HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0488443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NEW HAMPSHIRE AVENUE, SUITE 125
PORTSMOUTH, NEW HAMPSHIRE 03801
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 766-4990
51 DOW HIGHWAY, SUITE 7
ELIOT, MAINE 03903
(Former address of principal executive offices) (Former Zip Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
AMERICAN STOCK EXCHANGE
(Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 24, 2003, the approximate aggregate market value of the voting
stock held by non-affiliates of the registrant was $5,407,151 based on the last
reported sale price of the registrant's Common Stock on the American Stock
Exchange as of the close of business on March 24, 2003. There were 646,874
shares of Common Stock outstanding as of March 24, 2003.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is a holding company
incorporated in Delaware in 1996. Until 2003, BayCorp had two principal
operating subsidiaries that generated and traded wholesale electricity, Great
Bay Power Corporation ("Great Bay") and Little Bay Power Corporation ("Little
Bay"). Their principal asset was a combined 15% joint ownership interest in the
Seabrook Nuclear Power Project in Seabrook, New Hampshire (the "Seabrook
Project" or "Seabrook") until November 1, 2002, when BayCorp sold Great Bay's
and Little Bay's interest in Seabrook (see "Recent Developments" below.) That
ownership interest entitled Great Bay and Little Bay to approximately 174
megawatts ("MWs") of the Seabrook Project's power output. Great Bay and Little
Bay were exempt wholesale generators ("EWGs") under the Public Utility Holding
Company Act of 1935 ("PUHCA"). Unlike regulated public utilities, Great Bay and
Little Bay had no franchise area or captive customers. The companies sold their
power in the competitive wholesale power markets. Great Bay and Little Bay were
each wholly-owned by BayCorp. In December 2002, BayCorp formally dissolved Great
Bay and Little Bay.
Great Bay was incorporated in New Hampshire in 1986 and was formerly known
as EUA Power Corporation. Little Bay was incorporated in New Hampshire in 1998.
Great Bay sold its power, including its 12.1% share and Little Bay's 2.9% share
of the electricity output of the Seabrook Project, in the wholesale electricity
market, primarily in the Northeast United States. Little Bay sold its power
solely to Great Bay under an intercompany agreement. Neither BayCorp nor Great
Bay or Little Bay had operational responsibilities for the Seabrook Project.
Great Bay sold all but approximately 10 MWs of its share of the Seabrook Project
capacity in the wholesale short-term market. In addition to selling its power
generated by Seabrook, Great Bay purchased power on the open market for resale
to third parties.
Little Bay purchased a 2.9% interest in the Seabrook Project in November
1999 from Montaup Electric Company ("Montaup"), a subsidiary of Eastern
Utilities Associates ("EUA"), for a purchase price of $3.2 million, plus
approximately $1.7 million for certain prepaid items, primarily nuclear fuel and
capital expenditures. In addition, Montaup prefunded the decommissioning
liability associated with Little Bay's 2.9% share of Seabrook by transferring
approximately $12.4 million into Little Bay's decommissioning account, an
irrevocable trust earmarked for Little Bay's share of Seabrook Project
decommissioning expenses.
In October 2002, BayCorp created two new subsidiaries, Great Bay Power
Marketing, Inc. ("GBPM") and BayCorp Ventures, LLC. GBPM was created to hold the
purchase power agreement that Great Bay had with Unitil Power Corporation
("Unitil") and arrange for the power supply to satisfy the agreement. See
"Pre-November 2002 and Current Business -- Purchased Power Agreements" below.
Effective January 1, 2003, GBPM assumed the Unitil contract and holds the
letter of credit established to secure GBPM's obligations under the Unitil
contract. BayCorp created BayCorp Ventures, LLC to serve as a vehicle through
which the Company can make investments following the Seabrook sale and the
expiration of the Company's tender offer (see "Recent Developments").
In addition, BayCorp owns approximately 46.4% of HoustonStreet Exchange,
Inc. ("HoustonStreet"). HoustonStreet was incorporated in Delaware in 1999.
HoustonStreet is an equity investment of BayCorp. HoustonStreet developed and
operates HoustonStreet.com, an Internet-based independent crude oil and refined
products trading exchange in the United States.
RECENT DEVELOPMENTS
Sale of Seabrook
In October 2000, the Company announced that it reached an agreement with
Northeast Utilities ("NU") under which the Company's generating subsidiaries,
Great Bay and Little Bay, would include their aggregate 15% ownership share of
the Seabrook Project in the auction of NU's subsidiaries' shares of the Seabrook
Project. Under the terms of the agreement, BayCorp would receive the sales price
established by the auction process. In the event that the sale yielded proceeds
for BayCorp of more than $87.2 million, BayCorp and NU would share the excess
proceeds. Should BayCorp's sales proceeds be less than $87.2 million, NU was to
make up the difference below that amount on a dollar for dollar basis up to a
maximum of $17.4 million. Under the agreement, BayCorp was to be paid separately
for nuclear fuel and inventory. The agreement also limited any top-off amount
required to be funded by BayCorp for decommissioning as part of the sale process
at the amount required by the Nuclear Regulatory Commission ("NRC") regulations.
In September 2001, the State of New Hampshire Public Utilities Commission
(the "Commission" or "NHPUC") in coordination with the State of Connecticut
Department of Public Utility Control (the "Department" or "CDPUC") (and together
with the NHPUC, the "Commissions") retained JPMorgan to act as its exclusive
asset sale manager, financial advisor and auction advisor. The sale was
conducted in accordance with New Hampshire Revised Statutes (Annotated) ("RSA")
Chapter 369-B and Chapter 29:15, N.H. Laws
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2001 (the "NH Acts"), the "Agreement to Settle PSNH Restructuring," executed on
September 22, 2000, as approved in NHPUC Docket No. DE 99-099 (the "Settlement
Agreement"), and Connecticut General Statutes Section 16-244g (the "CT Act") on
behalf of North Atlantic Energy Corporation, The Connecticut Light and Power
Company and United Illuminating. In addition to the ownership interests in
Seabrook of North Atlantic Energy Corporation, Connecticut Light and Power and
United Illuminating, the Commissions authorized JPMorgan to include other
minority co-owner interests in the auction process (the "Auction"), and, as
indicated below, five additional co-owners, including Great Bay and Little Bay,
(the "Sellers") agreed to participate in the auction sale process. Great Bay and
Little Bay were the only Sellers that were not public utilities and the only
Sellers that had a price support and sharing agreement with another of the
Sellers.
The principal objectives of the Seabrook sale were to ensure that the
requirements set forth in the NH Acts, the Settlement Agreement and the CT Act
were satisfied. These requirements included: (i) that the Commission
administer a public auction conducted in New Hampshire maximizing the net
proceeds realized from the sale in order to mitigate stranded costs and benefit
all New Hampshire customers with stranded costs recovery obligations associated
with the Seabrook assets (the "Assets"); (ii) that the sale price for Seabrook
equals or exceeds the minimum bid prices separately established by the NHPUC and
the CDPUC; (iii) that the sale be conducted in accordance with certain
divestiture plans (the "Divestiture Plans") filed with the Commissions and in a
manner consistent with the public good; (iv) that the buyer is qualified to own
and operate the Assets, preserve existing labor agreements and provide certain
employee protections; and (v) that the sale results in a net benefit to
ratepayers and customers.
As a result of the Auction, FPL Energy Seabrook, LLC, a subsidiary of FPL
Group, Inc., ("FPL Energy Seabrook") agreed to purchase 88.2% of the 1,161 MW
Unit 1 and 88.2% of the partially constructed Unit 2, for $836.6 million subject
to certain adjustments, with payment deliverable fully in cash at closing. The
purchase price included the projected fuel and non-fuel inventories at closing
and Unit 2 components. The Sellers were responsible for making their then
required decommissioning fund top off payments on or before the date of sale
closing and to transfer their respective decommissioning trust funds to FPL
Energy Seabrook. FPL Energy Seabrook assumed all decommissioning liability for
the acquired portion of Seabrook including the requirement that it provide an
appropriate future funding assurance subject to the approval of the NDFC. FPL
Energy Seabrook provided a parent company guaranty that it will fully fund its
ownership share of the projected cost of decommissioning in a manner consistent
with New Hampshire statutory requirements. FPL Energy Seabrook will also comply
with all employee protections required by New Hampshire law and the Settlement
Agreement. On November 1, 2002, the Company closed the sale of its interests in
Seabrook and received net cash consideration of approximately $108.3 million for
its interests in the Seabrook Project (the "Seabrook Closing").
Issuer Tender Offer.
On January 31, 2003, BayCorp commenced an issuer tender offer to purchase up
to 8,500,000 shares of its Common Stock at a price of $14.85 per share (the
"Tender Offer" or "Offer"). The Company disclosed in the Offer to Purchase
mailed to shareholders that the Board may decide to reduce the number of shares
purchased in the Offer to preserve the Company's ability to use its
approximately $90 million in net operating loss ("NOL") carryforwards. The Offer
was scheduled to expire on March 3, 2003.
On March 4, 2003, in view of the response to the Offer and the significant
proration that would have been necessary to preserve the Company's approximately
$97 million in NOL carryforwards, the Board determined and announced that it
would not exercise its discretion to prorate the shares tendered in the Offer to
preserve the Company's ability to use the NOL carryforwards without limitation.
The Company extended the expiration date of the Tender Offer to March 18, 2003
to provide shareholders additional time to tender shares that had not been
tendered or to withdraw shares that had been tendered. At the extended
expiration date of March 18, 2003, 9,207,508 shares had been properly tendered
and not withdrawn (including options tendered for repurchase and cancellation)
and the Company exercised its discretion to purchase up to an additional 2% of
outstanding shares, purchasing a total of 8,673,887 shares (and options) at a
purchase price of $14.85, representing approximately 94.3% of the shares (and
options) tendered, excluding odd lots which were purchased without proration.
Payment for all such shares and options was completed by March 24, 2003. As a
result, as of March 24, 2003 the Company had 683,316 fully diluted shares and
cash and cash equivalents of approximately $11,800,000.
Enron Claim
On January 4, 2002, BayCorp reported that Great Bay received notice on
December 21, 2001 from Enron Power Marketing, Inc. ("Enron") that Enron was
terminating its contracts with Great Bay. Enron owes Great Bay $1,075,200 for
power delivered prior to Enron's Chapter 11 bankruptcy filing on December 2,
2001. Great Bay also had an administrative claim against Enron of $684,100 for
power delivered between December 2, 2001 and December 21, 2001 and an
unliquidated claim for damages resulting from the termination of the contracts.
Enron paid $684,100 to Great Bay on February 21, 2002. During the fourth quarter
of 2001, BayCorp recorded an expense of $1,100,000 to establish a reserve for
doubtful accounts due to the uncertainty of collecting remaining amounts
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owed by Enron to Great Bay for power delivered prior to Enron's Chapter 11
bankruptcy filing. Enron has not yet filed a plan of reorganization and the
amount of any recovery by the Company on account of its claim against Enron is
uncertain.
HoustonStreet Deconsolidation.
The Company owned 100% of HoustonStreet as of December 31, 1999.
HoustonStreet sold capital stock in 2000 to outside investors and as a result,
as of December 4, 2000, the Company's ownership fell below 50%, to 45.9%.
Subsequently, the Company deconsolidated HoustonStreet as of December 4, 2000
and started accounting for this investment on the equity method.
On March 30, 2001, HoustonStreet raised approximately $2.9 million in
additional funding, including $450,000 from BayCorp, by selling senior secured
notes, warrants to purchase HoustonStreet preferred stock and warrants to
purchase HoustonStreet common stock. Collectively, these securities are referred
to as the "HoustonStreet Series C Units." In April 2001, BayCorp authorized
HoustonStreet to convert BayCorp's $7,000,000 loan made in 2000, along with
approximately $1,000,000 in accrued interest and penalties on the note and past
due management fees, into $8,000,000 of Series C Units. The loan, accrued
interest and receivables from HoustonStreet had been written down to zero as of
December 31, 2000 and as such, the conversion of these amounts into Series C
units had no accounting impact on BayCorp.
In 2001, HoustonStreet significantly reduced the size of its organization
and focused its efforts on its crude oil and refined products trading platforms.
PRE-NOVEMBER 2002 AND CURRENT BUSINESS
Until November 1, 2002, BayCorp's principal wholesale electricity generation
and trading assets were its 100% equity interests in Great Bay and Little Bay.
The business of Great Bay and Little Bay consisted of managing their joint
ownership interests in the Seabrook Project and the sale in the wholesale power
market of their share of electricity produced by the Seabrook Project. Neither
Great Bay nor Little Bay had operational responsibility for the Seabrook
Project. Great Bay was a party to one long-term power contract for approximately
10 MW of Great Bay's share of the Seabrook Project capacity. GBPM has assumed
Great Bay's obligations under that contract which was amended, effective
November 1, 2002 to provide for 9.06 MW of firm (non-unit-specific) power. See
"Purchased Power Agreements" below. During the period that it owned interests in
Seabrook, Great Bay's business strategy was to utilize unit contingent and firm
forward sales contracts to maximize the value of its 174 MW power supply.
Prior to 1998, Great Bay sold most of its share of the Seabrook Project
electricity output under unit contingent contracts. Under unit contingent
contracts, Great Bay was obligated to provide the buyer with power only when the
Seabrook Project was operating. In late 1998, Great Bay began to sell some of
its electricity as firm power, which entitles the buyer to electricity whether
or not the Seabrook Project is operating. Buyers pay a premium for firm power
over unit contingent power because they can rely on uninterrupted electricity.
In order to supply firm power during unscheduled outages at the Seabrook
Project, Great Bay purchased power from the spot market and resold that power to
its firm power customers. Spot market sales are subject to price fluctuations
based on the relative supply and demand of electricity. As a result of spot
market power price fluctuations, Great Bay on occasion had to purchase power at
prices exceeding prices paid by Great Bay's firm power customers during outages.
Although Great Bay bore the primary risk of these price fluctuations, Great Bay
maintained insurance in 2000 and 2001 to protect Great Bay during periods of
extreme price volatility, subject to certain deductibles and coverage limits. In
December 2001, Great Bay cancelled this insurance. Great Bay did not enter into
any firm power contracts for 2002 given the expected sale of the Seabrook
Project in 2002.
After the Closing of the Seabrook sale on November 1, 2002, BayCorp's
principal operating assets have been its purchased power contract with Unitil
and its equity interest in HoustonStreet.
The Seabrook Project
The Seabrook Project is located on an 896-acre site in Seabrook, New
Hampshire. Until November 1, 2002, it was owned by Great Bay, Little Bay and
nine other utility companies, consisting of North Atlantic Energy Company,
Connecticut Light and Power, The United Illuminating Company, Canal Electric
Company, Massachusetts Municipal Wholesale Electric Company, New England Power
Company, New Hampshire Electric Cooperative, Inc., Taunton Municipal Lighting
Plant and Hudson Light & Power Department (together with Great Bay and Little
Bay, the "Participants").
Seabrook Unit 1 is a 1,150-MW nuclear-fueled steam electricity generating
station. It employs a four loop, pressurized water reactor and support auxiliary
systems designed by the Westinghouse Electric Company. The reactor is housed in
a steel-lined reinforced concrete containment structure and a concrete
containment enclosure structure. Reactor cooling water is obtained from the
Atlantic Ocean through a 17,000-foot-long intake tunnel and returned through a
16,500-foot-long discharge tunnel. The station has a remaining expected license
life of 23 years. Seabrook Unit 1 transmits its generated power to the New
England 345 kilovolt
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transmission grid, a major network of interconnecting lines covering New
England, through three separate transmission lines emanating from the station.
On March 15, 1990, the Participants received a full power operating license from
the NRC that authorizes operation of Seabrook Unit 1 until October 2026.
Commercial operation of Seabrook Unit 1 commenced on August 19, 1990. As of
November 1, 2002, Management believed that Seabrook Unit 1 was in good
condition.
Since the Seabrook Project was originally designed to consist of two
generating units, Great Bay and Little Bay also owned a combined 15% joint
ownership interest in Seabrook Unit 2. Great Bay and Little Bay assigned no
value to Seabrook Unit 2 because on November 6, 1986, the joint owners of the
Seabrook Project voted to dispose of Unit 2. Thereafter, Great Bay wrote off its
investment in Unit 2. Little Bay had no investment in Unit 2. Certain assets of
Seabrook Unit 2 have been sold from time to time to third parties. However,
there have been no material sales of Unit 2 assets since July 1996.
Because Seabrook Unit 2 was never completed or operated, costs associated
with its disposition were not included in the amounts collected for the
decommissioning of Unit 1 and the common facilities. Great Bay and Little Bay
paid their share of monthly expenses required to preserve and protect the value
of the Seabrook Unit 2 components. Seabrook Unit 2 was sold as part of the sale
of the Seabrook Project on November 1, 2002. At that date, the Sellers
contributed their pro-rata share of $2 million to an escrow account for the
development and performance of a plan to mitigate the visual impact of Unit 2.
Joint Ownership of Seabrook
Until November 1, 2002, Great Bay and Little Bay were parties to the
Agreement for Joint Ownership, Construction and Operation of New Hampshire
Nuclear Units (the "JOA"), along with the other Participants, which established
the respective ownership interests of the Participants in the Seabrook Project
and defined their responsibilities with respect to the ongoing operation,
maintenance and decommissioning of the Seabrook Project. In general, the ongoing
costs of the Seabrook Project were divided proportionately among the
Participants in accordance with their ownership interests in the Seabrook
Project. Ownership interests in the Seabrook Project were several and not joint,
and each Participant was only liable for its share of the Seabrook Project's
costs and not liable for any other Participant's share. Great Bay and Little
Bay's combined joint ownership interest of 15% was the third largest interest
among the Participants, exceeded only by the approximately 40% interest held by
affiliates of Northeast Utilities ("NU") and the 17.5% interest held by The
United Illuminating Company.
The JOA provided for a Managing Agent to carry out the daily operational and
management responsibilities of the Seabrook Project. The Managing Agent at the
time of the November 1, 2002 Closing, appointed by certain of the Participants
on June 29, 1992, was North Atlantic Energy Service Corporation ("NAESCO"), a
wholly-owned subsidiary of NU. NU, through certain of its
affiliates, held the largest joint ownership interest in the Seabrook Project,
as described above prior to FPL Energy Seabrook's acquisition on November 1,
2002. Certain material decisions regarding the Seabrook Project were made by an
Executive Committee consisting of the chief executive officers of certain of the
Participants or their designees.
Marketing and Customers
Before the Seabrook Closing, Great Bay sold most of its power in the
Northeast United States in the short-term wholesale power market. Great Bay did
not depend on any single customer because a number of utilities and marketers
were willing to buy Great Bay's share of electricity from the Seabrook Project
at substantially the same price. The Company received approximately 82% of its
2002 operating revenue from two customers: Constellation NewEnergy and
Constellation Power Source. These sales represented 37% and 46% respectively of
the Company's revenues. The Company believes that the loss of any or both of
these customers would not have had a material adverse effect on the Company's
results of operations because the electricity sold under the contracts with
these customers could have been sold on the open market at prices that
approximated the pricing under such contracts, and the Company did not rely on
repeat sales of electricity to these particular customers in any subsequent
year. Prices in the short-term market are typically higher during the summer and
winter because the demand for electrical power is higher during these periods in
the Northeast United States. The Company utilized unit contingent and firm
forward energy trading contracts to maximize the value of the uncommitted
portion of its 174-megawatt power supply from the Seabrook Project in 2001. The
Company was not a party to any firm forward energy trading contracts as of
December 31, 2001. The Company entered into one long-term firm forward energy
trading contract in 2002. In anticipation of the Seabrook Sale, the Unitil
Purchased Power Agreement was amended as of November 1, 2002. See "Purchased
Power Agreements" below. The amendment includes a provision that Great Bay will
supply power to Unitil Power Corporation regardless of whether Seabrook is
providing the power.
Purchased Power Agreements
Great Bay was party to a purchased power contract, dated as of April 1, 1993
(the "Unitil Purchased Power Agreement"), with Unitil Power Corporation
("Unitil") that provided for Great Bay to sell to Unitil 0.8696% of the energy
and capacity of
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Seabrook, approximately 10 MW. The Unitil Purchased Power Agreement commenced on
May 1, 1993 and runs through October 31, 2010. The price for power is subject to
increase in accordance with a formula that provides for adjustments at less than
the actual rate of inflation. Unitil has an option to extend the Unitil
Purchased Power Agreement for up to 12 years until 2022.
The Unitil Purchased Power Agreement is front-end loaded whereby Unitil pays
higher prices, on an inflation-adjusted basis, in the early years of the
Agreement and lower prices in later years. The amount of the excess paid by
Unitil in the early years of the Unitil Purchased Power Agreement was quantified
in a "Balance Account" which increased annually to a total of $4.1 million in
July 1998, and then decreased annually, reaching zero in July 2001. If the
Unitil Purchased Power Agreement had terminated prior to its scheduled
termination, and if at that time there was a positive amount in the Balance
Account, Great Bay would have been obligated to refund that amount to Unitil. To
secure the obligation of Great Bay to repay Unitil the amount in the Balance
Account, the Unitil Purchased Power Agreement granted Unitil a "Second Mortgage"
on Great Bay's interest in the Seabrook Project. As the result of the Balance
Account reaching zero in July 2001, the Second Mortgage was discharged by Unitil
in August 2001.
To secure the obligation of Great Bay under the Unitil Purchased Power
Agreement to pay damages in the event of a default by Great Bay, the Unitil
Purchased Power Agreement granted Unitil a "Third Mortgage" on Great Bay's
interest in the Seabrook Project. The Third Mortgage was subject and subordinate
to (i) senior mortgages and security agreements securing Great Bay's
indebtedness to lenders in an aggregate amount not to exceed $80,000,000 and
(ii) other mortgages that may be granted by Great Bay to other purchasers of
power from Great Bay to secure a Balance Account or similar obligation.
In anticipation of the Seabrook Sale, the Unitil Purchased Power Agreement
was amended as of November 1, 2002. The amendment primarily modifies the
existing power supply contract to reduce the amount of power delivered to 9.06
megawatts, reduce the price that Unitil pays for power to $50.34 per megawatt
hour, and provide that Great Bay will supply the power regardless of whether
Seabrook is providing the power. The amendment also provides alternative
security for Unitil's benefit, to replace and discharge the mortgage that
secured Great Bay's performance of the agreement. The amendment received FERC
approval. Great Bay has assigned the Unitil Purchased Power Agreement to GBPM.
In December 2002, Unitil began the sale of its portfolio of power purchase
contracts, including its contract with GBPM. Unitil has concluded the sale
process and on March 17, 2003 announced that Mirant Americas was the winning
bidder.
Great Bay and Little Bay were parties to a power sales agreement dated as of
November 19, 2001 under which Little Bay sold at cost, and Great Bay purchased,
all of the output of the portion of Seabrook owned by Little Bay. This agreement
was a unit power sale agreement. Accordingly, when all or part of Little Bay's
interest in Seabrook was not producing electricity, the obligation of Little Bay
to sell (and of Great Bay to purchase) was proportionately eliminated. The
agreement was terminated as of November 1, 2002.
Competition
Prior to the Seabrook Closing, Great Bay sold its share of Seabrook Project
electricity into the wholesale electricity market in the Northeast United
States. There are a large number of suppliers to this market and a surplus of
capacity, resulting in intense competition. In addition, non-utility wholesale
generators of electricity, such as independent power producers ("IPPs"),
Qualifying Facilities ("QFs") and EWGs, as well as power marketers and brokers,
actively sell electricity in this market.
Great Bay may have faced increased competition, primarily based on price,
from all the foregoing sources in the future, but believed that it would have
been able to compete effectively in the wholesale electricity market because of
the current low cost of electricity generated by the Seabrook Project in
comparison with existing alternative sources.
NEPOOL
Effective December 1, 2002 GBPM was a member of the New England Power Pool
("NEPOOL") and is a party to the Restated NEPOOL Agreement (the "NEPOOL
Agreement"). Great Bay had also been a member of Nepool prior to the termination
of its membership effective January 1, 2003. NEPOOL is a voluntary association
of companies engaged in the electricity business in New England and its
membership is open to all investor-owned, municipal and cooperative electric
utilities in New England and other companies that transact business in the
region's bulk power market. Certain end users of electricity may also become
NEPOOL members. The NEPOOL Agreement imposes certain obligations on its
participants concerning generating capacity reserves and the right to use major
transmission lines.
New England's independent system operator, ISO New England, Inc. ("ISO-NE"),
was established in July 1997 and is responsible for maintaining the safety and
reliability of the transmission grid and bulk power market within the NEPOOL
region. ISO-NE performs these functions under a services contract with NEPOOL.
ISO-NE administers a bid-based wholesale market system in New England that is
designed to provide a competitive and efficient generation market through an
hourly clearing price mechanism. During 2001 and 2002, ISO-NE was developing a
revised market system, known as Standard Market Design ("SMD"), which
incorporates location-base pricing, congestion management and day ahead and real
time energy markets.
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Northeast RTO
In January 2001, in response to Federal Energy Regulatory Commission
("FERC") Order No. 2000, ISO-NE and six companies owning transmission facilities
in New England filed a joint petition for a declaratory order to form a Regional
Transmission Organization ("RTO") for the NEPOOL control area. The NEPOOL RTO
filing proposed the establishment of two entities working in concert: (1) a new
independent transmission company, Northeast Independent Transmission Company,
LLC ("NE ITC"), and (2) an independent system operator. In July 2001, FERC
issued a series of orders that rejected stand-alone RTO proposals filed by
ISO-NE, the New York ISO ("NYISO"), and the PJM Interconnection ("PJM") and
directed these three northeastern power pools to participate in a mandatory
mediation process with the goal of forming a single Northeast RTO ("NE RTO").
The 45-day NE RTO mediation commenced in July 2001 and ran through early
September 2001, and resulted in a business plan for developing and implementing
the NE RTO. However, in early January 2002, PJM signaled its intent to move away
from the NE RTO and instead work to create an RTO with the Midwest ISO. ISO-NE
and NYISO continued evaluating the NE RTO and filed a proposal with FERC in
August 2002, but withdrew the proposal in November 2002 and announced that they
had abandoned plans to consolidate into a single RTO.
Nuclear Power, Energy and Utility Regulation
The Seabrook Project and Great Bay and Little Bay, as part owners of a
licensed nuclear facility, were subject to the broad jurisdiction of the NRC,
which is empowered to authorize the siting, construction and operation of
nuclear reactors after consideration of public health and safety, environmental
and antitrust matters. Great Bay and Little Bay had been affected to the extent
of their proportionate share by the cost of any such requirements made
applicable to the Seabrook Project.
Great Bay and Little Bay were also subject to the jurisdiction of the FERC
under Parts II and III of the Federal Power Act and, as a result, were required
to file with FERC all contracts for the sale of electricity. FERC has the
authority to suspend the rates at which Great Bay and Little Bay propose to sell
power, to allow such rates to go into effect subject to refund and to modify a
proposed or existing rate if FERC determines that such rate is not "just and
reasonable." FERC's jurisdiction also includes, among other things, the sale,
lease, merger, consolidation or other disposition of facilities, interconnection
of certain facilities, account and services and property records. As successor
to Great Bay with respect to the Unitil Purchased Power Agreement, GBPM is
similarly subject to FERC regulation.
Because they both were EWG's, Great Bay and Little Bay were not subject to
the jurisdiction of the Securities and Exchange Commission ("SEC") under PUHCA.
In order to maintain their EWG status, Great Bay and Little Bay had to engage
exclusively in the business of owning and/or operating all or part of one or
more "eligible facilities" and to sell electricity only at wholesale (i.e. not
to end users) and activities incidental thereto. An "eligible facility" is a
facility used for the generation of electric energy exclusively at wholesale or
used for the generation of electric energy and leased to one or more public
utility companies. The term "facility" may include a portion of a facility. In
the case of Great Bay and Little Bay, their combined 15% joint ownership
interest in the Seabrook Project comprised an "eligible facility."
Over the past several years, New Hampshire and a number of other New England
states have implemented deregulation of the electric retail utility industry. In
addition, NEPOOL restructured to create and maintain open, non-discriminatory,
competitive, unbundled wholesale markets for energy, capacity, and ancillary
services. The NEPOOL wholesale market commenced operation in May 1999. All of
the deregulation initiatives open retail and wholesale electricity markets to
competition in the affected states.
Nuclear Power Issues
Nuclear units in the United States have been subject to widespread criticism
and opposition, which has led to construction delays, cost overruns, licensing
delays and other difficulties. Various groups have sought to prohibit the
completion and operation of nuclear units and the disposal of nuclear waste by
litigation, legislation and participation in administrative proceedings. The
Seabrook Project was the subject of significant public controversy during its
construction and licensing and remains controversial. An increase in public
concerns regarding the Seabrook Project or nuclear power in general could have
adversely affected the operating license of Seabrook Unit 1.
In the event of a permanent shutdown of any unit, NRC regulations require
that the unit be completely decontaminated of any residual radioactivity. The
owners of the Seabrook Project had accumulated monies in a trust fund to pay
decommissioning costs. If such costs exceeded the amount of the trust fund, the
current owners at such time would be liable for the excess. In connection with
the sale of the Seabrook Project, the Sellers contributed additional funds to
the trust fund and transferred the trust funds to FPL Energy Seabrook, which
assumed all of the Sellers' including Great Bay's and Little Bay's,
decommissioning liability.
Nuclear Related Insurance
7
In accordance with the Price Anderson Act, the limit of liability for a
nuclear-related accident is approximately $9.5 billion, effective November 18,
1994. The primary layer of insurance for this liability is $200 million of
coverage provided by the commercial insurance market. The secondary coverage is
approximately $9.3 billion, based on the 106 nuclear units (103 operating units
and three units that still handle used fuel) in the United States. The secondary
layer is based on a retrospective premium assessment of $88.1 million per
nuclear accident per licensed reactor, payable at a rate not exceeding $10
million per year per reactor. In addition, the retrospective premium is subject
to inflation based indexing at five year intervals and, if the sum of all public
liability claims and legal costs arising from any nuclear accident exceeds the
maximum amount of financial protection available, then each licensee can be
assessed an additional 5% ($4.2 million) of the maximum retrospective
assessment. With respect to the Seabrook Project, Great Bay and Little Bay would
have been obligated to pay their ownership share of any assessment resulting
from a nuclear incident at any United States nuclear generating facility.
Great Bay and Little Bay also independently purchased business interruption
insurance from Nuclear Electric Insurance Limited ("NEIL"). The current policy
is in effect from April 1, 2002 until April 1, 2003. The policy provides for the
payment of a fixed weekly loss amount of $600,000 in the event of an outage at
the Seabrook Project of more than 23 weeks resulting from property damage
occurring from a "sudden fortuitous event, which happens by chance, is
unexpected and unforeseeable." The maximum amount payable to Great Bay and
Little Bay is a total of $81.1 million. Under the terms of the policy, Great Bay
and Little Bay are subject to a potential retrospective premium adjustment of up
to approximately $789,000 should NEIL's board of directors deem that additional
funds are necessary to preserve the financial integrity of NEIL. Since NEIL was
founded in 1980, there has been no retrospective premium adjustment; however,
there can be no assurance that NEIL will not make retrospective adjustments in
the future. The liability for this retrospective premium adjustment ceases six
years after the end of the policy unless prior demand has been made.
The board and management of NEIL has announced that in light of the events
of September 11, 2001, the current coverage for terrorism will remain available
under all the NEIL policies, but with the addition of a provision regarding the
maximum recoveries available for multiple terrorism occurrences. The NEIL board
approved the following changes to the NEIL policy forms to respond to the
increased potential of multiple terrorism losses at insured sites: (1) increase
the multiple for the maximum retrospective premium adjustments from five to ten;
and (2) provide specifically for the use of NEIL resources for multiple losses
resulting from terrorism within one year. Under this provision, all losses
occurring within 12 months from the date of the first loss would share a single
recovery of $3.24 billion plus any amounts NEIL recovers from reinsurers or the
government, with priority for the property claims over accidental outage claims.
In November 2002, the Terrorism Risk Insurance Act of 2002 was signed into law.
The legislation provides government indemnity for international acts of
terrorism in the United States, including at nuclear plants. The legislation has
automatic application to NEIL and its domestic insurance policies without the
need to alter or withdraw NEIL's current endorsement for terrorism. The current
endorsement still has effect where the legislation does not apply.
Nuclear Waste Disposal
Costs associated with nuclear plant operations include amounts for nuclear
waste disposal, including spent fuel, as well as for the ultimate
decommissioning of the plants. The Nuclear Waste Policy Act of 1982 (the "NWPA")
requires the United States Department of Energy (the "DOE"), subject to various
contingencies, to design, license, construct and operate a permanent repository
for high level radioactive waste and spent nuclear fuel, which are collectively
referred to as "high-level waste."
The joint owners of the Seabrook Project, through their managing agent
NAESCO, entered into contracts with the DOE for high-level waste disposal in
accordance with the NWPA. Under these contracts and the NWPA, the DOE was
required to take title to and dispose of the Seabrook Project's high-level waste
beginning no later than January 31, 1998. The DOE has not met its contractual
and statutory requirements under the NWPA calling for the DOE to begin accepting
spent fuel from the industry by January 1998. The DOE announced that its first
high-level waste repository will not be in operation until 2010 at the earliest.
As a result of this delay, many states and nuclear plant operators,
including NAESCO, sued the DOE for injunctive relief and monetary damages. Two
U.S. Courts of Appeals ordered the DOE to proceed with its high-level waste
disposal obligations and ruled that plant operators are entitled to monetary
damages from DOE. However, there can be no assurance that the Seabrook Project
will collect damages from the DOE because, among other things, NAESCO's case
against the DOE is still pending. Until the DOE begins receiving nuclear waste
materials in accordance with the NWPA and its contracts, nuclear plants such as
Seabrook must retain high-level waste on-site or make other storage provisions.
In addition, NAESCO advised the Company that the Seabrook Project has adequate
on-site storage capacity for high-level waste until approximately 2008.
In May 2001, the DOE issued a supplement to the 1999 draft Environmental
Impact Statement of Yucca Mountain in Nevada, and public hearings on this
document were held in mid-2001. On February 14, 2002, the DOE recommended to
President Bush that Yucca Mountain in Nevada be developed as the nation's first
long-term geologic repository for the disposal of spent nuclear fuel high-level
nuclear waste. On February 15, 2002 the President notified Congress that he
considers Yucca Mountain qualified for a construction permit application, taking
the next in a series of steps required for approving the site as a nuclear
materials repository.
8
The Low-Level Radioactive Waste Policy Act of 1980 requires each state to
provide disposal facilities for low-level waste ("LLW") generated within the
state, either by constructing and operating facilities or by joining regional
compacts with other states to jointly fulfill their responsibilities. However,
the Low-Level Radioactive Waste Policy Amendments Act of 1985 permits each state
in which a currently operating disposal facility is located (South Carolina,
Nevada and Washington) to impose volume limits and a surcharge on shipments of
LLW from states that are not members of their regional compact.
The Seabrook Project shipped certain LLW to privately owned facilities in
South Carolina and Utah. Since 1999, the Project had been shipping LLW to a
processing facility in Tennessee where the material is subjected to separation
and volume reduction methods to minimize the final volume to be disposed at a
burial site. All LLW generated by the Seabrook Project that exceeded the maximum
radioactivity level of LLW accepted by these facilities was, at the date of the
Seabrook Closing, stored on-site at the Seabrook facility. The liability for
the disposal of any LLW that remained at Seabrook after November 1, 2002 was
transferred to FPL Energy Seabrook upon closing.
Decommissioning
NRC licensing requirements and restrictions are also applicable to the
decommissioning of nuclear generating units at the end of their service lives,
and the NRC has adopted comprehensive regulations concerning decommissioning
planning, timing, funding and environmental review. Changes in NRC requirements
or technology can increase estimated decommissioning costs.
Until November 1, 2002, Great Bay and Little Bay were responsible for their
pro rata share of the decommissioning and cancellation costs for Seabrook. FPL
Energy Seabrook has assumed this decommissioning liability as of the Seabrook
Closing. Great Bay had paid its share of decommissioning funding on a monthly
basis. Little Bay's share of decommissioning costs were prefunded by Montaup,
the owner of the 2.9% interest in the Seabrook Project that Little Bay acquired
in November 1999. As part of that acquisition, Montaup transferred approximately
$12.4 million into Little Bay's decommissioning account, an irrevocable trust
earmarked for Little Bay's share of Seabrook Plant decommissioning expenses.
The Seabrook decommissioning funding schedule is determined by the New
Hampshire Nuclear Decommissioning Financing Committee (the "NDFC"). The NDFC
reviews the decommissioning funding schedule for the Seabrook Project at least
annually and, for good cause, may increase or decrease the amount of the funds
or alter the funding schedule.
In November 2001, the NDFC issued a Final Report and Order in proceeding
NDFC Docket 2001-1, which established a decommissioning funding schedule in
anticipation of the sale of a majority of the ownership interests in Seabrook.
The NDFC set an accelerated funding schedule for the years 2002 through 2006.
For the years 2007 and beyond, the funding schedule assumes contributions will
be made until 2026. The order also established the requirement for a lump sum
"top-off" payment at the transfer of Seabrook to a new owner, which would
result in a total decommissioning fund balance that meets the funding
requirements of the NDFC. The Sellers paid their shares of the top-off amount
which for Great Bay and Little Bay in the aggregate was $5,668,443.
Funds collected by Seabrook for decommissioning were deposited in an
external irrevocable trust pending their ultimate use. The earnings on the
external trusts also accumulated in the fund balance. The trust funds were
restricted for use in paying for the decommissioning of Unit 1. The investments
in the trust are available for sale. Great Bay and Little Bay therefore reported
their investment in trust fund assets at market value and any unrealized gains
and losses are reflected in equity. In connection with the sale of Great Bay's
and Little Bay's Seabrook interests, each company transferred its
decommissioning trust funds to FPL Energy Seabrook, which assumed their
decommissioning obligations.
Environmental Regulation
The Seabrook Project, like other electric generating stations, is subject to
standards administered by federal, state and local authorities with respect to
the siting of facilities and associated environmental factors. The United States
Environmental Protection Agency (the "EPA"), and certain state and local
authorities, have jurisdiction over releases of pollutants, contaminants and
hazardous substances into the environment and have broad authority in connection
therewith, including the ability to require installation of pollution control
devices and remedial actions. The NRC has promulgated a variety of standards to
protect the public from radiological pollution caused by the normal operation of
nuclear generating facilities.
The EPA issued a National Pollutant Discharge Elimination System ("NPDES")
permit, valid for a period of five years, to NAESCO on October 30, 1993
authorizing discharges from Seabrook Station into the Atlantic Ocean and the
Browns River in accordance with limitations, monitoring requirements and
conditions specified in the permit. A renewal application was filed in April
1998 and supplemented in August and September of 1998 and in September 1999. The
EPA issued a draft NPDES permit in December 2001. The final permit was issued in
February 2002. The permit indicates that the Seabrook Project water cooling
system represents the best technology available.
9
On July 26, 1999, the New Hampshire Department of Environmental Services
issued a renewal of NAESCO permits to operate two auxiliary boilers, two
emergency diesel generators and other smaller units in accordance with New
Hampshire Revised Statutes Annotated Chapter 125-C. These permits prescribed
limits of the emission of air pollutants into the ambient air as well as record
keeping and other reporting criteria.
In some environmental areas, the NRC and the EPA have overlapping
jurisdiction. Thus, in addition to being subject to NRC regulations, the
Seabrook Project is subject to all conditions imposed by the EPA and a variety
of federal environmental statutes, including obtaining permits for the discharge
of pollutants (including heat, which is discharged by the Seabrook Project) into
the nation's navigable waters. In addition, the EPA has established standards,
and is in the process of reviewing existing standards, for certain toxic air
pollutants, including radionuclides, under the United States Clean Air Act which
apply to NRC-licensed facilities. The effective date for the new EPA
radionuclide standard has been stayed as applied to nuclear generating units.
Management believes that Great Bay and Little Bay were, at the time of the
Seabrook Closing, in compliance in all material respects with applicable EPA,
NRC and other regulations relating to pollution caused by nuclear generating
facilities.
Equity Investment in HoustonStreet
BayCorp owns an approximate 46.4% equity interest in HoustonStreet.
HoustonStreet developed and operates HoustonStreet.com, an Internet-based,
independent crude oil and refined products trading exchange in the United
States. Following the Seabrook Closing, the Company's investment in
HoustonStreet, along with the Unitil Purchased Power Agreement, constitute the
Company's principal operating assets.
HoustonStreet operates in a very competitive market. Its main competitors
are numerous OTC telephone brokers and several online exchanges such as
IntercontinentalExchange and Tradespark. HoustonStreet believes, however, that
it is currently the only remaining online exchange for the OTC physical crude
oil and refined products markets. Other online exchanges focus primarily on
natural gas, power, and financial crude oil markets such as swaps and options.
HoustonStreet has exited the natural gas and power markets and currently focuses
exclusively on the physical crude oil markets.
HoustonStreet's crude oil platform includes several trading floors,
organized by grade and location. The platform allows for a user-customized view
where the user can specify which markets should appear together on a floor,
regardless of grade, location or type. HoustonStreet's refined products platform
includes several trading floors, organized by commodity, pipeline and geographic
location. Bids and offers are segmented by trading period (month and cycle) and
by grade. Commodities traded include numerous grades of gasoline and
distillates, specifically jet fuel, number 2 heating oil, low sulfur diesel,
regular gas, regular reformulated gas, premium gas and premium reformulated gas.
In 2002, HoustonStreet had trading volumes of over 117 million barrels with a
notional value of over $3 billion and revenues of $935,380. HoustonStreet has
six employees.
On March 30, 2001, HoustonStreet raised approximately $2.9 million in
additional funding, including $450,000 from BayCorp, by selling senior secured
notes, warrants to purchase HoustonStreet preferred stock and warrants to
purchase HoustonStreet common stock. Collectively, these securities are referred
to as the "HoustonStreet Series C Units." In April 2001, BayCorp authorized
HoustonStreet to convert BayCorp's $7 million loan made in 2000, along with
approximately $1 million in accrued interest and penalties on the note and past
due management fees, into $8 million of Series C Units.
The Company's ownership of the voting shares of HoustonStreet as of December
18, 2002 was 46.4%. In addition, the Company holds a senior secured promissory
note issued to the Company by HoustonStreet on March 30, 2001 with a face value
of $8,419,842, which is one of a series of notes. These notes bear interest on
the outstanding principal from the date issued until the notes are paid in full
at prime plus 5%. The notes were originally due and payable in December 2001,
and the maturity date was subsequently extended to January 15, 2004. Accrued
interest is payable, at the sole option of the holder, in cash or in warrants to
purchase shares of Series C convertible preferred stock. The notes are secured
by a first priority security interest in all the assets of HoustonStreet. Upon
the exercise of the preferred warrants by the holders of all of the notes,
including those issuable for payment of interest due under the notes, the
Company would own approximately 64% of the voting shares of HoustonStreet.
EMPLOYEES AND MANAGEMENT
As of March 15, 2003, BayCorp had seven employees. GBPM and BayCorp
Ventures, LLC had no employees. As of March 15, 2003, HoustonStreet had six
employees.
10
Executive Officers of the Registrant.
The executive officers of BayCorp are:
NAME AGE POSITION
- ---- --- --------
Frank W. Getman Jr.... 39 Chairman of the Board, Chief Executive Officer
and President
Anthony M. Callendrello 51 Chief Operating Officer and Secretary
Patrycia T. Barnard... 47 Vice President of Finance and Treasurer
Frank W. Getman Jr. has served as Chief Executive Officer and President of
the Company since May 1998. Mr. Getman has served as Chairman of the Board since
May 2000 and has served as Chief Operating Officer of the Company from September
1996 to March 2000 and Vice President, Secretary and General Counsel of Great
Bay from August 1995 to September 1996. From September 1991 to August 1995, Mr.
Getman was an attorney with the law firm of Hale and Dorr LLP, Boston,
Massachusetts. Mr. Getman holds J.D. and M.B.A. degrees from Boston College and
a B.A. in Political Science from Tufts University.
Anthony M. Callendrello has served as the Company's Chief Operating Officer
since April 2000 and as the Secretary of the Company since May 2000. Mr.
Callendrello has over 20 years experience in the nuclear industry. With over 16
years at the Seabrook Project, Mr. Callendrello most recently served as the
plant's Manager of Environmental, Government and Owner Relations. From 1980 to
1983, Mr. Callendrello was employed with Stone & Webster Engineering
Corporation, which provided engineer and architect services to utility and other
industries. Mr. Callendrello holds a Master of Engineering -- Mechanical degree
and a Bachelor of Engineering degree from Stevens Institute of Technology.
Patrycia T. Barnard has served as Vice President of Finance and Treasurer of
the Company since January 2001. Ms. Barnard served as Director of Accounting
since May 1996 and has served as Treasurer since 1998. Ms. Barnard has over 20
years experience in multi-national, corporate accounting and finance. From 1978
until 1993, Ms. Barnard was employed by BTR, Plc., a conglomerate of highly
diversified manufacturing companies, most recently as Assistant Controller for
Clarostat Mfg. Co. Inc., a vertically intergrated electronic manufacturing
company located in Plano, TX and Juarez, Mexico. Ms. Barnard holds an M.B.A and
a Masters in Accounting from New Hampshire College. She also holds a B.S. in
Business Administration from the University of New Hampshire.
BayCorp entered into Management and Administrative Services Agreements (the
"Services Agreements") with Great Bay and HoustonStreet. Under the Services
Agreement with Great Bay, BayCorp provided Great Bay with a full range of
management services, including general management and administration, accounting
and bookkeeping, budgeting and regulatory compliance. Great Bay paid $3,600,000
to BayCorp for these services in 2002. Under the Services Agreement with
HoustonStreet, BayCorp provides HoustonStreet with administrative, accounting
and bookkeeping, budgeting and human resource services. HoustonStreet paid
$60,000 to BayCorp in 2002 for these services. Each Services Agreement has a
one-year term and provides for automatic one-year renewals.
AVAILABLE INFORMATION
BayCorp does not maintain an Internet address and, therefore, BayCorp's
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports are not available on a Company Internet
website. BayCorp will provide paper copies of the Company's filings free of
charge upon request.
ITEM 2. PROPERTIES.
Until November 1, 2002, BayCorp's principal assets included its 100% equity
interests in Great Bay and Little Bay. In turn, Great Bay's and Little Bay's
principal asset was a combined 15% joint ownership interest in the Seabrook
Project. On November 1, 2002, BayCorp sold Great Bay's and Little Bay's interest
in Seabrook (see "Recent Developments" below.) In December 2002, BayCorp
formally dissolved Great Bay and Little Bay.
In October 2002, BayCorp created two new subsidiaries, Great Bay Power
Marketing, Inc. ("GBPM") and BayCorp Ventures, LLC. GBPM was created to hold the
purchased power contract that Great Bay has with Unitil and arrange for the
power supply to satisfy the contract. BayCorp created BayCorp Ventures, LLC to
serve as a vehicle through which the Company can make investments following the
Seabrook sale and the expiration of the Company's tender offer.
In addition, BayCorp owns approximately 46.4% of HoustonStreet which
developed and operates HoustonStreet.com, an Internet-based independent crude
oil and refined products trading exchange in the United States.
11
As of March 7, 2003, BayCorp's corporate headquarters is located in
Portsmouth, New Hampshire, where it occupies approximately 1,000 square feet of
leased office space. BayCorp's management believes that the corporate
headquarters in Portsmouth, New Hampshire meets its current requirements and
that additional space can be obtained to meet requirements for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of shareholders of the Company was held on October
29, 2002 at which the sale of substantially all of the assets and assignment of
certain liabilities of Great Bay and Little Bay to FPL Energy Seabrook pursuant
to a Purchase and Sale Agreement dated as of April 13, 2002 was approved.
6,487,681 shares were voted in favor of the proposal, 8,947 shares against, and
200 shares abstained. There were no broker nonvotes.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Following are the reported high and low sales prices of BayCorp Common Stock
("MWH") on the American Stock Exchange as reported in the Wall Street Journal
daily as traded, for each quarter of 2001 and 2002:
HIGH LOW
---- ---
2001
First Quarter $10.00 $6.25
Second Quarter 11.85 7.80
Third Quarter 9.70 8.25
Fourth Quarter 10.15 8.35
HIGH LOW
---- ---
2002
First Quarter. $ 10.10 $ 8.90
Second Quarter 12.50 9.70
Third Quarter 12.85 11.30
Fourth Quarter 14.75 12.49
As of March 24, 2003, the Company had 22 holders of record of its Common
Stock. The Company believes that as of March 24, 2003, the Company had
approximately 800 beneficial holders of its Common Stock. The number of
beneficial owners substantially exceeds the number of record holders because
many of the Company's stockholders hold their shares in street name. BayCorp has
never paid cash dividends on its common stock. Any future dividends depend on
future earnings, BayCorp's financial condition and other factors.
12
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company
as of and for the years ended December 31, 2002, 2001, 2000, 1999 and
1998. The information below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's financial statements, including the
notes thereto, contained elsewhere in this Report.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- -----------
INCOME STATEMENT DATA:
Operating Revenues............... $ 48,788 $ 79,480 $ 56,347 $ 45,761 $ 32,034
Operating Expenses............... 47,327 58,342 68,518 51,085 39,570
Net Income (Loss)................ 58,873 20,804 (21,945) (4,740) (6,769)
Weighted Average Shares
Outstanding - Basic 8,387,767 8,341,637 8,293,475 8,207,866 8,242,858
Weighted Average Shares
Outstanding - Diluted 8,671,328 8,556,994 8,293,475 8,207,866 8,242,858
Basic Net Income (Loss)
per share $7.02 $2.49 $(2.65) $(0.58) $(0.82)
Diluted Net Income (Loss)
per share $6.79 $2.43 $(2.65) $(0.58) $(0.82)
BALANCE SHEET DATA:
Cash, Cash Equivalents & Short Term
Investments.................... 136,664 17,181 14,109 6,064 12,055
Working Capital.................. 133,854 22,411 283 11,678 17,761
Total Assets..................... 142,591 173,971 155,355 159,184 140,358
Decommissioning Liability........ -0- 85,523 73,379 79,443 60,274
Capitalization:
Common Equity.................. 133,975 73,421 51,931 66,246 71,359
Total Capitalization............. 133,975 73,421 51,931 66,246 71,359
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
In October 2000, the Company announced that it reached an agreement with NU
under which the Company's generating subsidiaries, Great Bay and Little Bay,
would include their aggregate 15% ownership share of the Seabrook Project in the
auction of NU's subsidiaries' shares of the Seabrook Project. FPL Energy
Seabrook agreed to purchase 88.2% of the 1,161 MW Unit 1 and 88.2% of the
partially constructed Unit 2, for $836.6 million subject to certain adjustments,
with payment deliverable fully in cash at closing. On November 1, 2002, the
Company closed the sale of its interests in Seabrook and received cash
consideration of approximately $108.3 million for its interests in the Seabrook
Project. See "Item 1, Recent Developments - Sale of Seabrook."
BayCorp derived all of its operating revenue through its energy trading
activities and its 100% equity interest in Great Bay and Little Bay. Great Bay
and Little Bay were dissolved on December 31, 2002. In October 2002, BayCorp
created two new subsidiaries, Great Bay Power Marketing, Inc. ("GBPM") and
BayCorp Ventures, LLC. GBPM was created to hold the purchased power contract
that Great Bay had with Unitil and arrange for the power supply to satisfy the
contract. See "Item 1, Pre-November 2002 and Current Business -- Purchased Power
Agreements." BayCorp created BayCorp Ventures, LLC to serve as a vehicle through
which the Company can make investments following the Seabrook sale and the
expiration of the Company's tender offer. See Item 1, "Recent Developments."
As of December 31, 1999, the Company owned 100% of HoustonStreet.
HoustonStreet raised additional equity in 2000 from outside investors and as a
result, as of December 4, 2000, the Company's ownership fell below 50%, to
45.9%. Subsequently, the Company deconsolidated HoustonStreet as of
13
December 4, 2000, started accounting for this investment on the equity method
and suspended recognition of additional HoustonStreet losses as of that date. As
of December 31, 2002, the Company owned approximately 46.4% of HoustonStreet.
BayCorp reported net income for the years ended December 31, 2002 and 2001
and reported net losses for the years ended December 31, 2000, 1999 and 1998.
The net income in 2002 was primarily attributable to the gain on sale of the
Seabrook assets to FPL Energy Seabrook. The net income in 2001 was primarily
attributable to increased revenues and the realized gain in 2001 on firm forward
energy trading contracts. The 2000 net loss was primarily attributable to the
non-cash charge to earnings for unrealized losses on firm forward trading
contracts and the costs associated with a Seabrook refueling outage during the
final ten weeks of 2000 as well as the loss associated with the Company's equity
investment in HoustonStreet. The 1999 net loss was primarily due to costs
associated with the refueling outage during the fall of 1999 and to
HoustonStreet losses. The 1998 net loss was primarily due to the costs
associated with the unscheduled outages at the Seabrook Project that occurred
during the year and to the charge related to the termination of a power
marketing agreement between Great Bay and PECO Energy Company.
The Seabrook Project from time to time experienced both scheduled and
unscheduled outages. BayCorp incurred losses during outage periods due to the
loss of all revenues from the sale of generation and additional costs associated
with the outages as well as continuing operating and maintenance expenses and
depreciation. Unscheduled outages or operation of the unit at reduced capacity
could occur due to the automatic operation of safety systems following the
detection of a malfunction. In addition, it was possible for the unit to be shut
down or operated at reduced capacity based on the results of scheduled and
unscheduled inspections and routine surveillance by Seabrook Project personnel.
Refueling outages were generally scheduled every 18 months depending upon the
Seabrook Project capacity factor and the rate at which the nuclear fuel was
consumed. A scheduled refueling outage began on May 4, 2002. Seabrook resumed
full operating capacity on June 6, 2002.
The following discussion focuses solely on operating revenues and operating
expenses that are presented in a substantially consistent manner for all of the
periods presented.
RESULTS OF OPERATIONS
Operating Revenues
BayCorp's operating revenues for 2002 decreased by approximately
$30,692,000, or 38.6%, to $48,788,000 as compared to $79,480,000 for 2001. The
decrease was primarily attributable to a decrease in purchased power, a decrease
in selling prices and ownership of the Seabrook plant for only ten months of the
year. The Company purchased a significant amount of power to cover firm
contracts primarily due to unscheduled outages in 2001, and also purchased power
for resale in 2001, thus increasing revenues. Purchased power expenses for the
twelve months ended December 31, 2001 were approximately $27,008,000 as compared
to approximately $4,706,000 for the twelve months ended December 31, 2002. Power
was purchased primarily in the fourth quarter of 2002 to cover firm power supply
commitments following the sale of Seabrook. The capacity factor at the Seabrook
Project was 90.1% of the rated capacity for the twelve months ended December 31,
2002 as compared to a capacity factor of 85.8% for the twelve months ended
December 31, 2001. Sales of electricity were 1,278,732,000 kWhs in 2002 as
compare to 1,854,967,500 kWhs in 2001.
The Company realized a lower average selling price in 2002. During the
twelve months ended December 31, 2002, the average selling price decreased 11%
to 3.82 cents per kWh as compared to an average selling price of 4.29 cents per
kWh for the twelve months ended December 31, 2001.
Great Bay's cost of power (determined by dividing total operating expenses
by kWhs sold during the applicable period) increased 17.8% to 3.70 cents per kWh
in 2002 as compared to 3.14 cents per kWh in 2001. The increase was the result
of decreased kWhs sold in 2002.
BayCorp's operating revenues for 2001 increased by approximately
$23,100,000, or 41.1%, to $79,480,000 as compared to $56,347,000 for 2000. The
increase was attributable to several factors. The capacity factor at the
Seabrook Project was 85.8% of the rated capacity for the twelve months ended
December 31, 2001 as compared to a capacity factor of 78% for the twelve months
ended December 31, 2000. Operating revenues and capacity factor were adversely
impacted in 2000 and 2001 by the scheduled refueling outage at the Seabrook
Project that began on October 21, 2000. A return to full power was expected on
November 21, 2000. The outage was extended when damage to one of the plant's
emergency diesel generators occurred, requiring an extensive repair effort.
14
The Seabrook Project returned to full power on February 1, 2001. The Company
purchased a significant amount of power to cover firm contracts, primarily due
to this refueling outage, and also purchased power for resale in 2001, thus
increasing revenues. Purchased power expenses for the twelve months ended
December 31, 2001 were approximately $27,008,000 as compared to approximately
$13,270,000 for the twelve months ended December 31, 2000 primarily due to
increased power purchases. Increases in capacity factor and purchased power
increased sales of electricity by approximately 27.6% to 1,854,967,500 kWhs in
2001 as compared to 1,453,263,900 kWhs in 2000.
The Company also realized a higher average selling price in 2001. During the
twelve months ended December 31, 2001, the average selling price increased 10.9%
to 4.29 cents per kWh as compared to an average selling price of 3.87 cents per
kWh for the twelve months ended December 31, 2000.
Great Bay's cost of power (determined by dividing total operating expenses
by kWhs sold during the applicable period) decreased 33% to 3.14 cents per kWh
in 2001 as compared to 4.71 cents per kWh in 2000. This decrease was primarily
the result of increased kWhs sold in 2001 and lower operating expenses due to
realized gains on firm forward contracts of approximately $12,879,000 in 2001 as
compared to higher operating expenses in 2000 due to unrealized losses on firm
forward contracts of approximately $12,232,000 in 2000.
Expenses
BayCorp's total operating expenses for 2002 decreased approximately
$11,015,000, or 18.9%, in comparison with 2001. This decrease was primarily the
result of a decrease in purchased power expenses in 2002 as compared to 2001
and having only ten months of operations in 2002. Purchased power expenses
decreased approximately $22,302,000, or 82.6%, from $27,008,000 in 2001 to
$4,706,000 in 2001. This decrease was primarily attributable to the Company, in
anticipation of the sale of its Seabrook assets, entering into fewer firm energy
contracts in 2002 as compared to 2001. Offsetting this reduction in expenses was
a decrease in the gain on the mark to market of forward firm energy trading
contracts. In 2001, the Company recognized gains on firm forward energy trading
contracts of $12,879,000 as compared to $115,000 in 2002. This decrease was
primarily due to a decrease in the number of firm energy contracts that the
Company was a party to in 2002 as compared to 2001.
Production and transmission costs decreased approximately $3,501,000, or
13.8%, from $25,435,000 in 2001 to $21,934,000 in 2002. Depreciation and
amortization charges decreased approximately $596,000, or 16%, from $3,730,000
in 2001 to $3,134,000 in 2002. Taxes other than income decreased $437,000, or
12.4%, from $3,516,000 in 2000 to $3,080,000 in 2002. These decreases in
Seabrook related operating costs were primarily related to the Company's
ownership of Seabrook for ten months in 2002 as compared to twelve months in
2001. Decommissioning cost accretion increased $844,000, or 25.9%, from
$3,261,000 in 2001 to $4,105,000 in 2002. This accretion is a non-cash charge
that reflected Great Bay's and Little Bay's liability related to the closure and
decommissioning of the Seabrook Project in then current year dollars over the
licensing period during which the Seabrook Project is licensed to operate.
Decommissioning trust fund income decreased $466,000, or 29.1%, from $1,599,000
in 2001 to $1,133,000 in 2001. The decrease in interest earned on the
decommissioning trust fund reflected the lower rates of returns on investments.
Administrative and general expenses increased approximately $1,746,000, or
17.7%, from $9,870,000 in 2001 to $11,616,000 in 2002. This increase was
primarily attributable to $2.4 million of non-cash compensation expense related
to stock options offset by reduced expenses attributable to ownership of
Seabrook for only ten months during 2002.
Interest and dividend income increased approximately $363,000, or 69.8%,
from $520,000 in 2001 to $883,000 in 2002, primarily due to higher average cash
balances, including the proceeds from the sale of the Seabrook assets in
November 2002.
Equity loss in BayCorp's HoustonStreet investment was $450,000 in 2001 when
the Company invested an additional $450,000
15
cash in HoustonStreet. The Company deconsolidated HoustonStreet in 2000 and
accounts for its investment in HoustonStreet using the equity method. There were
no investments made by the Company in HoustonStreet in 2002
Other deductions decreased approximately $134,000, to a net deduction in
2002 of $45,000 as compared to a net deduction in 2001 of $179,000. This
decrease is due to ten months of expenses at Seabrook in 2002 and lower admin
fees charged to HoustonStreet.
On November 1, 2002, the Company closed the sale of its interests in
Seabrook and received cash consideration of approximately $108.3 million for its
interests in the Seabrook Project. The Company realized a gain on the sale of
its Seabrook assets of approximately $59,774,000. See "Item 1, Recent
Developments - Sale of Seabrook."
BayCorp's total operating expenses for 2001 decreased approximately
$10,176,000, or 14.9%, in comparison with 2000. This decrease was primarily the
result of the non-cash charge to earnings for unrealized gains/losses on firm
energy trading contracts. In 2001, the Company realized gains on firm forward
energy trading contracts of $12,879,000 and total operating expenses were
reduced by this amount. In 2000, total operating expenses were higher because
the Company recorded unrealized losses on firm forward energy trading contracts
of $12,232,000. As of December 31, 2000, the company held numerous firm forward
energy trading contracts to deliver power in 2001. The Company had no firm
forward energy trading contracts as of December 31, 2001.
Production and transmission costs decreased approximately $654,000, or 2.5%,
from $26,089,000 in 2000 to $25,435,000 in 2001. Purchased power expenses
increased approximately $13,738,000, or 103%, from $13,270,000 in 2000 to
$27,008,000 in 2001. This increase was primarily attributable to the extended
duration of the 2000 refueling outage that began on October 21, 2000. A return
to full power was expected on November 21, 2000. The outage was extended when
damage to one of the plant's emergency diesel generators occurred, requiring an
extensive repair effort. The Seabrook Project returned to full power on February
1, 2001. In order to cover some of its firm energy contracts and to secure cash
to cover some of its operating costs in the first half of 2001, Great Bay
executed a Purchase Power Agreement with Select in February 2001 whereby Great
Bay sold 50 MWs of energy associated with Seabrook to Select in exchange for 25
MWs of energy associated with Millstone Unit 2 and 25 MWs of energy associated
with Millstone Unit 3. The term of this agreement was April 1, 2001 through
December 31, 2001. See "Item 1, Pre-November 2002 and Current Business --
Purchased Power Agreements."
Administrative and general expenses increased approximately $2,947,000, or
42.5%, from $6,923,000 in 2000 to $9,870,000 in 2001. This increase was
primarily attributable to costs associated with employee turnover and
retirements at the Seabrook Project in 2001 and a bad debt expense of $1,100,000
to establish a reserve for bad debts specific to Enron. See "Item 1, Recent
Developments." There was no similar charge in 2000.
Depreciation and amortization charges decreased approximately $429,000, or
10.3%, from $4,159,000 in 2000 to $3,730,000 in 2001. This decrease was
primarily due to a reduction in fixed asset values. Taxes other than income
decreased $422,000, or 10.7%, from $3,938,000 in 2000 to $3,516,000 in 2001.
This decrease was due to the continued reduction in Seabrook property taxes
resulting from prior year negotiations between the management of the Seabrook
Project and the towns of Seabrook, Hampton and Hampton Falls, New Hampshire to
reduce the assessed value of the Seabrook Project.
Decommissioning cost accretion decreased $372,000, or 10.2%, to $3,261,000
in 2001 as compared to $3,633,000 in 2000. This accretion is a non-cash charge
that reflects Great Bay's liability related to the closure and decommissioning
of the Seabrook Project in current year dollars over the licensing period during
which the Seabrook Project is licensed to operate. Decommissioning trust fund
income decreased $127,000, or 7.4%, to $1,599,000 in 2001 as compared to
$1,726,000 in 2000. The decrease in interest earned on the decommissioning trust
fund reflected the lower rates of returns on investments.
Interest and dividend income decreased approximately $642,000, or 55.2%,
from $1,162,000 in 2000 to $520,000 in 2001, primarily due to lower average
monthly cash balances and lower interest rates in 2001 as compared 2000.
Although the Company's cash balance at December 31, 2001 of $17,181,000 was
approximately 55% greater than its cash balance at December 31, 2000, the
Company's cash balance during the first half of 2001 was adversely affected by
the late 2000 and early 2001 outage and was favorably affected by strong
operations at Seabrook during the second half of 2001.
Equity loss in BayCorp's HoustonStreet investment was $11,077,000 in 2000 as
compared to $450,000 in 2001. As of December 31, 1999, the Company owned 100% of
HoustonStreet. The Company recognized its ownership share of HoustonStreet's
losses of $3,396,000 in 1999. As a result of its capital raising activities in
2000, on December 4, 2000 HoustonStreet sold an amount of its own
16
stock such that BayCorp no longer had majority ownership in or control over
HoustonStreet. The Company deconsolidated HoustonStreet, and started accounting
for this investment on the equity method effective for the full year ended
December 31, 2000. The Company's equity method investment upon deconsolidation
was negative (HoustonStreet's losses exceeded the Company's investment in
HoustonStreet) and the Company wrote its investment to zero. As a result, an
equity loss in investment of $11,077,000 was reflected in the Company's
financial statements for 2000.
Other income (deductions) decreased approximately $932,000, to a net deduction
in 2001 of $179,000 as compared to other income in 2000 of $753,000. This
decrease in other income is primarily due to lower administrative fees charged
to HoustonStreet in 2001 as compared to 2000 and fewer sales of miscellaneous
Unit 2 equipment at Seabrook in 2001 as compared to 2000.
Net Operating Losses
For federal income tax purposes, as of December 31, 2002, the Company had
net operating loss carry forwards ("NOLs") of approximately $153 million, which
are scheduled to expire between 2004 and 2019. Because the Company has
experienced one or more ownership changes, within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, an annual limitation is imposed
on the ability of the Company to use $97 million of these carryforwards. The
Company estimates that the annual limitation on the use of $97 million of the
Company's NOLs is approximately $5.5 million per year. Any unused portion of the
$5.5 million annual limitation applicable to the Company's restricted NOLs is
available for use in future years until such NOLs are scheduled to expire.
Changes in ownership occurring in 2003 could result in further limitation,
including a complete limitation on its ability to utilize its NOLs. Whether the
Company incurs an ownership change under Section 382 is not within the Company's
control and there can be no assurance that such a change and resulting loss of
the Company's ability to utilize its NOLs will not occur.
LIQUIDITY AND CAPITAL RESOURCES
BayCorp's subsidiary, Great Bay, sold most of its power in the Northeast
United States short-term wholesale power
17
market. The cash generated from electricity sales by Great Bay was sufficient to
meet the Company's ongoing cash requirements in 2002.
The principal factor affecting liquidity in 2002 was the Company's sale of
its Seabrook assets. On November 1, 2002, the Company closed the sale of its
interests in Seabrook and received cash consideration of approximately $108.3
million for its interests in the Seabrook Project. See "Recent Developments -
Sale of Seabrook." BayCorp's total cash increased approximately $119,483,100
during 2002, and as of December 31, 2002, the Company had approximately
$136,664,100 million in cash and cash equivalents.
The Company had net income in 2002 of $58,872,700. Net income included the
gain on the sale of the Seabrook assets of approximately $59,774,300. Non-cash
charges to income included $3,134,000 for depreciation and amortization,
$3,450,000 for nuclear fuel amortization, $4,104,900 for decommissioning cost
accretion and non-cash compensation expense of approximately $2,467,700 for the
variable accounting of certain employee stock options. In addition, there was a
decrease in accounts receivable of approximately $5,975,300 and a increase in
taxes accrued of approximately $1,723,900. Offsetting these non-cash charges to
income were cash charges including approximately $1,416,500 in fixed asset
purchases, $753,000 for nuclear fuel purchases and $1,132,700 for
decommissioning interest. There was an approximate $2,054,800 increase in
prepaids and other assets. This increase was primarily due to amounts put into
escrow for costs associated with the sale of Seabrook assets.
Great Bay's 2002 decommissioning payments totaled approximately $1,161,000.
18
BayCorp received approximately $1,142,000 in 2002 from the exercise of stock
options to purchase 180,934 shares of BayCorp common stock by employees of the
Company. Also in 2002, BayCorp repurchased 126,929 shares of its stock for
approximately $1,452,000.
On January 31, 2003 the Company announced a self tender offer to purchase up
to 8,500,000 of its common stock shares. Under the terms of the offer, BayCorp
shareholders could offer to sell to BayCorp all or a portion of the shares that
they owned at a price of $14.85 per share in cash. The offer was expected to
close on March 3, 2003. Due to the overwhelming response to the tender and the
significant proration that would have been required to preserve the Company's
net operating loss carryforwards, the Board of Directors decided that it would
not exercise its discretion to effect a proration for that purpose and on March
4, 2003, extended the offer. The extension allowed shareholders additional time
to either tender shares that had not been tendered or withdraw shares already
tendered. The final result of the tender offer was announced on March 24, 2003.
BayCorp exercised its right to purchase up to an additional 2% of its
outstanding shares, and accepted 8,673,887 shares of common stock, including
options tendered by directors, officers and employees for repurchase, in the
tender. Funds were distributed to tendering shareholders and shares not accepted
in the tender were returned to shareholders beginning on March 24, 2003. The
Company distributed approximately $123,602,000.
The Company is presently uncertain about the future direction of the
business following the sale of Seabrook and the Company's issuer tender offer.
Among the Company's available alternatives following the completion of its
issuer tender offer are to acquire regulated utility assets or other
energy-related investments, including the development of its HoustonStreet
subsidiary, or to liquidate. If the Company sought to invest in energy-related
investments, the Company's cash remaining following the tender offer might be
insufficient to acquire such assets. In such case, the Company could seek to
raise additional funds through debt or equity financing. There can be no
assurance that the Company will be successful in obtaining additional financing.
If the Company is not successful in obtaining additional financing, the Company
would not be able to pursue its desired investments. In such case, the Company
would consider all of the options then available, including liquidation.
Alternatively, following the completion of the issuer tender offer, the Company
may decide to liquidate the Company's remaining assets rather than pursue
additional investment opportunities. If the Company decided to liquidate
following the tender offer, the cash available following the offer would need to
be reserved to pay for the expected expenses of a liquidation of the Company.
The Board of Directors plans to discuss the strategic direction of the Company
following the tender offer.
The Company has reduced the number of employees from eleven as of December
31, 2001 to nine as of December 31, 2002 and to seven as of March 24, 2003. The
Company relocated in March 2003 to smaller office space in Portsmouth, New
Hampshire.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report contains forward-looking statements. For this purpose,
any statements contained in this report that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the results of BayCorp
and/or its subsidiaries to differ materially from those indicated by
19
such forward-looking statements. These factors include, without limitation,
those set forth below and elsewhere in this report.
History of Losses. BayCorp reported operating income for 2001 and 2002.
Prior to 2001, BayCorp had never reported an operating profit for any year since
its incorporation.
Liquidity Need. As of December 31, 2002, BayCorp had approximately $134
million in cash and cash equivalents, restricted cash and short-term
investments. The Company believes that such cash, together with the anticipated
proceeds from the sale of electricity by Great Bay Power Marketing less cash
paid to shareholders in Tender Offer, will be sufficient to enable the Company
and its wholly owned subsidiaries to meet their cash requirements in 2003. The
direction of the Company's business and circumstances, foreseen or unforeseen,
may cause cash requirements to be materially higher than anticipated, the
Company or its wholly-owned subsidiaries would be required to raise additional
capital, either through a debt financing or an equity financing, to meet ongoing
cash requirements. In that event, the Company and its wholly owned subsidiaries
would likely need to raise additional capital from outside sources. There is no
assurance that the Company or its subsidiaries would be able to raise such
capital or that the terms on which any additional capital is available would be
acceptable. If additional funds are raised by issuing equity securities,
dilution to then existing stockholders will result.
Primary Reliance on a Single Asset. BayCorp's principal source of revenue is
its wholesale electricity trading business, which depends in large part on Great
Bay Power Marketing's contract to sell power to Unitil Power Corporation.
Accordingly, BayCorp's results of operations significantly depend on the
successful and continued performance under the Unitil contract.
Risks Associated with Post-Closing Obligations from the Seabrook Sale. On
November 1, 2002, Great Bay and Little Bay sold their interests in the Seabrook
Project. In the Purchase and Sale Agreement for the Seabrook Project, the buyer,
FPL Energy Seabrook, LLC, agreed to indemnify Great Bay and Little Bay against
certain claims specified in the agreement. Great Bay and Little Bay also agreed
to indemnify FPL Energy Seabrook against certain claims specified in the
Purchase and Sale Agreement. If a claim is brought against Great Bay and Little
Bay for which FPL Energy Seabrook is required to indemnify Great Bay and Little
Bay but FPL Energy Seabrook fails to provide such indemnity, or if Great Bay is
required to indemnify FPL Energy Seabrook pursuant to the agreement, then the
Company's results of operations could be materially different. In addition,
Great Bay and Little Bay have deposited funds into an escrow account for the
payment of Seabrook expenses incurred prior to Closing. The amount escrowed was
based on an estimate of those expenses. Should actual expenses be greater than
the amount escrowed, additional funds will be required.
Extensive Government Regulation. The electric energy industry is subject to
extensive regulation by federal and state agencies. . Great Bay Power
Marketingis subject to the jurisdiction of the FERC and, as a result, is
required to file with FERC all contracts for the sale of electricity. FERC's
jurisdiction also includes, among other things, the sale, lease, merger,
consolidation or other disposition of facilities, interconnection of certain
facilities, accounts, service and property records.
Risks Related to HoustonStreet. HoustonStreet's revenues depend on continued
and expanded use of Internet-based wholesale energy trading platforms.
Electronic trading of wholesale energy is new and evolving, and thus may not
achieve widespread market acceptance or emerge as a sustainable business. In
addition, HoustonStreet will need to enhance trading liquidity in order to
increase and sustain revenues. As a technology dependent business,
HoustonStreet's business could suffer due to computer or communications systems
interruptions or failures, technological change or adverse competitive
developments. Further, as electronic commerce evolves, federal, state and
foreign agencies could adopt regulations covering issues such as user privacy,
content and taxation of products and services. If enacted, government
regulations could materially adversely affect HoustonStreet's business. Although
HoustonStreet currently is not aware that it infringes any other patents, it is
possible that HoustonStreet's technology infringes patents held by third
parties. If HoustonStreet were to be found infringing, the owner of the patent
could sue HoustonStreet for damages, prevent HoustonStreet from making, selling
or using the owner's patented technology or could impose substantial royalty
fees for those privileges. If any of the foregoing risks materialize, or other
risks develop that adversely affect HoustonStreet, or if HoustonStreet fails to
grow its revenues and net income, BayCorp could lose all of the value of its
investment in HoustonStreet.
CRITICAL ACCOUNTING POLICIES
Preparation of the Company's financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities and revenues and expenses. Note
1 to the Consolidated Financial Statements is a summary of the significant
accounting policies used in the preparation of the Company's financial
statements. The following is a discussion of the most critical accounting
policies used historically by the Company.
Decommissioning
Based on the Financial Accounting Standards Board's ("FASB") tentative
conclusions, reflected on the February 7, 1996, Exposure Draft titled
"Accounting for Certain Liabilities Related to Closure and Removal of Long-Lived
Assets" Great Bay and Little Bay have
20
historically recognized as a liability their proportionate share of the present
value of the estimated cost of Seabrook Project decommissioning. For Great Bay,
the initial recognition of this liability was capitalized as part of the Fair
Value of the Utility Plant at November 23, 1994. For Little Bay, the amount was
provided for in the purchase price allocation.
New Hampshire enacted a law in 1981 requiring the creation of a
state-managed fund to finance decommissioning of any nuclear units in the state.
The Seabrook Project's decommissioning estimate and funding schedule is subject
to review each year by the New Hampshire Nuclear Decommissioning Financing
Committee ("NDFC"). This estimate is based on a number of assumptions. Changes
in assumptions for such things as labor and material costs, technology,
inflation and timing of decommissioning could cause these estimates to change,
possibly materially, in the near term. During November 2001, the NDFC issued an
order which established a decommissioning funding schedule in anticipation of
the sale of a majority of the ownership interests in Seabrook. The NDFC set an
accelerated funding schedule for the years 2002 through 2006. For the years 2007
and beyond, the funding schedule assumes contributions will be made until 2026.
The order also established the requirement for a lump sum "top-off" payment at
closing. The current estimated cost to decommission the Seabrook Project (based
on NDFC Docket 2001-1) is approximately $584.7 million in 2002 dollars, assuming
for decommissioning funding purposes, a remaining 23-year life for the facility
and a future cost escalation of 5.25%.
Great Bay and Little Bay, based on the initial exposure draft, recognized a
liability based on the present value of the estimated future cash outflows
required to satisfy their obligations using a risk free rate. As of December 31,
2001, the estimated undiscounted cash outflows for Great Bay and Little Bay, for
decommissioning, based on the November 2001 NDFC study, with decommissioning
expenditures starting in 2024 and being completed in 2046, was $418.3 million,
which discounted at an average rate of 5.25%, over the funding period, to
December 31, 2001, represented a liability of $85.5 million reflected in the
accompanying balance sheet. As of December 31, 2000, and based on the prior NDFC
study, the estimated undiscounted cash outflows for Great Bay and Little Bay,
for decommissioning expenditures, starting in 2013 and being completed in 2042
was $217.2 million, which discounted at an average rate of 5.0%, over the
funding schedule to December 31, 2000 represented a liability of $73.4 million
reflected in the accompanying consolidated balance sheet. In accordance with the
original exposure draft, the company's wholly-owned subsidiaries recorded any
adjustments to the decommissioning liability due to changes in estimates in the
utility plant account.
Great Bay and Little Bay accreted their share of the Seabrook Project's
decommissioning liability. This accretion was a non-cash charge and recognized
their liability related to the closure and decommissioning of their nuclear
plant in current year dollars over the licensing period of the plant. The
non-cash accretion charge recorded in the accompanied consolidated statements of
income was $4,105,000, $3,261,000 and $3,633,000 for the years ended December
31, 2002, 2001 and 2000. The change in the accretion between years reflects
adjustments to the estimated decommissioning by the NDFC.
Funds collected by Seabrook for decommissioning are deposited in an external
irrevocable trust pending their ultimate use. The earnings on the external
trusts also accumulate in the fund balance. The trust funds are restricted for
use in paying the decommissioning of Unit 1. The investments in the trust are
available for sale. Great Bay and Little Bay had therefore reported their
investment in trust fund assets at market value and any unrealized gains and
losses are reflected in equity. There was an unrealized holding gain of $221,700
as of December 31, 2001 that was realized in 2002.
Great Bay and Little Bay were responsible for making decommissioning fund
top off payments on or before the due date of the sale closing and to transfer
their respective decommissioning trust funds to FPL Energy Seabrook. FPL Energy
Seabrook assumed all decommissioning liability for the acquired portion of
Seabrook including the requirement that it provide an appropriate future
funding assurance subject to the approval of the NDFC. FPL Energy Seabrook
provided a parent company guaranty that it will fully fund its ownership share
of the projected cost of decommissioning in a manner consistent with New
Hampshire statutory requirements.
Stock Options
The Company accounts for its stock option plans under APB No. 25 and as such
no compensation cost has been recognized for options granted at fair market
value that have not been modified. The Company has repriced certain options,
accelerated the vesting of others, made limited recourse loans for certain
individuals to exercise options and issued contingent options. In accordance
with APB 25 and FIN 44, the Company has recorded compensation expense related to
these options. Compensation expense was $2,467,700, $358,000 and $110,000 for
2002, 2001 and 2000, respectively.
Seabrook Outage Costs
The Company's historical operating results and the comparability of these
results on an interim and annual basis have been
21
directly impacted by the operations of the Seabrook Project, including the
cyclical refueling outages (generally 18 months apart) as well as unscheduled
outages. During outage periods at the Seabrook Project, Great Bay and Little Bay
had no electricity for resale from the Seabrook Project and consequently no
related revenues. Therefore the impact of outages on the Company's and Great
Bay's and Little Bay's results of operations and financial position were, at
times, materially adverse.
Great Bay and Little Bay accrued for the incremental costs of the Seabrook
Project's scheduled outages over the periods between those outages. However,
Great Bay and Little Bay continue to expense the normal Seabrook operating and
maintenance expenses as incurred. Therefore, the Company incurred losses
during scheduled outage periods as a result of the combination of the lack of
revenue and the recognition of normal recurring operation and maintenance costs
as well as the continuing depreciation of the utility plant. At the Seabrook
Project, a scheduled refueling outage began on May 4, 2002. Seabrook resumed
full operating capacity on June 6, 2002. The 2002 outage cost approximately
$32 million. The Company's share was approximately $4.8 million.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and all its subsidiaries. The Company had a 15% joint ownership interest in
Seabrook, a 1,150 megawatt nuclear generating unit. The Company recorded in its
financial statements its proportional share of Seabrook's assets, liabilities
and expenses. The Company consolidates all majority-owned and controlled
subsidiaries and applies the equity method of accounting for investments between
20% and 50%. All significant intercompany transactions have been eliminated. All
sales of subsidiary stock are accounted for as capital transactions in the
consolidated financial statements. At December 31, 1999, BayCorp owned 100% of
HoustonStreet. As of December 31, 2000 and as of December 31, 2001, the Company
owned 45.9% of HoustonStreet. As of December 31, 2002, the Company owned 46.4%
of HoustonStreet. Of the 53.6% of HoustonStreet that is not owned by the
Company, approximately 3.1% is owned by Elliott Associates L.P. and
approximately 1.9% is owned by Omega Advisors Inc., both of whom were 5% or more
shareholders of the Company. The remaining 48.6% is owned by unrelated parties.
The Company deconsolidated HoustonStreet during 2000. At December 31, 2000 and
December 31, 2001, the Company accounts for this investment on the equity
method. The 1999 financial statements are presented on a consolidated basis.
(See Note 12.) The Company has an agreement with HoustonStreet under which it is
providing certain accounting and administrative services to HoustonStreet for
the periods April 1999 to December 2001 and for the calendar year 2002. Income
related to such services was $165,000 for the year ended December 31, 2001 and
$60,000 for the year ended December 31, 2002.
Energy Marketing
The Company utilized unit contingent and firm forward sales contracts to
maximize the value of its 174 MW power supply from the Seabrook Project. The
Company currently utilizes forward and spot market purchases to maximize the
value of its Unitil agreement. The Company had not entered into any forward firm
energy trading contracts as of December 31, 2001. The forward purchase contracts
and Unitil agreement are recorded at fair value. The initial fair value gain of
the Unitil agreement has been deferred and is being amortized over the life of
the agreement. As of December 31, 2002, the Company had an unrealized loss on
the mark-to-market of purchase contracts of $7,533 and an unrealized gain on the
mark-to-market of the Unitil agreement of $43,800. The deferred gain on the
Unitil agreement was $2,061,000 as of December 31, 2002. As of December 31,
2001, the Company had no unrealized loss or gain on the mark-to-market of
forward firm energy trading contracts recorded in accrued expenses. The net
change in unrealized gain on trading activities for the year ended December 31,
2001 was $12,879,000 and is included in the accompanying consolidated statement
of income for 2001. As of December 31, 2000, the Company had a net unrealized
loss of approximately $12,879,427 recorded in accrued expenses. The net change
in unrealized loss on trading activities for the year ended December 31, 2000
was $12,232,000 and is included in the accompanying consolidated statement of
income for 2000.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
COMMODITY PRICE RISK
The prices of electricity are subject to fluctuations resulting from changes
in supply and demand. Great Bay sold a portion of its electricity through
forward, fixed-price energy trading contracts in prior years, including in 2001.
GBPM tracks market exposure for any forward firm energy trading contracts in a
mark-to-market model that is updated daily with current market prices and is
reflected in the company's balance sheet. See "Note 5 -- Energy Marketing." The
positive, or negative, value of the portfolio of forward firm power commitments
represents an estimation of the gain, or loss, that Great Bay and GBPM would
have experienced if open firm commitments were covered at then-current market
prices. As of December 31, 2001, Great Bay had no forward firm fixed energy
trading contracts. As of December 31, 2002 GBPM Bay had an unrealized loss on
forward firm fixed energy trading contracts of approximately $7,533.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary data is presented in Part IV, Item 14
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Dismissal of Arthur Andersen LLP; Engagement of Deloitte & Touch LLP. As
previously disclosed on the Current Report on Form 8-K/A filed on July 26, 2002,
BayCorp Holdings, Ltd. (the "Company") engaged Deloitte & Touche LLP as the
Company's independent public accountants for the 2002 fiscal year, and dismissed
Arthur Andersen LLP ("Andersen"), which served as the Company's independent
public accountants for the 2000 and 2001 fiscal years. The decision to change
accountants was recommended by the Company's Audit Committee and approved by the
Company's Board of Directors.
The audit reports issued by Andersen on the consolidated financial
statements for the years ended December 31, 2001 and 2000 did not contain an
adverse opinion or disclaimer of opinion nor were they qualified or modified as
to uncertainty, audit scope or accounting principles.
During each of the years ended December 31, 2001 and 2000, and during the
subsequent interim period through July 25, 2002, there were no disagreements
between the Company and Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Andersen's satisfaction, would have
23
caused Andersen to make reference to the subject matter of the disagreement in
connection with its reports on the Company's consolidated financial statements
for such periods.
None of the reportable events described in Item 304(a)(1)(v) of Regulation
S-K occurred during the Company's two most recent fiscal years or during the
subsequent interim period through July 25, 2002. During the fiscal years ended
December 31, 2001 and 2000, and during the subsequent interim period through
July 25, 2002, the Company did not consult with Deloitte & Touche LLP with
respect to the application of accounting principles to a specified transaction
or regarding any of the other matters or events set forth in Item 304(a)(2)(i)
or (ii) of Regulation S-K.
Resignation of Deloitte & Touche LLP; Engagement of Vitale, Caturano &
Company. As previously reported the Current Report on Form 8-K filed on January
16, 2003, as amended on Form 8-K/A Filed on January 17, 2003, on January 9,
2003, Deloitte & Touche LLP ("Deloitte ") notified BayCorp Holdings, Ltd. (the
"Company") that Deloitte resigned as the Company's independent auditor. Deloitte
had been engaged as the Company's independent public accountants since July 25,
2002. On January 14, 2003, the Company engaged Vitale, Caturano & Company
("Vitale, Caturano") as the Company's independent public accountants to conduct
the audit for the Company's 2002 fiscal year and a re-audit for the 2001 and
2000 fiscal years. The reasons for the change in accountants are explained
below.
In September 2002, the Securities and Exchange Commission (the "Commission")
notified the Company that the Commission planned to conduct a routine review of
the Company's Annual Report on Form 10-K for the year ended December 31, 2001
(the "2001 Annual Report") and the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002. During the review process, the Company received
and responded to comments made by Commission staff ("Staff") about those
reports. The Commission and the Company agreed to certain adjustments that the
Company would make to its 2001 Annual Report in response to Staff's comments.
The Company had to then file a Form 10-K/A containing amendments (the
"Amendments") to its 2001 Annual Report after Vitale, Caturano completed an
audit of the restated financial statements for 2001 and 2000 and issued their
opinion that was to be included in the Form 10-K/A.
On November 15, 2002, the Company announced its intention to commence an
issuer tender offer for its own shares (the "Tender Offer") in January 2003. The
Company determined that it was in the Company's best interests that the
Amendments be filed before the Company commenced the Tender Offer. The Company's
goal was to commence the Tender Offer as soon as possible. However, Deloitte
informed the Company that because of the significance to the Company of its
interest in the Seabrook Project in 2000 and 2001, Deloitte would not be willing
to report on an audit of the Company's 2002 financial statements unless the
re-audits for 2000 and 2001 are conducted in a manner that places no reliance on
the 2000 and 2001 audit reports on Seabrook's financial statements issued by
Arthur Andersen. The Chairman of the Company's Audit Committee discussed this
matter with Deloitte and the Company authorized Deloitte to respond fully to
inquiries of Vitale, Caturano concerning this matter. Moreover, Deloitte
indicated that they would be unable to complete their audit of the Company's
2002 financial statements and re-audit of 2001 and 2000 within a time frame that
would allow the Company to commence the Tender Offer before March 2003. None of
the Commission's comments related to the Company's reporting of Seabrook
financial information. A partner at Vitale, Caturano was the concurring partner
at Arthur Andersen for the Seabrook audit for the periods covered by the
Amendments. This partner has also been involved with the Company's audits since
1994. Because of that partner's experience with audits of the Company and of
Seabrook, Vitale, Caturano undertook to conduct the re-audits of the Company for
2001 and 2000 in a time frame that would allow the Company to commence the
Tender Offer as planned. In addition, the cost to the Company would be
substantially reduced based on estimates received from both firms.
Deloitte's resignation followed the Company's discussion with Deloitte of
its intention to dismiss Deloitte as the Company's auditor. Deloitte had been
engaged by the Company since July 2002 and had not issued a report on any of the
Company's financial statements and, therefore, there has been no report
containing an adverse opinion or disclaimer of opinion, or a report that was
qualified or modified as to uncertainty, audit scope, or accounting principles.
There have been no disagreements between the Company and Deloitte on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which disagreements, if not resolved to Deloitte's
satisfaction, would have caused Deloitte to make reference to the subject matter
of the disagreement in connection with its reports on the Company's consolidated
financial statements for any period.
The Company believes that the change in accountants is in the best interests
of the Company and its shareholders. The decision to engage Vitale, Caturano was
recommended by the Company's Audit Committee and approved by the Company's Board
of Directors.
The Company previously provided a copy of the disclosures in the contained
in this Form 10-K to Deloitte and requested Deloitte to furnish a letter stating
whether Deloitte agrees with the Company's statements as required by Item
304(a)(3) of Regulation S-K. Deloitte has provided a letter that acknowledges,
with respect to the disclosures in Form 8-K/A filed on January 17, 2003,
agreement
24
with the statements made in the first two sentences in the first paragraph, the
first two sentences and the last sentence in the second paragraph, the first,
fourth, fifth, sixth and seventh sentences in the third paragraph, and all of
the fourth paragraph.
The Company has provided a copy of the disclosures contained in this Form
8-K to Vitale, Caturano and requested Vitale, Caturano to furnish a letter
stating whether Vitale, Caturano agrees with the Company's statements as
required by Item 304(a)(2)(D) of Regulation S-K. Vitale, Caturano has provided a
letter acknowledging its agreement with the disclosures made on the Company's
Form 8-K/A filed on January 17, 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Set forth below are the name, business address, and age of each member
of the Company's Board of Directors and the positions and offices held by him,
his principal occupation and business experience during the past five years, the
names of other publicly held companies of which he serves as a director and the
year of commencement of his term as a director of the Company. Each director's
term expires at the next annual meeting of shareholders. Information with
respect to the number of shares of Common Stock beneficially owned by each
director and director nominee, directly or indirectly, as of March 25, 2003,
appears under "Item 11. Security Ownership of Certain Beneficial Owners and
Management."
ALEXANDER ELLIS, III, age 53, has served as a director of the Company since
May 2000. Since January 1999, Mr. Ellis has been a member of RockPort Partners,
LLC, a merchant banking firm serving the electric and energy industries. Mr.
Ellis is a founding member of RockPort Capital Partners, LLC, a private equity
fund established in May 2000. Since May 1996, Mr. Ellis has been a member of
Acadia Bay Energy Co., LLC, a developer of electric power generating stations.
Mr. Ellis was also, until December 2002, a director of Wattage Monitor, Inc., a
web-based electric rate and service information provider, and Brazilian
Resources, Inc., an energy resources company. Mr. Ellis holds a B.A. in
Political Science from Colorado College and an M.B.A. from Yale School of
Management.
STANLEY I. GARNETT, II, age 59, has served as a director of the Company
since June 1997. Mr. Garnett was a senior advisor to PHB Hagler Bailly ("PHB"),
an economic and management consulting firm, from September 1998 until November
2000 when PA Consulting Group acquired PHB. Mr. Garnett was an Executive Vice
President of Florida Progress Corporation, an electric utility, from April 1997
to August 1998. From March 1996 until March 1997, Mr. Garnett was a senior
advisor with Putnam, Hayes & Bartlett, an economic and management consulting
firm. From September 1981 until December 1995, he was a senior executive at
Allegheny Power System, Inc., an electric utility, serving as the company's
chief legal officer and CFO from 1990 until December 1995. Mr. Garnett holds a
B.A. in Business Administration from Colby College, an M.B.A. from the Wharton
Graduate School of Commerce and Finance, and a J.D. from New York University
School of Law.
FRANK W. GETMAN JR., age 39, has served as Chairman of the Company's Board
of Directors since May 2000 and as its President and Chief Executive Officer
since May 1998. From September 1996 to May 1998, Mr. Getman was Chief Operating
Officer of the Company and Great Bay. Mr. Getman served as Vice President,
Secretary and General Counsel of Great Bay from August 1995 to May 1998. From
September 1991 to August 1995, Mr. Getman was an attorney with the law firm of
Hale and Dorr LLP, Boston, Massachusetts. Mr. Getman is President and a director
of HoustonStreet, a crude oil and refined products trading exchange in which
BayCorp holds a 46.4% equity interest. Mr. Getman holds J.D. and M.B.A. degrees
from Boston College and a B.A. in Political Science from Tufts University.
JAMES S. GORDON, age 48, has served as a director of the Company since May
2001. Mr. Gordon has served as President of Energy Management, Inc., a privately
held independent power company, since 1975. Energy Management, Inc. developed
seven power plants in New England. Mr. Gordon is the President of Cape Wind
Associates, a partnership working to permit, finance and operate an offshore
wind farm approximately five miles off the coast of Nantucket, Massachusetts.
Mr. Gordon founded the Competitive Power Coalition of New England and formerly
served as its Chairman. Mr. Gordon holds a B.S. in Broadcasting and Film from
Boston University.
MICHAEL R. LATINA, age 30, has served as a director of the Company since
February 1999. Mr. Latina has served as an independent consultant to the energy
industry since July 2001. From January 1998 to July 2001, Mr. Latina was a
portfolio manager for Elliott Management Corporation, an affiliate of Elliott
Associates, L.P., having served as an analyst at Elliot Management Corporation
from March 1996 to January 1998. Mr. Latina is a director of Horizon Offshore,
Inc., an offshore construction company, and HoustonStreet, a crude oil and
refined products trading exchange in which BayCorp holds a 46.4% equity
interest. He served as a Director of Prime Natural Resources, Inc., Grant
Geophysical, Inc., Odyssea Marine, Inc., and Intedyne, LLC, from 1998-2001. He
25
also served as a Director of Solid State Geophysical, Inc. from 1996 to 1997 and
worked as an investment banker with Bear, Stearns & Co., Inc. from 1994 to 1996.
Mr. Latina holds a B.S. in Finance from New York University's Stern School of
Business.
LAWRENCE M. ROBBINS, age 33, has served as a director of the Company since
February 1999. Mr. Robbins has served as the Chief Executive Officer of Glenview
Capital Management since September 2000. From January 1995 to September 2000,
Mr. Robbins served as a general partner of Omega Advisors, Inc., where he was a
portfolio manager since January 1995. Mr. Robbins is a Certified Public
Accountant and graduated from the University of Pennsylvania, earning degrees
from the Wharton School and the Moore School of Engineering.
JOHN A. TILLINGHAST, age 75, has served as a director of the Company since
November 1994 and was the President and Chief Executive Officer of the Company
from April 1995 until May 1998. Mr. Tillinghast served as the Company's Chief
Engineer from April 1995 through May 2000. Since 1987, Mr. Tillinghast has
served as President and the sole stockholder of Tillinghast Technology
Interests, Inc. ("TILTEC"), a private consulting firm. From 1986 to 1993, Mr.
Tillinghast served as Chairman of the Energy Engineering Board of the National
Academy of Sciences. Mr. Tillinghast holds an M.S. in Mechanical Engineering
from Columbia University.
26
(b) Executive Officers. The information with respect to executive officers
required under this item is incorporated by reference to Part I, Item 1 of this
10-K.
(c) Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of the Company's Common Stock to
file with the Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Such
persons are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms filed by such person with respect to the
Company.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that during 2002, its directors, executive officers and holders of more than 10%
of the Company's Common Stock complied with all Section 16(a) filing
requirements.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF DIRECTORS
Employee directors do not receive any compensation for serving on the Board.
Non-employee directors receive $2,500 per quarter, plus reasonable expenses.
Non-employee directors are also eligible to receive stock option grants in
accordance with a formula specified in the 1996 Plan. The Plan allows for grants
of 20,000 options per year for up to four years.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information concerning the compensation of the Company's Chief Executive
Officer, the Company's Chief Operating Officer and the Company's Vice President
of Finance (together, the "Named Executive Officers"). As of December 31, 2002,
the Company did not have any other executive officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG-TERM
COMPENSATION AWARDS
----------------------
SECURITIES UNDERLYING
SALARY BONUS OTHER ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(1) COMPENSATION ($) (NO. OF SHARES, (#)(2)
- --------------------------- ---- ------ ------ ---------------- ----------------------
Frank W. Getman Jr......... 2002 207,582 756,573(9) 0 70,000
President and 2001 169,673 0(3) 0 20,000
Chief Executive Officer 2000 160,000 100,000(4) 12,500(5) 20,000
27
LONG-TERM
COMPENSATION AWARDS
----------------------
SECURITIES UNDERLYING
SALARY BONUS OTHER ANNUAL OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(1) COMPENSATION ($) (NO. OF SHARES, (#)(2)
- --------------------------- ---- ------ ------ ---------------- ----------------------
Anthony M. Callendrello(7) 2002 158,050 478,287(9) 0 40,000
Chief Operating Officer 2001 136,019 30,000 0 50,000
and Secretary 2000 89,508 30,000(8) 0 30,000
Patrycia T. Barnard(6)... 2002 158,050 75,000 0 20,000
Vice President of Finance 2001 136,019 30,000 0 0
- ------------------
(1) Amounts shown represent cash compensation earned by the Named Executive
Officers for the fiscal years presented. Excludes amounts paid by
HoustonStreet to Mr. Getman in 2000, 2001 or 2002. See "Employment
Agreements."
(2) The option exercise price is equal to the fair market value of the Common
Stock on the date of grant. In addition, in October 2001, the Company
granted Contingent Options to each of the Named Executive Officers. The
Company granted Contingent Options to acquire 50,000 shares to Mr. Getman,
Contingent Options to acquire 40,000 shares to Mr. Callendrello and
Contingent Options to acquire 20,000 shares to Ms. Barnard, in each case
exercisable, once vested, at $9.05 per share. Each of these options was
exercisable upon and only upon the closing of the sale of the Company's
interests in the Seabrook Project. In accordance with the rules of the
Commission relating to beneficial ownership of options that are contingent
on external events, the occurrence of which is uncertain and the timing of
which is unknown, the Contingent Options are excluded in 2001 and included
in 2002.
(3) In January 2002, the Company paid a bonus of $100,000 to Mr. Getman to
recognize his performance in 2001.
(4) Represents payment received in 2000 for Mr. Getman's performance in 1999.
(5) Amount shown represents compensation in the form of partial forgiveness of a
loan to Mr. Getman. See "Employment Agreements."
(6) Ms. Barnard was promoted to Vice President of Finance in January 2001 and
became a Named Executive Officer at that time.
(7) Mr. Callendrello joined the Company on April 3, 2000.
(8) Represents payment received in 2001 for Mr. Callendrello's performance in
2000.
(9) Represents payments under the Company's Incentive Compensation Program
established by the Board for achieving specific objectives and creation of
incremental value above certain benchmarks established by the Board. See
"Employment Agreements".
Option/SAR Grant Table. The following table sets forth certain information
regarding options and SARs granted during 2002 by the Company to its executive
officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL RATES OF STOCK
UNDERLYING OPTION/SARS PRICE APPRECIATION
OPTION/SARS GRANTED TO EXERCISE OR FOR OPTION TERM (3)
GRANTED AND EMPLOYEES IN BASE PRICE --------------------
NAME COMPANY (1) FISCAL YEAR ($/SH)(2) EXPIRATION DATE 5% 10%
- ---- ---------- ----------- --------- --------------- --- ----
Frank W. Getman Jr. 20,000(4) 50% $12.22 4/24/09 $ 99,677 $232,829
50,000(5) $9.05 10/22/08 $184,423 $430,408
Anthony M. Callendrello 40,000(5) 28.6% $9.05 10/22/08 $144,265 $339,788
Patrycia T. Barnard 20,000(5) 14.3% $9.05 10/22/08 $ 73,769 $172,163
28
- --------------
(1) Options granted pursuant to the Company's 2001 Nonstatutory Stock Option
Plan (the "2001 Plan"). All options granted are non-transferable except by
will or the laws of descent or pursuant to a Qualified Domestic Relations
Order, in accordance with the terms and conditions of the 2001 Plan and
the individual Nonstatutory Stock Option Agreements.
(2) The exercise price of the options is equal to the fair market value of the
Company's Common Stock on the date of grant. The exercisability of these
options is accelerated upon the occurrence of a change in control (as
defined in the 2001 Plan).
(3) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5%
and 10%, compounded annually from the dates the respective options were
granted to their expiration dates. The gains shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise. All of the options were either (i) exercised
and the shares received upon exercise were tendered in connection with the
Company's issuer tender offer that expired on March 18, 2001 or (ii)
tendered to the Company for repurchase in the tender offer. The purchase
price for tendered shares was $14.85 per share and for tendered options
was $14.85 less the option exercise price. Shares and options were subject
to proration. Mr. Getman tendered these 70,000 options to the Company;
60,176 options were accepted for payment after proration. Mr. Getman
realized value of approximately $316,800. Mr. Callendrello exercised these
40,000 options and tendered the shares in the tender offer; 37,720 shares
were accepted for payment in the tender offer. Mr. Callendrello realized
value of approximately $218,800. Ms. Barnard exercised these 20,000
options and tendered the shares; 18,860 shares were accepted for payment
in the tender offer. Ms. Barnard realized value of approximately $109,400.
(4) Options granted on April 24, 2002. Subject to the terms of the
Nonstatutory Stock Option Agreements, the option was immediately
exercisable.
(5) Contingent Options granted on October 22, 2001. See "Executive
Compensation - Summary Compensation Table - Note 2." Subject to the terms
of the Nonstatutory Stock Option Agreements, each option became
exercisable upon the Closing of the sale of the Company's interests in the
Seabrook Project (and would also have become exercisable in the event of a
"change of control" of the Company as defined in the 2001 Plan.)
Option Exercises and Year-End Values. The following table sets forth certain
information concerning each exercise of stock options during the fiscal year
ended December 31, 2002 by each of the Company's executive officers and the
number and value of unexercised options held by each of the these executive
officers on December 31, 2002.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
YEAR-END (#)(1) YEAR-END ($)(2)
SHARES VALUE ---------------------- ----------------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------ ------------- -------------
Frank W. Getman Jr............ 56,250 $244,688 (3) 311,500/0 $2,200,860/$0
Patrycia T. Barnard............ 0 0 60,000/0 $484,212/$0
Anthony M. Callendrello....... 0 0 76,667/43,333 $419,735/$208,315
- ------------------
(1) Includes Contingent Options. See "Executive Compensation - Summary
Compensation Table - Note 2."
(2) Based on the fair market value of the Company's Common Stock on December 31,
2002 ($14.74 per share.)
(3) Based on the fair market value of the Company's Common Stock on March 27,
2002 ($9.25 per share)
29
EMPLOYMENT AGREEMENTS
On May 25, 2000, the Company entered into an employment agreement with Frank
W. Getman Jr. (the "Getman Employment Agreement") pursuant to which Mr. Getman
agreed to serve as the Company's Chairman, President and Chief Executive Officer
through July 31, 2003. The Getman Employment Agreement provides for an annual
salary of $200,000 as of May 25, 2002. Separately, on May 5, 1998, the Company
loaned Mr. Getman $25,000 to purchase shares of the Company's Common Stock. In
accordance with the terms of this loan, the Company forgave $12,500 of the loan
on each of May 5, 1999 and May 5, 2000.
If Mr. Getman's employment with the Company terminates in a "Qualifying
Termination" in connection with a "Change in Control" (each as defined in the
Getman Employment Agreement), (i) Mr. Getman is entitled to receive in cash an
amount equal to the greater of the sum of his annual salary from the date of
termination until the date of expiration of the Getman Employment Agreement or
twice his annual salary at the date of such Change in Control; (ii) all
outstanding stock options shall become immediately exercisable, and (iii) the
non-competition and non-solicitation clauses contained in Subsections 5.c and
5.d of the Getman Employment Agreement shall cease to apply. Under certain
circumstances identified in the Getman Employment Agreement, the Company may be
required to pay to Mr. Getman additional compensation such that the total of the
amounts payable under clause (i) above and the value of Mr. Getman's options (as
defined in the Getman Employment Agreement) is $500,000. A Qualifying
Termination will be treated as having occurred if, prior to the second
anniversary of a Change in Control, (i) Mr. Getman's employment is terminated
other than for cause or (ii) Mr. Getman voluntarily resigns following,
generally, any material impairment or material adverse change in his working
conditions, authority, position or compensation as compared with that in effect
immediately prior to the Change in Control.
On September 1, 2000, HoustonStreet entered into an employment agreement
with Frank W. Getman Jr. (the "Getman/HSE Employment Agreement") pursuant to
which Mr. Getman agreed to serve as HoustonStreet's President and Chief
Executive Officer through August 31, 2003. Under the Getman/HSE Employment
Agreement, Mr. Getman earned $52,923 in salary in 2000, $165,577 in salary in
2001, $199,083 in 2002 and will earn additional salary in future years. Other
terms of the Getman/HSE Employment Agreement are substantially similar to the
terms of Mr. Getman's employment agreement with BayCorp.
Key Employee Retention and Incentive Plan. In October 2001, the Board approved
its Compensation Committee's recommendation that the Board adopt a Key Employee
Retention and Incentive Plan (the "Retention and Incentive Plan"). The purpose
of the Retention and Incentive Plan was to accomplish the sale of the Company's
interests in the Seabrook Project, maximize the results to the Company of that
sale, and retain key employees through the successful completion of the Seabrook
sale and thereafter if desired by the Board. Under the Retention and Incentive
Plan, the officers, directors, and key employees received stock options and
officers and key employees received other incentives under Retention and
Incentive Agreements. Pursuant to such Retention and Incentive Agreements
officers and key employees received cash payments based upon the achievement of
particular objectives and have the ability to receive additional cash payments.
On November 21, 2001, the Company entered into a Retention and Incentive
Agreement with Patrycia T. Barnard, the Company's Vice President of Finance and
Treasurer. The agreement provides that in the event that Ms. Barnard continues
to be an employee of the Company through final liquidation of substantially all
of the assets of the Company and the approval of a plan of distribution of the
Company's assets net liabilities to its shareholders, the Company will pay to
Ms. Barnard bonus compensation in an amount equivalent to one year of Ms.
Barnard's salary at the time of any such liquidation and distribution, or
approximately $145,000.
On November 30, 2001, the Company also entered into a Retention and
Incentive Agreement with Anthony M. Callendrello, the Company's Chief Operating
Officer. The agreement provides a six-month severance payment (approximately
$73,000) to Mr. Callendrello that is payable upon and only upon a final
liquidation of substantially all of the assets of the Company and the approval
of a plan of distribution of the Company's assets net liabilities to its
shareholders. In addition, the agreement established goals and financial
incentives for achieving certain specific objectives and addresses constructive
termination issues. The agreement provided a $100,000 bonus to Mr. Callendrello
upon the closing of the sale of the Company's interests in the Seabrook Project.
This payment was made in November 2002. The Board based the financial incentives
on a concept of sharing incremental value created by employees above certain
benchmarks set by the Board. The potential incentive payment is calculated as a
percentage, ranging from one to ten percent, of (i) the savings from the
reduction of certain identified liabilities, and (ii) the incremental value
realized from identified assets, such that Mr. Callendrello will benefit only in
the event of demonstrable financial benefit to the Company. None of the
incentive payments were to be made unless and until the closing of the Seabrook
sale and unless Mr. Callendrello continued as an employee through the closing.
Total incentive payments of $378,286 were made in 2002, as a result of
$7,565,731 of increased value to the Company. Additional incentive payments may
be made under the agreement in 2003.
On December 5, 2001, the Company entered into a similar Retention and
Incentive Agreement with Frank W. Getman, Jr., the Company's President and
Chief Executive Officer, which established goals and financial incentives for
achieving certain specific objectives. The Board based the financial incentives
on a concept of sharing incremental value created by employees above certain
benchmarks set by the Board. The potential incentive payment is calculated as a
percentage, ranging from one to ten percent, of (i) the savings from the
reduction of certain identified liabilities, and (ii) the incremental value
realized from identified assets, such that Mr. Getman will benefit only in the
event of demonstrable financial benefit to the Company. None of the incentive
payments were to be made unless and until the closing of the Seabrook sale and
unless Mr. Getman continued as an employee through the closing. Total incentive
payments of $756,573 were made in 2002, as a result of $7,565,731 of increased
value to the Company. Additional incentive payments may be made under the
agreement in 2003. Mr. Getman's agreement does not contain a retention bonus
component or any constructive termination provisions. Mr. Getman is entitled to
a retention bonus under the Getman Employment Agreement.
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Equity Compensation Plan Information. The following table provides information
about the Company's common stock that may be issued upon the exercise of options
and rights under all of the Company's existing equity compensation plans as of
December 31, 2002.
(c)
(a) (b) Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column (a))
- ------------- ------------------- ------------------------- ------------------------
Equity compensation plans
approved by security 945,767 $8.3294 54,683
holders(1)
Equity compensation plans not N/A N/A N/A
approved by security holders
Totals 945,767 $8.3294 54,683
- ----------
(1) Includes the Company's 1996 Stock Option Plan and the 2001 Nonstatutory
Stock Option Plan.
Security Ownership of Certain Beneficial Owners and Management. The following
table sets forth information regarding the ownership of the shares of the
Company's common stock as of March 25, 2003 by (i) the only persons known by the
Company to own more than five percent of the Company's outstanding shares, (ii)
all directors of the Company, (iii) each of the executive officers of the
Company (the "Named Executive Officers"), and (iv) all directors and executive
officers of the Company as a group.
SHARES PERCENTAGE OF
NAME, ADDRESS, AND AGE (IF A PERSON) OF BENEFICIALLY SHARES
BENEFICIAL OWNER OWNED (1) OUTSTANDING (2)
- --------------------------------------- --------- ---------------
5% Shareholders
Group consisting of:
Leon G. Cooperman
Omega Capital Partners, L.P.
Omega Institutional Partners, L.P, and
Omega Advisors, Inc.
(the "Omega Group") ..................... 125,134(3) 19.3%
c/o Omega Advisors, Inc.
Wall Street Plaza
88 Pine Street
New York, NY 10005
31
SHARES PERCENTAGE OF
NAME, ADDRESS, AND AGE (IF A PERSON) OF BENEFICIALLY SHARES
BENEFICIAL OWNER OWNED (1) OUTSTANDING (2)
- --------------------------------------- --------- ---------------
Directors and Executive Officers
Patrycia T. Barnard ........................ 4,400 *
Anthony M. Callendrello .................... 31,037(4) 4.6%
Alexander Ellis III ........................ 4,602(5) *
Stanley I. Garnett II ...................... 2,470(6) *
Frank W. Getman Jr. ........................ 21,129(7) 3.3%
James S. Gordon ............................ 6,268(8) *
Michael R. Latina .......................... 4,559(9) *
Lawrence M. Robbins ........................ 4,559(10) *
John A. Tillinghast ........................ 11,314(11) 1.7%
All directors and executive officers as a
group (9 individuals) .................... 88,338(12) 12.4%
- ------------------
* Less than 1% of the total number of shares outstanding.
(1) The number of Shares beneficially owned by each person or entity is
determined under rules promulgated by the Commission. Under such rules,
beneficial ownership includes any shares as to which the person or entity
has sole or shared voting power or investment power, and also includes any
shares of the Company that the person or entity has the right to acquire
within 60 days after March 25, 2003. Unless otherwise indicated, each
person or entity referred to above has sole voting and investment power
with respect to the shares listed. The inclusion of any shares deemed
beneficially owned does not constitute an admission of beneficial
ownership of such shares.
(2) Number of shares deemed outstanding includes 646,874 shares outstanding as
of March 25, 2003, plus any shares subject to options held by the person
or entity in question that are currently exercisable or exercisable within
60 days after March 25, 2003.
32
(3) The information presented is based upon a Schedule 13D/A filed with the
Commission on March 28, 2003 by the indicated shareholders. Leon G.
Cooperman reported beneficial ownership of 125,134 shares, with sole
voting and dispositive power with respect to 92,345 of such shares and
shared voting and dispositive power with respect to 32,789 of such shares.
Mr. Cooperman's 125,134 beneficially owned shares represent 19.3% of
BayCorp's shares outstanding as of March 25, 2003. Omega Capital Partners,
L.P. ("Omega Capital") reported beneficial ownership of 48,107 shares,
with sole voting and dispositive power, as to all such shares. Omega
Institutional Partners, L.P. ("Omega Institutional") reported beneficial
ownership of 731 shares, with sole voting and dispositive power as to such
shares. Omega Equity Investors, L.P. ("Omega Equity") reported beneficial
ownership of 6,622 shares, with sole voting and dispositive power as to
such shares. Omega Advisors, Inc. ("Omega Advisors") reported beneficial
ownership of 69,674 shares, with sole voting and dispositive power with
respect to 36,885 of such shares and shared voting and dispositive power
with respect to 32,789 of such shares. Mr. Cooperman is the managing
partner of each of Omega Capital, Omega Institutional Partners and Omega
Equity and is the President of Omega Advisors. These shareholders may be
deemed to be a group for purposes of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"). Collectively, these
shareholders and other affiliates of Mr. Cooperman and Omega Advisors,
Inc. are referred to as the "Omega Group" or "Omega Group entities."
33
(4) Includes 28,757 shares issuable upon exercise of outstanding stock options
granted under the 1996 and 2001 Plans.
(5) Includes 4,559 shares issuable upon exercise of outstanding stock options
granted under the 2001 Plan.
(6) Consists of 2,470 shares issuable upon exercise of outstanding stock
options granted under the 2001 Plan.
(7) Includes 9,824 shares issuable upon exercise of outstanding stock options
granted under the 2001 Plan.
(8) Includes 3,419 shares issuable upon the exercise of outstanding stock
options granted under the 2001 Plan.
(9) Consists of 4,559 shares issuable upon the exercise of outstanding stock
options granted under the 2001 Plan.
(10) Consists of 4,559 shares issuable upon the exercise of outstanding stock
options granted under the 2001 Plan.
(11) Includes 3,419 shares issuable upon exercise of outstanding stock options
granted under the 2001 Plan.
(12) Includes 61,566 shares issuable upon exercise of outstanding stock options
granted under the 1996 and 2001 Plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
HoustonStreet sold shares of its Series A Convertible Preferred Stock at
$3.75 per share to entities related to the Omega Group and to Elliot Associates,
L.P., a member of a group that owned more than five percent of the Company's
outstanding shares during the Company's 2002 fiscal year, as follows:
SALE DATE PURCHASER SHARES TOTAL PURCHASE
--------- --------- ------ --------------
2/2/2000 Omega Group Entities 266,667 $1,000,001
34
SALE DATE PURCHASER SHARES TOTAL PURCHASE
--------- --------- ------ --------------
2/2/2000 Elliott Associates, L.P. 266,667 $1,000,001
3/6/2000 Omega Group Entities 400,000 $1,500,000
3/6/2000 Elliott Associates, L.P. 400,000 $1,500,000
As part of HoustonStreet's Series A financing, HoustonStreet sold 2,426,669
additional shares of its Series A Stock to third parties, also at $3.75 per
share. Each of these third parties, as well as HoustonStreet, Omega Group
entities and Elliott Advisors, L.P., entered into a (i) Series A Convertible
Preferred Stock Purchase Agreement, (ii) Stockholders' Voting Agreement, (iii)
Investor Rights Agreement and (iv) Right of First Refusal and Co-Sale Agreement.
Each of these agreements was amended and restated on March 31, 2001 in
connection with HoustonStreet's sale of senior secured promissory notes, Series
C preferred stock warrants and common stock warrants. The Company is also a
party to the Amended and Restated Stockholders' Voting Agreement and the Amended
and Restated Investor Rights Agreement.
The Amended and Restated Stockholders' Voting Agreement requires the parties
to cause to be elected to the board of directors of HoustonStreet one member
designated by Omega Advisors, Inc., one member designated by Elliott Associates,
L.P., one member who serves as the Company's Chief Executive Officer and up to
six additional directors as described in the Agreement. From January 1995 to
September 2000, Lawrence M. Robbins, a director of the Company, was a general
partner of Omega Advisors, Inc. From January 1998 to July 2001, Michael R.
Latina, a director of the Company, was a portfolio manager for an affiliate of
Elliott Associates, L.P. The Amended and Restated Investor Rights Agreement
requires that HoustonStreet provide certain registration rights and rights of
first refusal to certain holders of HoustonStreet capital stock, including the
Series A stockholders. In addition, the Amended and Restated Right of First
Refusal and Co-Sale Agreement requires that certain holders of HoustonStreet
capital stock, including the Series A stockholders, provide each other with
certain rights of first refusal and rights of co-sale in the event that certain
stockholders seek to sell their shares of HoustonStreet capital stock.
On March 30, 2001, HoustonStreet received approximately $2.8 million in
additional funding, including $90,000 from Omega Group entities and $187,500
from James S. Gordon, a director of the Company. This financing involved the
sale by HoustonStreet of senior secured notes, warrants to purchase
HoustonStreet preferred stock and warrants to purchase HoustonStreet common
stock.
In March 2002, in connection with the exercise of stock options, the Company
received limited recourse promissory notes and stock pledge agreements from its
President, Frank Getman, and a director, John Tillinghast. Mr. Getman borrowed
$275,625 on March 27, 2002, pursuant to two promissory notes, one for $167,502
and one for $108,123. On March 7, 2002, Mr. Tillinghast borrowed $461,502
pursuant to a note. The loans were secured by stock pledge agreements between
the individuals and the Company. The notes, which were approved by the Company's
full board of directors, bore interest at 5%. The notes and agreements were
executed in order to allow Mr. Getman and Mr. Tillinghast to exercise certain
stock options before the options expired. The notes were given in lieu of cash
payments for the exercise price of the options. The exercise price of Mr.
Getman's options was $275,625 and the exercise price of Mr. Tillinghast's
options was $461,502. Mr. Getman pledged 56,250 shares under his agreements and
Mr. Tillinghast pledged 94,184 shares under his agreement, in each case to
secure repayment of the notes. The notes were due on the earlier of (i) December
31, 2003 or (ii) 30 days after the payment to Great Bay, Little Bay and BayCorp
or its common shareholders, as the case may be, of the proceeds of the sale of
(a) Great Bay's and Little Bay's interests in the Seabrook Project or (b)
BayCorp's shares of capital stock of Great Bay and Little Bay, or (c) the
outstanding shares by merger, share exchange or otherwise. The security
agreements provided that the borrowers must maintain collateral having a value
of at least two times the remaining loan principal in the event of partial
repayments. The sale of Seabrook closed on November 1, 2002. The outstanding
balances of, and all accrued but unpaid interest on the promissory notes issued
to Mr. Getman and Mr. Tillinghast were repaid in full within 30 days of the
Seabrook Closing.
In April 2002, the Company entered into a consulting agreement with Michael
Latina, one of its directors, under which Mr. Latina received $10,000 per month
for six months in exchange for assisting the Company with financial analysis and
evaluation of business opportunities identified by the Company's management.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Chairman, CEO, and President and the Vice-President of Finance of the
Company have reviewed and evaluated the effectiveness of disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14 (c))
within 90 days
35
before the filing of this annual report. Based on that evaluation, the Chairman,
CEO, and President and the Vice-President of Finance have concluded that their
current disclosure controls and procedures are, in all material respects,
effective and timely, providing them with material information relating to that
required to be disclosed in the reports the Company files or submits under the
Exchange Act.
The Company's management, including the Chairman, CEO and President and the
Vice President of Finance, does not expect that the Company's disclosure
controls and procedures or its internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, provides
reasonable, not absolute, assurance that the objectives of the control system
are met. The design of a control system reflects resource constraints; the
benefits of controls must be considered relative to their costs. Because there
are inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been or will be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns occur because of simple error or mistake. Controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all future conditions; over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with the policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Changes in Internal Controls
There have not been any significant changes in the Company's internal
controls or, to its knowledge, in other factors that could significantly affect
these controls subsequent to the date of their evaluation. The Company is not
aware of any significant deficiencies or material weaknesses and, therefore, no
corrective actions were taken.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of this Form 10-K:
1. Financial Statements. The Consolidated Financial Statements listed in
the Index to Consolidated Financial Statements and Financial Statement
Schedules are filed as part of this Annual Report on Form 10-K.
2. Exhibits. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the three month
period ended December 31, 2002:
The Company filed a Current Report on Form 8-K on November 15, 2002
reporting that on November 1, 2002, Great Bay and Little Bay Power,
wholly-owned subsidiaries of BayCorp, and other selling owners
consummated the sale of their interests, which amount to approximately
88% of the ownership, in the Seabrook Nuclear Power Plant to FPL
Energy Seabrook, LLC, a subsidiary of FPL Group, Inc. An unaudited pro
forma balance sheet as of December 31, 2001 and pro forma income
statements as of December 31, 2002 and September 31, 2002 were
presented in the Form 8-K to give effect to the sale of the Company's
Seabrook investment reflecting the disposition of operating assets and
their replacement with cash.
36
INDEX TO FINANCIAL STATEMENTS
BAYCORP HOLDINGS, LTD.
PAGE
----
Reports of Independent Public Accountants.............. F-1
Consolidated Balance Sheets as of December 31, 2002 and
2001................................................. F-2
Consolidated Statements of Operations and Comprehensive
Income (Loss) -- Years Ended December 31, 2002,
December 31, 2001 and December 31, 2000.............. F-3
Consolidated Statements of Changes in Stockholders' Equity
-- Years Ended December 31, 2002, December 31, 2001 and
December 31, 2000.................................. F-4
Consolidated Statements of Cash Flows
-- Years Ended December 31, 2002, December 31, 2001 and
December 31, 2000............................... F-5
Notes to Consolidated Financial Statements............. F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
BayCorp Holdings, Ltd.
We have audited the accompanying consolidated balance sheets of BayCorp
Holdings, Ltd. (a Delaware corporation) and its wholly-owned subsidiaries, as of
December 31, 2002 and 2001, and the related consolidated statements of
operations and comprehensive income (loss), changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BayCorp
Holdings, Ltd. and its wholly-owned subsidiaries as of December 31, 2002 and
2001, and the results of their operations and cash flows for the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
VITALE, CATURANO & COMPANY P.C.
Boston, Massachusetts
February 10, 2003
(Except for the matters discussed
in Note 8
as to which the date is March 24, 2003)
F-1
BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2002 2001
------------- -------------
ASSETS:
Current Assets:
Cash & Cash Equivalents ...................................... $ 134,164 $ 15,278
Restricted Cash -- Escrow .................................... 2,500 1,903
Accounts Receivable, net ..................................... 316 6,291
Materials & Supplies, net .................................... -- 4,708
Prepayments & Other Assets ................................... 3,427 1,372
--------- ---------
Total Current Assets ................................. 140,407 29,552
Property, Plant, & Equipment and Fuel:
Utility Plant Assets ......................................... -- 123,923
Non-utility Plant Assets ..................................... -- --
--------- ---------
Total Property, Plant & Equipment .................... -- 123,923
Less: Accumulated Depreciation ............................... -- (22,944)
--------- ---------
Net Property, Plant & Equipment ......................... -- 100,979
Nuclear Fuel ................................................. -- 23,365
Less: Accumulated Amortization ............................... -- (12,096)
--------- ---------
Net Nuclear Fuel ............................................. -- 11,269
Net Property, Plant & Equipment and Fuel ................ -- 112,248
Other Assets:
Decommissioning Trust Fund ................................... -- 32,048
Energy Trading Contracts - at market ......................... 2,184 --
Deferred Debits & Other ...................................... -- 123
--------- ---------
Total Other Assets ...................................... 2,184 32,171
Total Assets ......................................... $ 142,591 $ 173,971
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable ............................................. $ 414 $ 1,607
Miscellaneous Current Liabilities ............................ 6,141 5,534
--------- ---------
Total Current Liabilities ................................. 6,554 7,141
Operating Reserves:
Decommissioning Liability .................................... -- 85,523
Miscellaneous Other .......................................... -- 386
--------- ---------
Total Operating Reserves .................................. -- 85,909
Other Liabilities & Deferred Credits ........................... -- 7,500
Deferred Gain on Long Term Power Contract ...................... 2,061 --
Commitments & Contingencies
Stockholders' Equity:
Common stock, $0.01 par value Authorized -- 20,000,000
shares; issued and outstanding -- 8,455,269 at December
31, 2002 and 8,586,316 at December 31, 2001 ............... 84 86
Less: Treasury Stock --0 and 185,052 shares respectively, at
cost ......................................................... -- (1,396)
Additional Paid-in Capital ................................... 100,893 100,383
Accumulated Other Comprehensive Income ....................... -- 223
Retained Earnings (Accumulated Deficit) ...................... 32,998 (25,875)
--------- ---------
Total Stockholders' Equity .............................. 133,975 73,421
Total Liabilities and Stockholders' Equity ........... $ 142,591 $ 173,971
========= =========
(The accompanying notes are an integral part of these consolidated financial
statements.)
F-2
BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 2000
----------- ----------- -----------
Operating Revenues ............................. $ 48,788 $ 79,480 $ 56,347
Operating Expenses:
Production ................................... 21,089 24,438 25,016
Transmission ................................. 845 997 1,073
Purchased Power .............................. 4,706 27,008 13,270
Unrealized (Gain) Loss on Firm Energy Trading
Contracts ................................. (115) (12,879) 12,232
Administrative & General ..................... 11,616 9,870 6,923
Depreciation & Amortization .................. 3,134 3,730 4,159
Decommissioning Cost Accretion................ 4,105 3,261 3,633
Decommissioning Trust Fund Income............. (1,133) (1,599) (1,726)
Taxes Other than Income ...................... 3,080 3,516 3,938
----------- ----------- -----------
Total Operating Expenses .................. 47,327 58,342 68,518
Operating Income (Loss) ........................ 1,461 21,138 (12,171)
Other Income:
Interest and Dividend Income ................. (883) (520) (1,162)
Equity Loss in HoustonStreet Investment ...... -- 450 11,077
Gain on Sale of Seabrook Asset ............... (59,774) -- --
Other Deductions (Income) .................... 45 179 (753)
----------- ----------- -----------
Total Other Deductions (Income) ........... (60,612) 109 9,162
Income (Loss) Before Income Taxes and Accounting
Change ....................................... 62,073 21,029 (21,333)
Provision for Income Taxes ..................... (3,200) (225) (612)
----------- ----------- -----------
Net Income (Loss) .............................. 58,873 20,804 (21,945)
Other Comprehensive Income (Expense), net of tax 0 (95) 321
----------- ----------- -----------
Comprehensive Income (Loss) .................... $ 58,873 $ 20,709 $ (21,624)
=========== =========== ===========
Weighted Average Shares Outstanding -- Basic ... 8,387,767 8,341,637 8,293,475
Weighted Average Shares Outstanding -- Diluted . 8,671,328 8,556,994 8,293,475
Basic Net Income (Loss) per Share .............. $ 7.02 $ 2.49 $ (2.65)
Diluted Net Income (Loss) per Share ............ $ 6.79 $ 2.43 $ (2.65)
(The accompanying notes are an integral part of these consolidated financial
statements.)
F-3
BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON
STOCK, $0.01 PAR
VALUE LESS:
----------------------- TREASURY ACCUMULATED RETAINED
ISSUED AND ISSUED AND STOCK ADDITIONAL OTHER EARNINGS TOTAL
OUTSTANDING OUTSTANDING ------------------ PAID-IN COMPREHENSIVE (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME DEFICIT) EQUITY
----------- ----------- ------ ------ ------- ------ -------- ------
Balance at December 31,
1999 ................... 8,417,000 $ 84 185,052 $ (1,396) $ 92,295 $ (3) $ (24,734) $ 66,246
Stock Options Exercised 102,316 2 -- -- 472 -- -- 474
Other Incentive Stock
Option Transactions .. -- -- -- -- 110 -- -- 110
Net Change in Unrealized
Holding Gain ......... -- -- -- -- -- 321 -- 321
Unrealized Gain on Sale
of Stock By Subsidiary
(Note 7) ............. -- -- -- -- 6,725 -- -- 6,725
Financial Results,
January 1 to
December 31, 2000 .... -- -- -- -- -- -- (21,945) (21,945)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
2000 ................... 8,519,316 $ 86 185,052 $ (1,396) $ 99,602 $ 318 $ (46,679) $ 51,931
Stock Options Exercised 67,000 -- -- -- 423 -- -- 423
Other Incentive Stock
Option Transactions .. -- -- -- -- 358 -- -- 358
Net Change in Unrealized
Holding Gain ......... -- -- -- -- -- (95) -- (95)
Financial Results,
January 1 to
December 31, 2001 .... -- -- -- -- -- -- 20,804 20,804
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
2001 ................... 8,586,316 $ 86 185,052 $ (1,396) $ 100,383 $ 223 $ (25,875) $ 73,422
Stock Options Exercised 180,934 2 -- -- 1,142 -- -- 1,144
Treasury Stock ......... (311,981) (4) (185,052) 1,396 (2,844) -- -- (1,452)
Other Incentive Stock
Option Transactions .. -- -- -- -- 2,212 -- -- 2,212
Net Change in Unrealized
Holding Gain ......... -- -- -- -- -- (223) -- (223)
Financial Results,
January 1 to
December 31 2002 ..... -- -- -- -- -- -- 58,873 58,873
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31,
2002 ................... 8,455,269 $ 84 -- $ -- $ 100,893 $ 0 $ 32,998 $ 133,975
========== ========== ========== ========== ========== ========== ========== ==========
(The accompanying notes are an integral part of these consolidated financial
statements.)
F-4
BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
2002 2001 2000
--------- --------- ------
Net cash flows from operating activities:
Net Income (Loss) .............................. $ 58,873 $ 20,804 $(21,945)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity loss in HoustonStreet investment ..... -- 450 11,077
Depreciation and Amortization ............... 3,134 3,272 4,159
Amortization of nuclear fuel ................ 3,450 4,140 4,791
Unrealized (gain) loss on firm energy trading
contracts ................................. (115) (12,879) 12,232
Stock compensation expense .................. 2,468 358 110
Gain on Sale of Seabrook Asset .............. (59,774) -- --
Decommissioning cost accretion .............. 4,105 3,261 3,633
Decommissioning trust fund income ........... (1,133) (1,284) (1,604)
(Increase) decrease in accounts receivable .. 5,975 (3,160) 5,550
(Increase) decrease in materials & supplies . 73 52 (373)
(Increase) decrease in prepayments and other
assets .................................... (2,055) (258) 1,900
Increase (decrease) in accounts payable and
accrued expenses .......................... (1,195) (6,580) 7,202
Increase (decrease) in misc. and other
liabilities ............................... 1,338 4,441 (917)
---------- -------- --------
Net cash provided by operating activities ...... 15,144 12,617 25,815
Net cash flows from investing activities:
Capital additions .............................. (1,417) (1,789) (2,108)
Nuclear fuel additions ......................... (753) (5,017) (6,803)
Payments to decommissioning fund ............... (1,161) (2,617) (1,763)
(Increase) decrease in restricted cash.......... (597) 113 487
Investment in HoustonStreet .................... 0 (450) (7,570)
Seabrook Sale-Net Cash Proceeds................. 108,276 -- --
Purchases of short-term investments............. (16,625) 0 (4,025)
Sales of short-term investments ................ 16,329 2,927 1,384
---------- -------- --------
Net cash provided by (used in) investing
activities ... .............................. 104,052 (6,833) (20,398)
Net cash flows from financing activities:
Stock option exercise .......................... 1,142 423 474
Require capital stock........................... (1,452) -- --
---------- -------- --------
Net cash (used in) provided by financing
activities.................................. (310) 423 474
Net increase in cash and cash equivalents ........ 118,886 6,207 5,891
Cash and cash equivalents, beginning of period ... 15,278 9,071 3,180
---------- -------- --------
Cash and cash equivalents, end of period ......... $ 134,164 $ 15,278 $ 9,071
========== ======== ========
Supplemental disclosure of cash flow information
Cash paid for income taxes........................ $1,550,669 $ 26,928 $ 16,056
========== ======== ========
(The accompanying notes are an integral part of these consolidated financial
statements).
F-5
BAYCORP HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. THE COMPANY
BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is a holding company
incorporated in Delaware in 1996. Until November 1, 2002, BayCorp had two
principal operating subsidiaries that generated and traded wholesale
electricity, Great Bay Power Corporation ("Great Bay") and Little Bay Power
Corporation ("Little Bay"). Their principal asset was a combined 15% joint
ownership interest in the Seabrook Nuclear Power Project in Seabrook, New
Hampshire (the "Seabrook Project" or "Seabrook"), until November 1, 2002, when
BayCorp sold Great Bay's and Little Bay's interest in Seabrook (see "Sale of
Seabrook Ownership" below.) That ownership interest entitled Great Bay and
Little Bay to approximately 174 megawatts ("MWs") of the Seabrook Project's
power output. Great Bay and Little Bay were exempt wholesale generators ("EWGs")
under the Public Utility Holding Company Act of 1935 ("PUHCA"). Unlike regulated
public utilities, Great Bay and Little Bay had no franchise area or captive
customers. The companies sold their power in the competitive wholesale power
markets. Great Bay and Little Bay were each wholly-owned by BayCorp. In December
2002, BayCorp formally dissolved Great Bay and Little Bay.
Great Bay was incorporated in New Hampshire in 1986 and was formerly known
as EUA Power Corporation. Little Bay was incorporated in New Hampshire in 1998.
Great Bay sold its power, including its 12.1% share and Little Bay's 2.9% share
of the electricity output of the Seabrook Project, in the wholesale electricity
market, primarily in the Northeast United States. Little Bay sold its power
solely to Great Bay under an intercompany agreement. Neither BayCorp nor Great
Bay or Little Bay had operational responsibilities for the Seabrook Project.
Great Bay sold all but approximately 10 MWs of its share of the Seabrook Project
capacity in the wholesale short-term market. In addition to selling its power
generated by Seabrook, Great Bay purchased power on the open market for resale
to third parties.
Little Bay purchased a 2.9% interest in the Seabrook Project in November
1999 from Montaup Electric Company ("Montaup"), a subsidiary of Eastern
Utilities Associates ("EUA"), for a purchase price of $3.2 million, plus
approximately $1.7 million for certain prepaid items, primarily nuclear fuel and
capital expenditures. In addition, Montaup prefunded the decommissioning
liability associated with Little Bay's 2.9% share of Seabrook by transferring
approximately $12.4 million into Little Bay's decommissioning account, an
irrevocable trust earmarked for Little Bay's share of Seabrook Project
decommissioning expenses.
Traditionally, Great Bay sold most of its share of the Seabrook Project
electricity output under unit contingent contracts. Under unit contingent
contracts, Great Bay was obligated to provide the buyer with power only when the
Seabrook Project was operating. In late 1998, Great Bay began to sell some of
its electricity as firm power, which entitled the buyer to electricity whether
or not the Seabrook Project was operating. Buyers paid a premium for firm power
over unit contingent power because they could rely on uninterrupted electricity.
In order to supply firm power during unscheduled outages at the Seabrook
Project, Great Bay purchased power from the spot market and sold that power to
its firm power customers. Spot market sales are subject to price fluctuations
based on the relative supply and demand of electricity. As a result of spot
market power price fluctuations, Great Bay may have had to purchase power at
prices exceeding prices paid by Great Bay's firm power customers during outages.
Although Great Bay bore the primary risk of these price fluctuations, Great Bay
maintained insurance in 2001 and 2000 to protect Great Bay during periods of
extreme price volatility, subject to certain deductibles and coverage limits.
Great Bay had not entered into any firm power contracts for 2002 given the
expected sale of the Seabrook Project in 2002. In December 2001, Great Bay
negotiated a buyout of the remaining insurance policy it held due to the absence
of any firm sales during 2002. Without firm contracts, the insurance was not
needed as protection against replacement power costs.
The Seabrook Project is a nuclear-fueled, steam electricity, generating
plant located in Seabrook, New Hampshire, which was originally planned to have
two Westinghouse pressurized water reactors, Seabrook Unit 1 and Seabrook Unit 2
(each with a rated capacity of 1,150 megawatts), utilizing ocean water for
condenser cooling purposes. Seabrook Unit 1 entered commercial service on August
19, 1990. Seabrook Unit 2 has been canceled. Great Bay became a wholesale
generating company when Seabrook Unit 1 commenced commercial operation on August
19, 1990. In 1993, the Company became an EWG under the Energy Policy Act of
1992.
The Seabrook Project was owned by Great Bay, Little Bay and nine other
utility companies, consisting of North Atlantic Energy Corporation, Connecticut
Light and Power, The United Illuminating Company, Canal Electric Company,
Massachusetts Municipal Wholesale Electric Company, New England Power Company,
New Hampshire Electric Cooperative, Inc., Taunton Municipal
F-6
Lighting Plant and Hudson Light & Power Department (together with Great Bay and
Little Bay, the "Participants"). Great Bay, Little Bay and the other
Participants were parties to the Agreement for Joint Ownership, Construction and
Operation of New Hampshire Nuclear Units (the "JOA"), which established the
respective ownership interests of the Participants in the Seabrook Project and
defined their responsibilities with respect to the ongoing operation,
maintenance and decommissioning of the Seabrook Project. In general, all ongoing
costs of the Seabrook Project were divided proportionately among the
Participants in accordance with their ownership interests in the Seabrook
Project. Each Participant was only liable for its share of the Seabrook
Project's costs and not liable for any other Participant's share as ownership
interests in the Seabrook Project are several and not joint. Great Bay's and
Little Bay's combined joint ownership interest of 15% was the third largest
interest among the Participants, exceeded only by the approximately 40% interest
held by affiliates of Northeast Utilities ("NU") and the 17.5% interest held by
The United Illuminating Company.
In October 2002, BayCorp created two new subsidiaries, Great Bay Power
Marketing, Inc. ("GBPM") and BayCorp Ventures, LLC. GBPM was created to hold the
purchased power contract that Great Bay has with Unitil Power Corporation
("Unitil") and arrange for the power supply to satisfy the contract. See
"Pre-November 2002 and Current Business--Purchased Power Agreements". Effective
January 1, 2003, GBPM assumed the Unitil contract and holds the Company's letter
of credit established to secure GBPM's obligations under the Unitil contract.
BayCorp Ventures, LLC was created to serve as a vehicle through which the
Company can make investments following the Seabrook sale and the expiration of
the Company's tender offer.
BayCorp also owns approximately 46.4% of HoustonStreet Exchange, Inc.
("HoustonStreet"). HoustonStreet was incorporated in Delaware in 1999.
HoustonStreet is an equity investment of BayCorp. HoustonStreet developed and
operates HoustonStreet.com, an Internet-based independent crude oil and refined
products trading exchange in the United States.
As of December 31, 1999, the Company owned 100% of HoustonStreet.
HoustonStreet raised additional equity in 2000 from outside investors and as a
result, as of December 4, 2000, the Company's ownership fell below 50%, to
45.9%. Subsequently, the Company deconsolidated HoustonStreet as of December 4,
2000 and started accounting for this investment on the equity method.
On March 21, 2001, HoustonStreet raised approximately $2.9 million in
additional funding, including $450,000 from BayCorp, by selling senior secured
notes, warrants to purchase HoustonStreet preferred stock and warrants to
purchase HoustonStreet common stock. Collectively, these securities are referred
to as the "HoustonStreet Series C Units." In April 2001, BayCorp authorized
HoustonStreet to convert BayCorp's $7,000,000 loan made in 2000, along with
approximately $1,000,000 in accrued interest and penalties on the note and past
due management fees, into $8,000,000 of Series C Units. The loan, accrued
interest and receivables from HoustonStreet had been written down to zero as of
December 31, 2000 and as such, the conversion of these amounts had no accounting
impact on BayCorp.
In 2001, HoustonStreet made the decision to downsize its organization and to
focus its efforts on its crude oil and refined products trading platforms.
HoustonStreet shut down its electricity-trading platform in the second half of
2001. As of March 15, 2003, HoustonStreet had six employees.
B. SALE OF SEABROOK OWNERSHIP
In October 2000, the Company announced that it reached an agreement with
Northeast Utilities ("NU") under which the Company's generating subsidiaries,
Great Bay and Little Bay, would include their aggregate 15% ownership share of
the Seabrook Project in the auction of NU's subsidiaries' shares of the Seabrook
Project. Under the terms of the agreement, BayCorp would receive the sales price
established by the auction process. In the event that the sale yielded proceeds
for BayCorp of more than $87.2 million, BayCorp and NU would share the excess
proceeds. Should BayCorp's sales proceeds be less than $87.2 million, NU was to
make up the difference below that amount on a dollar for dollar basis up to a
maximum of $17.4 million. Under the agreement, BayCorp was to be paid separately
for nuclear fuel and inventory. The agreement also limited any top-off amount
required to be funded by BayCorp for decommissioning as part of the sale process
at the amount required by the Nuclear Regulatory Commission ("NRC") regulations.
In September 2001, the State of New Hampshire Public Utilities Commission
(the "Commission" or "NHPUC") in coordination with the State of Connecticut
Department of Public Utility Control (the "Department" or "CDPUC") (and together
with the NHPUC, the "Commissions") retained JPMorgan to act as its exclusive
asset sale manager, financial advisor and auction advisor. The sale was
conducted in accordance with New Hampshire Revised Statutes (Annotated) ("RSA")
Chapter 369-B and Chapter 29:15, N.H. Laws 2001 (the "NH Acts"), the "Agreement
to Settle PSNH Restructuring," executed on September 22, 2000, as approved in
NHPUC Docket No. DE 99-099 (the "Settlement Agreement"), and Connecticut General
Statutes Section 16-244g (the "CT Act") on behalf of North Atlantic Energy
Corporation, The Connecticut Light and Power Company and United Illuminating. In
addition to the ownership
F-7
interests in Seabrook of North Atlantic Energy Corporation, Connecticut Light
and Power and United Illuminating, the Commissions authorized JPMorgan to
include other minority co-owner interests in the auction process (the
"Auction"), and, as indicated below, five additional co-owners, including Great
Bay and Little Bay, (the "Sellers") agreed to participate in the auction sale
process. Great Bay and Little Bay were the only Sellers that were not public
utilities and the only Sellers that had a price support and sharing agreement
with another of the Sellers.
The principal objectives of the Seabrook sale were to ensure that the
requirements set forth in the NH Acts, the Settlement Agreement and the CT Act
have been satisfied. These requirements include: (i) that the Commission
administer a public auction conducted in New Hampshire maximizing the net
proceeds realized from the sale in order to mitigate stranded costs and benefit
all New Hampshire customers with stranded costs recovery obligations associated
with the Seabrook assets (the "Assets"); (ii) that the sale price for Seabrook
equals or exceeds the minimum bid prices separately established by the NHPUC and
the CDPUC; (iii) that the sale be conducted in accordance with certain
divestiture plans (the "Divestiture Plans") filed with the Commissions and in a
manner consistent with the public good; (iv) that the buyer is qualified to own
and operate the Assets, preserve existing labor agreements and provide certain
employee protections; and (v) that the sale results in a net benefit to
ratepayers and customers.
As a result of the Auction, FPL Energy Seabrook, LLC, a subsidiary of FPL
Group, Inc., ("FPL Energy Seabrook") agreed to purchase 88.2% of the 1,161 MW
Unit 1 and 88.2% of the partially constructed Unit 2, for $836.6 million subject
to certain adjustments, with payment deliverable fully in cash at closing. The
purchase price included the projected fuel and non-fuel inventories at closing
and Unit 2 components. The Sellers were responsible for making their then
required decommissioning fund top off payments on or before the date of sale
closing and to transfer their respective decommissioning trust funds to FPL
Energy Seabrook. FPL Energy Seabrook assumed all decommissioning liability for
the acquired portion of Seabrook including the requirement that it provide an
appropriate future funding assurance subject to the approval of the NDFC. FPL
Energy Seabrook provided a parent company guaranty that it will fully fund its
ownership share of the projected cost of decommissioning in a manner consistent
with New Hampshire statutory requirements. FPL Energy Seabrook will also comply
with all employee protections required by New Hampshire law and the Settlement
Agreement. On November 1, 2002, the Company closed the sale of its interests in
Seabrook and received net cash consideration of approximately $108.3 million for
its interests in the Seabrook Project (the "Seabrook Closing"). The Company has
funded certain escrows for potential closing adjustments of $3.6 million. These
amounts are included in prepayments and miscellaneous current liabilities at
December 31, 2002.
The following unaudited pro forma income statement assumes the disposition
of the Seabrook investment occurred on December 31, 2001. The unaudited pro
forma financial information is presented for comparative purposes only and is
not intended to be indicative of actual results of continuing operations that
would have been achieved had the sale been consummated as of December 31, 2001,
nor do they purport to indicate results which may be attained in the future.
Year Ended December 31, 2002
--------------------------------------
Seabrook
Investment(1)
BayCorp Proforma
Historical Adjustments Pro-Forma
---------- ------------ ---------
(dollars in thousands)
OPERATING REVENUES
Sales $48,788 ($42,815) $5,973
OPERATING EXPENSES
Production 21,089 (21,089) 0
Transmission 845 (845) 0
Unrealized Gain on Energy Contracts (115) 0 (115)
Purchased Power 4,706 0 4,706
Admin & General 11,616 (3,662) 7,954
Decommissioning Cost Accretion 4,105 (4,105) 0
Decommissioning Trust Fund Income (1,133) 1,133 0
Depreciation and Amortization 3,134 (3,134) 0
Taxes other than Income 3,080 (2,987) 93
-------- --------- --------
Total Operating Expenses 47,327 (34,689) 12,638
OPERATING INCOME (LOSS) 1,461 8,126 (6,665)
OTHER (INC) DEC
Interest and Investment Income (883) 0 (883)
Gain on Sale of Seabrook Asset (59,774) 59,774 0
Other Expense 45 (45) 0
-------- --------- --------
F-8
Year Ended December 31, 2002
----------------------------------------
BayCorp Seabrook
Historical Investment(1) Pro-Forma
---------- ------------- -----------
(dollars in thousands)
Total Other Deductions (60,612) 59,729 (883)
INCOME (LOSS) BEFORE TAXES 62,073 (67,855) (5,782)
Income Tax Expense (3,200) 3,200 0
-------- --------- ---------
NET INCOME (LOSS) $58,873 ($64,655) ($5,782)
Weighted Average Shares Outstanding - Basic 8,387,767 8,387,767
Weighted Average Shares Outstanding - Diluted 8,671,328 8,387,767
Basic Net Income (Loss) per share $7.02 ($0.69)
Diluted Net Income (Loss) per share $6.79 ($0.69)
- --------
(1) Pro forma income statement amounts represent short term sales and sales
under the Unitil contract along with related purchased power. The Admin &
General expenses represent the costs incurred by BayCorp to manage its
investment in Seabrook. Pro forma results do not consider the cost
reductions which would be required if the Company no longer held its
Seabrook investment. Pro forma results also do not include assumed earnings
on the proceeds from the sale of Seabrook.
C. REGULATION
Great Bay and Little Bay were and GBPM is subject to the regulatory
authority of the Federal Energy Regulatory Commission ("FERC"), the NRC, the
NHPUC and other federal and state agencies as to rates, operations and other
matters. Great Bay's and Little Bay's cost of service, however, is not
regulated. As such, Great Bay's, Little Bay's and GBPM's accounting policies
were and are not subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation."
D. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
E. UTILITY PLANT
The costs of additions to utility plant and non-utility plant are recorded
at original cost.
F. DEPRECIATION
Utility plant was depreciated on the straight-line method at rates designed
to fully depreciate all depreciable properties over the lesser of estimated
useful lives or the Seabrook Project's remaining NRC license life, which expires
in 2026.
Capital projects constituting retirement units were charged to electric
plant. Minor repairs were charged to maintenance expense. When properties were
retired, the original costs, plus costs of removal, less salvage, were charged
to the accumulated provision for depreciation.
G. AMORTIZATION OF NUCLEAR FUEL
The cost of nuclear fuel was amortized to expense based on the rate of
burn-up of the individual assemblies comprising the total core. Great Bay and
Little Bay also provided for the cost of disposing of spent nuclear fuel at
rates specified by the United States Department of Energy ("DOE") under a
contract for disposal between Great Bay and Little Bay, through their managing
agent North Atlantic Energy Service Corporation ("NAESCO"), and the DOE.
H. AMORTIZATION OF MATERIALS AND SUPPLIES
Great Bay and Little Bay amortized to expense an amount designed to fully
amortize the cost of the material and supplies inventory that is expected to be
on hand at the expiration of the Plant's NRC operating license.
F-9
I. DECOMMISSIONING
Based on the Financial Accounting Standards Board's ("FASB") tentative
conclusions, reflected on the February 7, 1996, Exposure Draft titled
"Accounting for Certain Liabilities Related to Closure and Removal of Long-Lived
Assets" Great Bay and Little Bay have historically recognized as a liability
their proportionate share of the present value of the estimated cost of Seabrook
Project decommissioning. For Great Bay, the initial recognition of this
liability was capitalized as part of the Fair Value of the Utility Plant at
November 23, 1994. For Little Bay, the amount was provided for in the purchase
price allocation.
New Hampshire enacted a law in 1981 requiring the creation of a
state-managed fund to finance decommissioning of any nuclear units in the state.
The Seabrook Project's decommissioning estimate and funding schedule is subject
to review each year by the New Hampshire Nuclear Decommissioning Financing
Committee ("NDFC"). This estimate is based on a number of assumptions. Changes
in assumptions for such things as labor and material costs, technology,
inflation and timing of decommissioning could cause these estimates to change,
possibly materially, in the near term. During November 2001, the NDFC issued an
order which established a decommissioning funding schedule in anticipation of
the sale of a majority of the ownership interests in Seabrook. The NDFC set an
accelerated funding schedule for the years 2002 through 2006. For the years 2007
and beyond, the funding schedule assumed contributions will be made until 2026.
The order also established the requirement for a lump sum "top-off" payment at
the transfer of Seabrook to a new owner, which would result in a total
decommissioning fund balance that meets the funding requirements of the NDFC.
The Sellers paid their shares of the top-off amount which for Great Bay and
Little Bay in the aggregate was $5,668,443.
The Staff of the Securities and Exchange Commission ("SEC") has questioned
certain of the current accounting practices of the electric utility industry
regarding the recognition, measurement and classification of decommissioning
costs for nuclear generating stations and joint owners in the financial
statements of these entities. In response to these questions, the FASB agreed to
review the accounting for nuclear decommissioning costs. On February 17, 2000
the FASB issued a "Revision of Exposure Draft issued February 7, 1996, Proposed
Statement of Financial Accounting Standards: Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." On June 30, 2000, the
respective proposed statement was issued by the FASB. In August 2001, the FASB
approved the issuance of Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Retirement Obligations." SFAS No. 143 provides accounting
requirements for the recognition and measurement of liabilities associated with
the retirement of long-lived assets and requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. Great Bay's and Little Bay's accounting for decommissioning was
based on the FASB's original tentative conclusions. The new statement requires
that an obligation associated with the retirement of a tangible long-lived asset
be recognized as a liability when incurred, and that the amount of the liability
resulting from (a) the passage of time and (b) revisions to either the timing or
amount of estimated cash flows should also be recognized. The new statement also
requires that, upon initial recognition of a liability for an asset retirement
obligation, an entity capitalize that cost by recognizing an increase in the
carrying amount of the related long-lived asset.
The new statement requires the initial measurement of the liability to be
based on fair value, where the fair value is the amount that an entity would be
required to pay in an active market to settle the asset retirement obligation in
a current transaction in circumstances other than a forced liquidation or
settlement. Because in most circumstances, a market for settling asset
retirement obligations does not exist, the FASB described an expected present
value technique for estimating fair value. If the new statement was adopted,
Great Bay's and Little Bay's decommissioning liability and annual provision for
decommissioning accretion could change relative to 2001. The new statement is
effective for fiscal years beginning after June 15, 2002, with earlier adoption
encouraged. Due to the sale of Seabrook assets and the dissolution of Great Bay
and Little Bay this new statement will have no impact on the consolidated
financial statements.
Great Bay and Little Bay, based on the initial exposure draft, recognized a
liability based on the present value of the estimated future cash outflows
required to satisfy their obligations using a risk free rate. As of December 31,
2001, the estimated undiscounted cash outflows for Great Bay and Little Bay, for
decommissioning, based on the November 2001 NDFC study, with decommissioning
expenditures starting in 2024 and being completed in 2046, was $418.3 million,
which discounted at an average rate of 5.25%, over the funding period, to
December 31, 2001, represented a liability of $85.5 million reflected in the
accompanying balance sheet. In accordance with the original exposure draft, the
company's wholly-owned subsidiaries recorded any adjustments to the
decommissioning liability due to changes in estimates in the utility plant
account. As of December 31, 2002, the decommissioning liability was $0 as a
result of the sale of Seabrook and the buyer's assumption of all decommissioning
liability on November 1, 2002.
Great Bay and Little Bay accreted their share of the Seabrook Project's
decommissioning liability. The accretion is a non-cash charge and recognizes
their liability related to the closure and decommissioning of their nuclear
plant in current year dollars over the licensing period of the plant. The
non-cash accretion charge recorded in the accompanied consolidated statements of
income was $4,105,000, $3,261,000 and $3,633,000 for the years ended December
31, 2002, 2001 and 2000.
F-10
Funds collected by Seabrook for decommissioning are deposited in an external
irrevocable trust pending their ultimate use. The earnings on the external
trusts also accumulate in the fund balance. The trust funds are restricted for
use in paying the decommissioning of Unit 1. The investments in the trust are
available for sale. Great Bay and Little Bay had therefore reported their
investment in trust fund assets at market value and any unrealized gains and
losses are reflected in equity. There was an unrealized holding gain of $222,700
as of December 31, 2001 that was realized in 2002.
J. OPERATING REVENUES
Revenues are recorded on an accrual basis based on billing rates provided
for in contracts and approved by FERC. During the year ended December 31, 2002,
two customers accounted for 46% and 37% of total operating revenues. For the
year ended December 31, 2001, three customers accounted for 32%, 16% and 15% of
total operating revenues. For the year ended December 31, 2000, four customers
accounted for 17%, 15%, 14% and 13% of total operating revenues.
K. TAXES ON INCOME
The Company accounts for taxes on income under the liability method required
by SFAS No. 109, "Accounting for Income Taxes."
L. CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid short-term investments with an original maturity of three months
or less to be cash equivalents. The carrying amounts approximate fair value
because of the short-term maturity of the investments.
All other short-term investments with a maturity of greater than three
months are classified as available-for-sale and reflected as a current asset at
market value. Changes in the market value of such securities are reflected in
equity. There were no short-term investments, and accordingly no unrealized
gains or losses on short term investments, as of December 31, 2002 and as of
December 31, 2001. The cost of short-term investments that were sold was based
on specific identification in determining realized gains and losses recorded in
the accompanying statement of operations. The net realized gain is recorded as a
component of interest and dividend income. The net realized loss on the sale of
available-for-sale investments of $296,200 in 2002 resulted from gross realized
gains of $50,000 and gross realized losses of $346,200. The net realized gain on
the sale of available-for-sale investments of $12,400 in 2001 resulted from
gross realized gains of $19,400 and gross realized losses of $7,000. The net
realized loss on the sale of available-for-sale investments of $38,600 in 2000
resulted from gross realized gains of $12,500 and gross realized losses of
$51,100
M. SEABROOK UNIT 2
Since the Seabrook Project was originally designed to consist of two
generating units, Great Bay and Little Bay also owned a combined 15% joint
ownership interest in Seabrook Unit 2. Great Bay and Little Bay assigned no
value to Seabrook Unit 2 because on November 6, 1986, the joint owners of the
Seabrook Project voted to dispose of Unit 2. Thereafter, Great Bay wrote off its
investment in Unit 2. Little Bay had no investment in Unit 2. Certain assets of
Seabrook Unit 2 have been sold from time to time to third parties. However,
there have been no material sales of Unit 2 assets since July 1996.
Because Seabrook Unit 2 was never completed or operated, costs associated
with its disposition are not included in the amounts collected for the
decommissioning of Unit 1 and the common facilities. Great Bay and Little Bay
paid their share of monthly expenses required to preserve and protect the value
of the Seabrook Unit 2 components. Any sales of Unit 2 property or inventory
were reflected in other income as gains on the sale or transfer of assets.
Transfers of Unit 2 items to Unit 1 were done at the historical basis of Unit 2
property or components. Seabrook Unit 2 was sold as part of the sale of the
Seabrook Project in 2002. The Participants in Seabrook Unit 1 and Unit 2 agreed
to contribute their pro-rata share of $2 million to an escrow account for the
development and performance of a plan to mitigate the visual impact of Unit 2.
Great Bay and Little Bay made their pro-rata contribution to this escrow account
at the time of the Seabrook Closing.
N. SEABROOK OUTAGE COSTS
The Company's operating results and the comparability of these results on an
interim and annual basis were directly impacted by
F-11
the operations of the Seabrook Project, including the cyclical refueling outages
(generally 18 months apart) as well as unscheduled outages. During outage
periods at the Seabrook Project, Great Bay and Little Bay had no electricity for
resale from the Seabrook Project and consequently no related revenues. Therefore
the impact of outages on the Company's and Great Bay's and Little Bay's results
of operations and financial position were materially adverse.
Great Bay and Little Bay accrued for the incremental costs of the Seabrook
Project's scheduled outages over the periods between those outages. However,
Great Bay and Little Bay continued to expense the normal Seabrook operating and
maintenance expenses as incurred. Therefore, the Company incurred losses during
scheduled outage periods as a result of the combination of the lack of revenue
and the recognition of normal recurring operation and maintenance costs as well
as the continuing depreciation of the utility plant. At the Seabrook Project, a
scheduled refueling outage began on May 4, 2002. Seabrook resumed full operating
capacity on June 6, 2002. The 2002 outage cost approximately $32 million. The
Company's share was approximately $4.8 million.
O. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
reporting of information about operating segments in annual and interim
financial statements and requires restatement of prior year information.
Operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker(s) in deciding how to allocate resources and in
assessing performance. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. In 2002, the Company operated
only in the electric generating segment in the Northeast United States.
P. EARNINGS PER SHARE
Basic earnings (loss) per share is computed by dividing net earnings by the
weighted number of common shares outstanding for all periods presented. Diluted
earnings (loss) per share reflects the dilutive effect of shares under option
plans. Potentially dilutive shares outstanding during 2000 were excluded from
dilutive earnings (loss) per share because their effect would be antidilutive.
Based on an average market price of common stock of $14.74 per share for the
year ended December 31, 2002, $9.11 per share for the year ended December 31,
2001 and $11.35 per share for the year ended December 31, 2000, the following
table reconciles the weighted average common shares outstanding to the shares
used in the computation of the basic and diluted earnings per share outstanding.
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------- ------------- -------------
Weighted average number of common shares outstanding
and used in basic EPS calculation.............. 8,387,767 8,341,637 8,293,475
Weighted average number of common shares outstanding
and used in diluted EPS calculation............ 8,671,328 8,556,994 8,293,475
Shares under option plans, excluded in computation
of diluted EPS due to antidilutive effects....... -- -- 276,296
Q. ACCUMULATED OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which requires the Company to report the changes in
shareholders' equity from all sources during the period other than those
resulting from investments by shareholders (i.e., issuance or repurchase of
common shares and dividends.) Although adoption of this standard has not
resulted in any change to the historic basis of determination of earnings or
shareholders' equity, the other comprehensive income components recorded under
generally accepted accounting principles and previously included under the
category "retained earnings" are displayed as "accumulated other comprehensive
income" within the balance sheet. The composition of other comprehensive income
is as follows:
UNREALIZED ACCUMULATED OTHER
GAINS (LOSSES) COMPREHENSIVE
ON SECURITIES INCOME
-------------- -----------------
Twelve Months Ending December 31, 1999
Beginning Balance................... $ (3,000) $ (3,000)
2000 Change......................... 321,032 321,032
---------- ---------
December 31, 2000..................... 318,032 318,032
2001 Change......................... (95,340) (95,340)
---------- ---------
December 31, 2001..................... $ 222,692 $ 222,692
F-12
UNREALIZED ACCUMULATED OTHER
GAINS (LOSSES) COMPREHENSIVE
ON SECURITIES INCOME
------------- ------
2002 Change......................... (222,692) (222,692)
---------- ---------
December 31, 2002..................... $ 0 $ 0
========== =========
R. RECLASSIFICATIONS
Certain reclassifications have been made in prior years' financial
statements to conform to classifications and presentation used in the current
year.
S. PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company
and all its majority-owned and controlled subsidiaries. The Company had a 15%
joint ownership interest in Seabrook, a 1,150 megawatt nuclear generating unit.
The Company recorded in its financial statements its proportional share of
Seabrook's assets, liabilities and expenses. The Company applies the equity
method of accounting for investments between 20% and 50%. All significant
intercompany transactions have been eliminated. All sales of subsidiary stock
are accounted for as capital transactions. At December 31, 1999, BayCorp owned
100% of HoustonStreet. As of December 31, 2000 and as of December 31, 2001, the
Company owned 45.9% of HoustonStreet. As of December 31, 2002, the Company owned
46.4% of HoustonStreet. Of the 54.6% of HoustonStreet that is not owned by the
Company, approximately 3.1% is owned by Elliott Associates L.P. and
approximately 1.9% is owned by Omega Advisors Inc., both of whom were 5% or more
shareholders of the Company. The remaining 48.6% is owned by unrelated parties.
As a result of the above decrease in ownership, during 2000, the Company
deconsolidated HoustonStreet. At December 31, 2000, December 31, 2001 and at
December 31, 2002, the Company accounts for this investment on the equity
method. The Company has an agreement with HoustonStreet under which it is
providing certain accounting and administrative services to HoustonStreet for
the periods April 1999 to December 2001 and for the calendar year 2002. Income
related to such services was $60,000 for the year ended December 31, 2002,
$165,000 for the year ended December 31, 2001 and $641,400 for the year ended
December 31, 2000.
T. LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," required that long-lived assets held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review of the recoverability, the entity would
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. This statement required that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. In October 2001, the FASB issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which
replaces SFAS No. 121. This new statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. Although SFAS No.
144 supersedes SFAS No. 121, it retains the fundamental provisions of SFAS No.
121 regarding recognition/measurement of impairment of long-lived assets to be
held and used and measurement of long-lived assets to be disposed of by sale.
Under SFAS No. 144, asset write-downs from discontinuing a business segment will
be treated the same as other assets held for sale. The new statement also
broadens the financial statement presentation of discontinued operations to
include the disposal of an asset group (rather than a segment of a business
segment). SFAS No. 144 was effective beginning January 1, 2002. The adoption by
the Company did not have a significant impact on its financial position or
results of operations.
U. FAIR VALUE OF FINANCIAL INSTRUMENTS.
The estimated fair value of the Company's financial instruments as of
December 31, 2002 and 2001 are as follows:
2002 2001
------------------------------- ---------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
Cash & Cash Equivalents .. $134,164 $134,164 $ 15,278 $ 15,278
Restricted Cash - Escrow . 2,500 2,500 1,903 1,903
Accounts Receivable ...... 316 316 6,291 6,291
Decommissioning Trust Fund -- -- 32,048 32,048
Energy Trading Contracts . 2,184 2,184 -- --
F-13
The carrying amounts approximate fair value because of the short maturity of
these instruments.
L. DETAIL OF MISCELLANEOUS CURRENT LIABILITIES
Miscellaneous current liabilities consisted of the following as of December
31, 2002 and 2001:
2002 2001
------ ------
Unrealized Loss on Firm Forward Contracts $ -- $ 8
Accrued Seabrook Costs .................. 3,594 900
Accrued Outage Costs .................... 3,336 0
Accrued Taxes ........................... 2,341 617
Accrued Other ........................... 198 681
------ ------
$6,141 $5,534
====== ======
2. TAXES ON INCOME
The following is a summary of the provision (benefit) for income taxes for
the years ended December 31, 2002, 2001 and 2000:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
--------------- --------------- -----------------
(DOLLARS IN THOUSANDS)
Federal
Current. $ -- $ -- $ 50
Deferred -- -- --
------ ----- -------
$ -- $ -- $ 50
====== ===== =======
State
Current. $3,200 $ 225 $ 562
Deferred -- -- --
------ ----- -------
$3,200 $ 225 $ 612
====== ===== =======
Accumulated deferred income taxes consisted of the following at December 31,
2001 and 2000:
2002 2001
-------- --------
(DOLLARS IN THOUSANDS)
Assets
Net operating loss carryforwards.... $ 52,100 $ 71,212
Decommissioning expense............. - 33,354
Unfunded pension expense............ - 2,765
Accrued outage expense.............. - 1,301
Inventory........................... - 511
Other, net.......................... 471 392
Liabilities
Utility plant....................... - (36,041)
-------- --------
Accumulated deferred income tax asset. 52,571 73,494
Valuation allowance................... (52,571) (73,494)
-------- --------
Accumulated deferred income tax asset,
net................................... $ -- $ --
======== ========
The federal income tax provision set forth above represents 0% of pre-tax
loss in the years ended December 31, 2002, 2001 and 2000. The following table
reconciles the statutory federal income tax rate to those percentages:
F-14
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------- ------------- ---------
(DOLLARS IN THOUSANDS)
Income (Loss) before taxes..................... $62,073 $ 21,029 $(21,333)
Federal statutory rate......................... 34% 34% 34%
Federal income tax liability (benefit) at
statutory Levels............................... 21,105 7,150 (7,253)
Decrease (increase) from statutory levels State
tax net
of federal tax benefit....................... 3,200 225 562
Valuation allowance.......................... (24,305) (7,328) 7,242
Alternative minimum tax...................... -- -- 50
Other........................................ -- (47) (24)
------- --------- -------
Total Provision................................ $ -- $ -- $ 50
======= ======== =======
Valuation allowances have been provided against any deferred tax assets, net
due to the limitations on the use of carryforwards, discussed below, and the
uncertainty associated with future taxable income. The valuation allowance of
$56,086,000 as of December 31, 1994, if subsequently recognized, will be
allocated directly to paid in capital.
For federal income tax purposes, as of December 31, 2002, the Company had
net operating loss carry forwards ("NOLs") of approximately $153 million, which
are scheduled to expire between 2004 and 2019. Because the Company has
experienced one or more ownership changes, within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, an annual limitation is imposed
on the ability of the Company to use $97 million of these carryforwards. The
Company estimated that the annual limitation on the use of $97 million of the
Company's NOLs is approximately $5.5 million per year. Any unused portion of the
$5.5 million annual limitation applicable to the Company's restricted NOLs is
available for use in future years until such NOLs are scheduled to expire.
Changes in ownership occurring in 2003 could result in further limitation,
including a complete limitation on its ability to utilize its NOLs. Whether the
Company incurs an ownership change under Section 382 is not within the Company's
control and there can be no assurance that such a change and resulting loss of
the Company's ability to utilize its NOLs will not occur.
3. ENERGY MARKETING
The Company utilized unit contingent and firm forward sales contracts to
maximize the value of its 174 MW power supply from the Seabrook Project. It
currently utilizes firm forward and spot purchases to maximize the value of the
Unitil contract. The net unrealized gain on trading activities for the year
ended December 31, 2002 was $115,300 and is included in the accompanying
consolidated statement of operations for 2002. The Company had not entered into
any forward firm energy trading contracts as of December 31, 2001. As a result,
as of December 31, 2001, the Company had no unrealized loss or gain on the
mark-to-market of forward firm energy trading contracts recorded in accrued
expenses. The net change in unrealized gain on trading activities for the year
ended December 31, 2001 was $12,879,000 and is included in the accompanying
consolidated statement of operations for 2001. As of December 31, 2000, the
Company had a net unrealized loss of approximately $12,879,000 recorded in
accrued expenses. The net change in unrealized loss on trading activities for
the year ended December 31, 2000 was $12,232,000 and is included in the
accompanying consolidated statement of operations for 2000.
4. PURCHASED POWER AGREEMENTS
Great Bay was party to a purchased power contract, dated as of April 1,
1993 (the "Unitil Purchased Power Agreement"), with Unitil Power Corporation
("Unitil") that provided for Great Bay to sell to Unitil 0.8696% of the energy
and capacity of Seabrook, approximately 10 MW. The Unitil Purchased Power
Agreement commenced on May 1, 1993 and was to run through October 31, 2010. The
price for power was subject to increase in accordance with a formula that
provided for adjustments at less than the actual rate of inflation. Unitil had
an option to extend the Unitil Purchased Power Agreement for an additional 12
years until 2022.
F-15
To secure the obligation of Great Bay under the Unitil Purchased Power
Agreement to pay damages in the event of a default by Great Bay, the Unitil
Purchased Power Agreement granted Unitil a "Third Mortgage" on Great Bay's
interest in the Seabrook Project. The Third Mortgage was subject and subordinate
to (i) senior mortgages and security agreements securing Great Bay's
indebtedness to lenders in an aggregate amount not to exceed $80,000,000 and
(ii) other mortgages that may be granted by Great Bay to other purchasers of
power from Great Bay to secure a Balance Account or similar obligation.
In anticipation of the Seabrook Sale, the Unitil Purchased Power Agreement
was amended as of November 1, 2002. The amendment primarily modifies the
existing power supply contract to reduce the amount of power delivered to 9.06
megawatts, reduce the price that Unitil pays for power to $50.34 per megawatt
hour, and provide that Great Bay will supply the power regardless of whether
Seabrook is providing the power. The amendment also provides alternative
security for Unitil's benefit, to replace and discharge the Third Mortgage that
secured Great Bay's performance of the contract. In connection with the amended
contract, the Company was required to deposit $2.5 million into a restricted
account for the benefit of Unitil should the Company default. The amount is
reflected as restricted cash in the accompanying balance sheet. The amendment
received FERC approval. Great Bay has assigned the Unitil Purchased Power
Agreement to GBPM.
This contract meets the definition of an energy trading contract under EITF
98-10 and 00-17. In accordance with the FASB's Emerging Issues Task Force
interpretation 02-03 the inception gain (initial value of $2.1 million) on the
contract has been deferred and will be recognized over the life of the contract.
As of December 31, 2002 the fair value of the contract was $2.2 million. The
deferred gain on the contract is $2.1 million. Both of these amounts are
reflected in the Company's balance sheet.
Great Bay and Little Bay were parties to a power sales agreement dated as of
November 19, 2001 under which Little Bay sold at cost, and Great Bay purchased,
all of the output of the portion of Seabrook owned by Little Bay. This agreement
was a unit power sale agreement. Accordingly, when all or part of Little Bay's
interest in Seabrook was not producing electricity, the obligation of Little Bay
to sell (and of Great Bay to purchase) was proportionately eliminated. The
agreement was terminated as of November 1, 2002.
In February 2001, Great Bay executed a Purchase Power Agreement with Select
Energy ("Select") whereby Great Bay sold 50 MWs of energy associated with the
Seabrook Project to Select in exchange for 25 MWs of energy associated with
Millstone Unit 2 and 25 MWs of energy associated with Millstone Unit 3.
Millstone is a nuclear power plant located in Connecticut. The term of this
agreement was April 1, 2001 through December 31, 2001. Delivery of power from
either company was contingent on each of the units operating at a certain
capacity.
As part of the agreement, Select made a prepayment of $3.7 million to Great
Bay in February 2001 and a second prepayment of $3.3 million in March 2001.
Great Bay compensated Select for the prepayments by (i) paying 12% annual
interest for the period from February 6, 2001 through March 31, 2001 and (ii)
giving Select a price differential for the power being exchanged until such time
as the Select prepayment had been repaid. In order to collateralize the
transaction, Great Bay and Little Bay each provided Select with a mortgage lien
and security interest in their respective interests in the Seabrook Project.
Great Bay repaid Select in 2001 and the mortgage liens and security interests
were released as of July 2001 and there was no price differential in exchanging
power throughout the remaining term of the agreement.
5. STOCK OPTION PLAN
On April 24, 1995, the Board of Directors of the Company established the
1995 Stock Option Plan (the "1996 Plan"), which received shareholder approval at
the Company's annual meeting on April 16, 1996. On May 2, 2001 the Board of
Directors of the Company established the 2001 Non-Statutory Stock Option Plan
(the "2001 Plan"), which received shareholder approval at the Company's annual
meeting on April 24, 2002. The purpose of these plans is to secure for the
Company and its shareholders the benefits arising from capital stock ownership
by employees, officers and directors of, and consultants or advisors to, the
Company who are expected to contribute to the Company's future growth and
success. Options granted pursuant to the 1996 Plan may be either incentive stock
options meeting the requirements of Section 422 of the Internal Revenue Code or
nonstatutory options, which are not intended to meet the requirements of Section
422. Options granted pursuant to the 2001 plan will be non-statutory options
that are not intended to meet the requirements of Section 422 of the Internal
Revenue Code. The 1996 Plan and the 2001 Plan are administered by the Board of
Directors of the Company and may be modified or amended by the Board in any
respect, subject to shareholder approval in certain instances in the case of the
1996 Plan.
The Company accounts for the plans under Accounting Principles Board Opinion
No. 25, and as such no compensation cost is recognized on options that are
granted at fair market value and that have not been modified.
F-16
On December 3, 1998, the Board of Directors of the Company voted to reprice
all of the outstanding options of the Company, at that date, as the then
outstanding options were "out of the money." The Board of Directors determined
that the then outstanding options no longer had the desired motivational effect
or compensatory benefit for the employees. The repricing of the options was
based on the current market value of the stock as of December 18, 1998.
Simultaneously with the repricing, 139,583 existing options were forfeited.
During 2000, the Board of Directors of the Company accelerated the vesting
period of the options held by certain employees of the Company.
In October 2001, the Company issued 240,000 non qualified options pursuant
to the 2001 Non Statutory Stock Option Plan. These options have an exercise
price of $9.05 and vested only upon the completion of the sale of the Seabrook
Project. In accordance with APB 25 and FIN 44 compensation expense has been
recorded with respect to these options.
In March 2002, the Company issued loans of $756,029 to its President, Frank
Getman, and a director, John Tillinghast, in order for them to exercise 150,384
options for common stock. These loans had limited recourse and were repaid in
November 2002. The options that were exercised were part of the above repricing.
FASB Interpretation No. 44, Accounting for Certain Transactions involving
Stock Compensation ("FIN 44"), effective July 1, 2000 and applied prospectively,
(except for direct or indirect option repricings and the definition of an
employee in which case the effective date is December 15, 1998), addresses
compensation issues regarding the definition of an employee, modifications to
plan awards, changes in grantee status, business combinations and share
repurchase features. For transactions subject to the December 15, 1998 effective
date, no compensation expense is recognized for the period between December 15,
1998 and July 1, 2000. FIN 44 requires variable accounting when direct or
indirect reductions of the exercise price occur. In accordance with APB 25 and
FIN 44, the Company recorded compensation expense related to the repriced and
contingent options and the accelerated options of $2,467,700, $358,000 and
$110,000 for 2002, 2001 and 2000, respectively.
In April 2002, the Company issued 80,000 options to management under the
2001 plan. The options have an exercise price of $12.22.
Had compensation cost for these Plans been determined consistent with SFAS
No. 123, Accounting for Stock Based Compensation, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts.
2002 2001 2000
-------- --------- ------
Net Income (Loss): As Reported............ $58,873 $ 20,804 $(21,945)
Pro Forma............................ 58,220 18,517 (23,056)
Earnings (Loss) Per Share (Basic): As
Reported.................................. $ 7.02 $ 2.49 $ (2.65)
Pro Forma............................ 6.94 2.22 (2.78)
Earnings (Loss)Per Share (Diluted): As
Reported.................................. $ 6.79 $ 2.43 $ (2.65)
Pro Forma............................ 6.71 2.16 (2.78)
A summary of the Company's stock option plan at December 31, 2002, 2001 and
2000, and changes during the years then ended, is presented in the table and
narrative below:
F-17
2002 2001 2000
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding at beginning
of year................ 1,046,701 $ 7.39 711,001 $ 6.14 700,917 $ 5.36
Granted.................... 80,000 $12.22 410,500 $ 9.30 132,400 $ 9.40
Exercised.................. (180,934) $ 4.91 (67,000) $ 6.31 (102,316) $ 5.01
Forfeited.................. -- -- (20,000) $ 4.75
Expired.................... -- (7,800) --
Outstanding at end of year. 945,767 $ 8.33 1,046,701 $ 7.39 711,001 $ 6.14
Exercisable at end of year. 902,434 $ 8.20 682,034 $ 7.24 571,668 $ 5.86
Weighted average fair value of
options granted.......... $12.22 $ 7.06 $ 6.85
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002, 2001 and 2000:
WEIGHTED
EXERCISE
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
OF SHARES LIFE EXERCISE OF SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
- ------------------------ ----------- ----------- -------- ----------- --------
2002
$2.88 - $4.32 40,000 3.3 $2.88 40,000 $ 2.88
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$4.33 - $6.50 120,167 2.8 $4.74 120,167 $ 4.74
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$6.51 - $9.74 545,100 4.8 $8.25 535,100 $ 8.32
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$9.75 - $12.69 240,500 5.1 $4.62 207,167 $11.13
- ------------------------- ------------ ----------------- ---------- ----------- ---------
Total 945,767 4.4 $6.65 902,434 $ 8.25
- ------------------------- ------------ ----------------- ---------- ----------- ---------
2001
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$2.88 - $4.32 40,000 4.3 $2.88 40,000 $2.88
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$4.33 - $6.50 300,601 1.8 $4.84 300,601 $4.84
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$6.51 - $9.74 545,600 5.8 $8.25 230,933 $7.69
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$9.75 - $12.69 160,500 6.3 $10.40 110,500 $10.47
- ------------------------- ------------ ----------------- ---------- ----------- ---------
Total 1,046,701 4.7 $7.39 682,034 $6.60
- ------------------------- ------------ ----------------- ---------- ----------- ---------
2000
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$2.88 - $4.32 40,000 5.3 $2.88 40,000 $2.88
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$4.33 - $6.50 316,601 2.7 $4.82 316,601 $4.82
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$6.51 - $9.74 337,600 5.1 $7.55 198,267 $7.72
- ------------------------- ------------ ----------------- ---------- ----------- ---------
$9.75 - $12.69 16,800 3.9 $12.69 16,800 $12.69
- ------------------------- ------------ ----------------- ---------- ----------- ---------
Total 711,001 4.0 $6.19 571,668 $5.86
- ------------------------- ------------ ----------------- ---------- ----------- ---------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants in 2002, 2001 and 2000 respectively: weighted average risk-free interest
rates of 4.9, 4.9 and 6.4 percent, expected dividend yields of 0 % and expected
lives of seven years and expected volatility of 47%, 67% and 71%, respectively.
F-18
6. COMMITMENTS AND CONTINGENCIES
BayCorp and its wholly owned subsidiaries currently lease office space under
noncancelable operating leases. Rental expense under operating lease agreements
for the years ended December 31, 2002, 2001 and 2000 was $81,144, $101,325 and
$78,747, respectively.
Future minimum commitments for operating leases as of December 31, 2002 are
as follows:
YEAR ENDING OPERATING LEASES
- ------------------ ----------------
December 31, 2003. $ 61,800
7. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
HoustonStreet developed and operates HoustonStreet.com. During 1999,
HoustonStreet developed and operated a platform for the trading of electricity
over the Internet. As of December 31, 1999, the Company owned 100% of
HoustonStreet.
During 2000, the Company loaned $7,000,000 to HoustonStreet at an annual
interest rate of 10%. As of December 31, 2000, the Company also had
approximately $570,000 in receivables due from HoustonStreet.
HoustonStreet raised additional capital in 2000 to fund its development and
operations. In February 2000, HoustonStreet raised $11,0000,000 in cash by
issuing 4,814,815 shares of common stock at $0.415 per share and 2,400,001
shares of Series A preferred stock at $3.75 per share. The Company's ownership
in HoustonStreet at the end of February 2000 was 58.1%. In March 2000,
HoustonStreet raised $5,600,005 in cash by issuing 266,667 shares of its common
stock at $3.75 per share and 1,226,668 shares of Series A preferred stock at
$3.75 per share. The Company's ownership in HoustonStreet at the end of March
2000 was 53.5%. In April 2000, HoustonStreet raised $13,500,000 by issuing
133,334 shares of Series A preferred stock at $3.75 per share and 1,083,334
shares of Series B preferred stock at $12.00 per share. The Company's ownership
in HoustonStreet at the end of April 2000 was 50.2%. In May 2000, HoustonStreet
received approximately $4,998 from the exercise of an employee stock option. The
Company's ownership in HoustonStreet at the end of May 2000 was 50.0%. On
December 4, 2000, HoustonStreet signed an agreement with Enron Net Works LLC to
have electricity and natural gas prices that are posted on EnronOnline
automatically posted on HoustonStreet. HoustonStreet issued Enron 1,781,043
shares of common stock in exchange for this agreement. As a result, as of
December 4, 2000, the Company's ownership in HoustonStreet was 45.9%. The
Company reflected its proportionate share of subsidiary equity resulting from
the additional equity raised by HoustonStreet as a capital transaction in
accordance with SEC Staff Accounting Bulletin Topic 5:H. These sell down gains
resulted in an unrealized gain for 2000 of approximately $6.7 million recorded
as additional paid in capital in the accompanying statement of changes in
shareholders' equity.
F-19
As a result of its capital raising activities in 2000, on December 4, 2000
HoustonStreet sold an amount of its own stock such that BayCorp no longer had
majority ownership in or control over HoustonStreet. In 2000, the Company
recorded its portion of the operating losses for the period during which the
Company owned more than 50% of HoustonStreet. The loss for this period was
$22,258,967. As of December 4, 2000, the Company deconsolidated HoustonStreet
and started accounting for this investment on the equity method effective for
the full year ended December 31, 2000. The Company's equity method investment
upon deconsolidation was negative (HoustonStreet's losses exceeded the Company's
investment in HoustonStreet) and the Company wrote its investment to zero. At
the point of deconsolidation, the Company's investment balance was approximately
negative $11.2 million. As BayCorp had no obligation to fund HoustonStreet, a
gain was recognized when HoustonStreet was deconsolidated. As a result of all of
the above, an equity loss in investment of $11,077,000 was reflected in the
Company's 2000 financial statements.
Balance Sheet
Reconciliation
--------------
Carrying Value at December 31, 1999.............................. $(3,216,957)
Company's Sell Down Gains........................................ 6,725,185
Company's Equity in HoustonStreet Loss as of December 4, 2000.... (22,258,967)
Loan to HoustonStreet............................................ 7,000,000
Receivable due from HoustonStreet................................ 569,766
-----------
Carrying Value at December 4, 2000............................... (11,180,973)
Gain on Deconsolidation at December 4, 2000...................... 11,180,973
-----------
Carrying Value at December 31, 2000.............................. $ 0
===========
Income Statement
Reconciliation
----------------
Company's Equity in HoustonStreet Loss as of December 4, 2000.... $(22,258,967)
Gain on Deconsolidation at December 4, 2000...................... 11,180,973
------------
Company's Equity in HoustonStreet Loss as of December 31, 2000... $(11,077,994)
============
In June 2001, HoustonStreet issued 426,667 shares of its common stock to
settle amounts owed to a creditor of HoustonStreet. The Company's ownership in
HoustonStreet at the end of June 2001 was 45%. In December 2001, HoustonStreet
cancelled 850,521 shares of common stock previously issued to Enron in 2000.
Enron terminated the agreement between HoustonStreet and Enron based on
allegations that HoustonStreet had defaulted under the agreement. The agreement
provided for the cancellation of certain shares upon this termination by Enron.
HoustonStreet believes that Enron wrongfully terminated its agreement with
HoustonStreet and is pursuing its rights and remedies under the contract. Also
in December 2001, HoustonStreet repurchased 281,650 shares of Series A preferred
stock from certain investors for $3.00. The Company's ownership in HoustonStreet
at the end of December 2001 was 47.5%. The Company's ownership in HoustonStreet
at the end of December 2002 was 46.4%.
Under the equity method in 2001, the Company did not recognize HoustonStreet
operating losses as the Company was no longer a majority owner and did not have
voting control of HoustonStreet. In March 2001, the Company loaned an additional
$450,000 in cash to HoustonStreet as part of a senior secured debt financing.
The secured creditors, including BayCorp, have a first priority secured interest
in all of HoustonStreet's assets. The Company recorded this loan as an equity
loss in HoustonStreet in 2001 because it was uncertain if and when this amount
would be recovered given the termination of the agreement with Enron that
followed in June 2001. The table below reflects the pro rata portion of
operating losses attributable to BayCorp's interest in HoustonStreet for 2002,
2001 and 2000.
HoustonStreet 2002 2001 2000
----------- ------------- -----------
Total assets........................... $ 585,238 $ 1,256,362 $ 11,958,624
Total liabilities...................... 12,558,312 14,784,077 15,395,770
Net sales.............................. 1,689,906 523,393 1,899,498
Net income (loss)...................... 1,383,376 (40,046,837) (14,936,899)
Company's equity in net loss........... 641,886 (22,258,967) (6,856,037)
As of December 31, 2001, HoustonStreet had ceased operation of its
electricity trading platform and focused exclusively on its crude oil and
refined products trading platform. The Company had no investments or receivables
from HoustonStreet recognized on the accompanying balance sheet.
8. SUBSEQUENT EVENTS
F-20
Issuer Tender Offer.
On January 31, 2003, BayCorp commenced an issuer tender offer to purchase up
to 8,500,000 shares of its Common Stock at a price of $14.85 per share (the
"Tender Offer" or "Offer"). The Company disclosed in the Offer to Purchase
mailed to shareholders that the Board may decide to reduce the number of shares
purchased in the Offer to preserve the Company's ability to use its
approximately $90 million in net operating loss ("NOL") carryforwards. The Offer
was scheduled to expire on March 3, 2003.
On March 4, 2003, in view of the response to the Offer and the significant
proration that would have been necessary to preserve the Company's approximately
$97 million in NOL carryforwards, the Board determined and announced that it
would not exercise its discretion to prorate the shares tendered in the Offer to
preserve the Company's ability to use the NOL carryforwards without limitation.
The Company also announced that its Board of Directors will consider proposing
the dissolution and liquidation of the Company for approval at a meeting of
shareholders called for that purpose. The Company extended the expiration date
of the Tender Offer to March 18, 2003 to provide shareholders additional time to
tender shares that had not been tendered or to withdraw shares that had been
tendered. At the extended expiration date of March 18, 2003, 9,207,508 shares
had been properly tendered and not withdrawn (including options tendered for
repurchase and cancellation) and the Company exercised its discretion to
purchase up to an additional 2% of outstanding shares, purchasing a total of
8,673,887 shares (and options) at a purchase price of $14.85, representing
approximately 94.3% of the shares (and options) tendered, excluding odd lots,
which were purchased without proration. Payment for all such shares and options
was completed by March 24, 2003. As a result, as of March 24, 2003 the Company
had 683,316 fully diluted shares and cash and cash equivalents of approximately
$11,800,000.
F-21
THE FOLLOWING REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE
PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT ON HOUSTONSTREET EXCHANGE, INC.
ARTHUR ANDERSEN LLP HAS NOT REISSUED THIS REPORT.
HOUSTONSTREET EXCHANGE, INC.
Consolidated Financial Statements
as of December 31, 2000 and 1999
Together with Auditors' Report
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
HoustonStreet Exchange, Inc.:
We have audited the accompanying consolidated balance sheets of
HoustonStreet Exchange, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 2000 and 1999 and the related consolidated statements of
operations, shareholders' deficit and cash flows for the year ended December 31,
2000 and for the period from inception (April 27, 1999) to December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
HoustonStreet Exchange, Inc. as of December 31, 2000 and 1999 and the results of
its operations and its cash flows for the year ended December 31, 2000 and for
the period from inception to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
since inception, has a net capital deficiency and expects to incur additional
losses that, along with current conditions in the capital markets, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1 and
Note 12. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 30, 2001
F-22
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
------------ ------------
Current Assets:
Cash and cash equivalents $ 4,499,466 $ 133,471
Restricted cash 223,145 --
Accounts receivable 183,877 9,424
Other current assets 303,150 29,397
------------ ------------
Total current assets 5,209,638 172,292
Property and Equipment (Note 3) 7,794,747 3,098,530
Accumulated Depreciation (2,752,595) (286,407)
------------ ------------
Total property and equipment, net 5,042,152 2,812,123
Intangible Assets, net of amortization (Note 2) 1,706,834 --
Total assets $ 11,958,624 $ 2,984,415
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 6,246,730 $ 1,962,948
Accounts payable to parent 569,766 --
Accrued expenses 1,579,269 111,383
Notes payable to parent (Note 5) 7,000,000 4,127,041
------------ ------------
Total current liabilities 15,395,765 6,201,372
Commitments and Contingencies (Note 8)
Series A preferred stock; $0.01 par value - (Note 6)
Authorized--3,760,003 shares
Outstanding--3,760,003 shares 14,100,011 --
Series B preferred stock; $0.01 par value - (Note 6)
Authorized 2,333,334 shares
Outstanding--1,083,334 shares 13,000,008 --
Preferred Stock of Subsidiary (Note 6) 7,333,334 --
Shareholders' Deficit: (Note 6)
Common stock; $0.01 par value-
Authorized--50,000,000 shares
Issued and outstanding--16,922,525 and 10,000,000 shares at December 31,
2000 and 1999, respectively 169,225 100,000
Additional paid-in capital 5,404,075 80,000
Accumulated deficit (43,443,794) (3,396,957)
------------ ------------
Total shareholders' deficit (37,870,494) (3,216,957)
Total liabilities and shareholders' deficit $ 11,958,624 $ 2,984,415
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2000 AND FOR THE PERIOD
FROM INCEPTION TO DECEMBER 31, 1999
2000 1999
------------ ------------
Operating Revenues (Note 1) $ 523,393 $ 59,186
Operating Expenses: (Note 1)
Selling and marketing 6,886,306 972,203
Product development 11,796,000 893,126
General and administrative 14,742,000 1,208,312
Depreciation and amortization 2,540,396 286,407
Impairment write-down of assets 4,714,559 0
------------ ------------
Total operating expenses 40,679,261 3,360,048
Operating loss (40,155,868) (3,300,862)
Other Income and Expense
Interest Expense (195,627) (97,482)
Interest Income 337,816 1,387
Other Expenses (33,158) --
------------ ------------
Total Other Income (Expenses) 109,031 (96,095)
Net loss $(40,046,837) $ (3,396,957)
============ ============
Basic and Diluted Net Loss per Common Share $ (2.71) $ (0.34)
============ ============
Weighted Average Shares Outstanding 14,781,705 10,000,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S
DEFICIT FOR THE YEAR ENDED DECEMBER
31, 2000 AND FOR THE PERIOD
FROM INCEPTION THRU
DECEMBER 31, 1999
Common Stock ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED SHAREHOLDERS'
ISSUED AMOUNT CAPITAL DEFICIT DEFICIT
---------- ------------ ------------ ------------ ------------
Balance, Inception ............................ -- $ -- $ -- $ -- $ --
Issuance of common stock, $0.01 par value .. 10,000,000 100,000 80,000 -- 180,000
Preferred stock, $0.01 par value ........... -- -- -- -- --
Net loss ................................... (3,396,957) (3,396,957)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 .................... 10,000,000 $ 100,000 $ 80,000 $ (3,396,957) $ (3,216,957)
Issuance of common stock, $0.01 par value .. 5,081,482 50,815 2,949,187 -- 3,000,002
Issuance of common stock in exchange for an
intangible asset, $0.01 par value (Note 2) 1,781,043 17,810 1,763,233 -- 1,781,043
Exercise of stock options .................. 60,000 600 4,398 -- 4,998
Issuance of warrants in exchange for
services (Note 6) ........................ -- -- 607,257 -- 607,257
Net loss ................................... -- -- -- (40,046,837) (40,046,837)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 .................... 16,922,525 $ 169,225 $ 5,404,075 $(43,443,794) $(37,870,494)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND FOR THE PERIOD
FROM INCEPTION THRU DECEMBER 31, 1999
2000 1999
------------ ------------
Operating Activities:
Net loss .................................................................. $(40,046,837) $ (3,396,957)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization ........................................... 2,540,396 286,407
Impairment writedown of assets .......................................... 4,714,559 0
Changes in operating assets and liabilities--
Accounts receivable ..................................................... (174,453) (9,424)
Other current assets .................................................... (273,753) (29,397)
Accounts payable ........................................................ 4,283,782 1,962,948
Accounts payable to parent .............................................. 569,766 --
Accrued expenses ........................................................ 1,467,886 111,383
------------ ------------
Net cash used in operating activities ............................... (26,918,654) (1,075,040)
Investing Activities:
Purchases of property and equipment ........................................ (8,803,518) (3,098,530)
Change in restricted cash .................................................. (223,145) --
------------ ------------
(9,026,663) (3,098,530)
Financing Activities:
Proceeds from issuance of common stock ..................................... 3,000,002 180,000
Proceeds from exercise of stock options .................................... 4,998 --
Proceeds from issuance of Series A preferred stock ......................... 14,100,011 --
Proceeds from issuance of Series B preferred stock ......................... 13,000,008 --
Proceeds from preferred stock of subsidiary ................................ 7,333,334 --
Notes payable to parent .................................................... 2,872,959 4,127,041
------------ ------------
Net cash provided by financing activities ........................... 40,311,312 4,307,041
Net increase in cash and cash equivalents ........................... 4,365,995 133,471
Cash and Cash Equivalents, beginning of period ............................... 133,471 --
------------ ------------
Cash and Cash Equivalents, end of year ....................................... $ 4,499,466 $ 133,471
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest ................................... $ -- $ 96,095
============ ============
Cash paid during the period for taxes ...................................... $ -- $ --
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
HOUSTONSTREET EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
HoustonStreet Exchange, Inc. (HoustonStreet or the Company) developed and
operates HoustonStreet.com, an Internet-based trading platform and information
portal for wholesale energy-related commodities. HoustonStreet offers online
trading exchanges for electricity, crude oil and refined products in the United
States and exchanges for electricity in Europe. The Company was incorporated in
Delaware on April 27, 1999 (inception). HoustonStreet initially launched its
Internet-based wholesale electricity trading exchange in the Northeast in July
1999 and nationwide in September 1999. In May 2000, HoustonStreet launched
exchanges for crude oil, refined products and a new electricity platform
dedicated to standard products trading. In September 2000, HoustonStreet
launched an exchange for electricity in Europe with trading floors for the
United Kingdom, Germany, Belgium, Switzerland, Austria and the Netherlands.
During fiscal year 2000, the Company established a new subsidiary,
HoustonStreet B.V. (United Kingdom), for the purpose of providing related
services primarily to European companies (HoustonStreet Exchange Europe).
The Company is subject to certain risks common to rapidly growing
technology-based companies. Principal risks to the Company include the need to
obtain adequate financing to fund future expansion and operations, dependence on
key employees and suppliers, competition and market acceptance, the need to
manage growth and expansion and the need for successful marketing, development
and protection of its products and services to achieve profitable future
operations.
The Company has incurred losses of $43,443,794 from inception through
December 31, 2000 and expects to incur additional losses. These losses have been
funded through borrowings from BayCorp Holdings (an affiliated company) and the
sale of common and preferred stock of the Company and its subsidiary. The future
viability of the Company is dependent on its ability to obtain necessary
additional financing and to generate cash from operations. The Company intends
to continue to obtain additional equity and debt financing in order to further
develop its products and markets and to meet working capital requirements.
Nonetheless, there can be no assurance that the Company will be able to raise
additional capital.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiary, HoustonStreet B.V. All
significant intercompany balances and transactions have been eliminated.
Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation, establishes standards of financial accounting and reporting for
foreign currency transactions in financial statements of a reporting enterprise
and for translating foreign currency financial statements that are incorporated
in the financial statements of an enterprise by consolidation.
Transaction gains or losses realized upon settlement of a foreign currency
transaction are included in the income statement. The Company determined that
the functional and the reporting currency of its subsidiary is the U.S. dollar.
The effects of translation of their financial statements are immaterial to the
consolidated statements as a whole.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-27
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
CASH AND CASH EQUIVALENTS
Cash equivalents are carried at cost plus accrued interest, which
approximates fair value. The Company considers all highly liquid investments
with an original maturity date of three months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash at December 31, 2000 represents cash that is required to be
held in escrow in accordance with a lease agreement for the Company's office
space in Portsmouth, New Hampshire.
REVENUE RECOGNITION
Operating revenue consists of commissions for megawatt hours and thousands
of barrels (BBLS) traded on HoustonStreet.com and is recognized once the terms
of the trade have been accepted by both parties to the trade.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses include advertising and promotional
expenditures, payroll and expenses related for personnel engaged in marketing,
customer service and related activities.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses include payroll and related expenses for Web
site development and information technology personnel and Web content and design
expenses.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation, requires that stock
awards granted subsequent to January 1, 1995 be recognized as compensation
expense based on their fair value at the date of grant. Alternatively, a company
may use Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and disclose pro forma income amounts that would have
resulted from recognizing employee awards at their fair value. The Company has
elected to account for employee stock-based compensation expense under APB
Opinion No. 25 and make the required pro forma disclosures for compensation (see
Note 7).
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, the liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using enacted tax rates. A valuation
allowance is established against deferred tax assets unless the Company believes
it is more likely than not that the benefit will be realized.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company reviewed its
computer and software assets at December 31, 2000 and determined that there was
an impairment of $4,714,559 related to such assets. The related charge is
included in operating expenses in the accompanying consolidated statement of
operations for the year ended December 31, 2000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and notes payable. The
carrying amount of the Company's cash and cash equivalents, accounts receivable
and accounts payable approximates
F-28
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
fair value due to the short-term nature of these instruments. At December 31,
2000, the notes payable to parent bears interest at 10% and the carrying amount
approximates fair value. The notes payable at December 31, 1999 bear interest at
a variable market rate and the carrying amount approximates fair value.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
number of common shares outstanding for all periods presented. Diluted net loss
per share reflects the dilutive effect of shares under option plans, warrants
and convertible preferred stock. Potentially dilutive shares, if any,
outstanding during the period have been excluded from diluted net loss per share
because their effect would be anti-dilutive.
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of the basic and diluted
earnings per share outstanding:
PERIOD ENDED DECEMBER 31,
-------------------------
2000 1999
------ -------
Weighted average number of common shares
outstanding and used in basic and
diluted EPS calculation 14,781,705 10,000,000
Shares under option plans,
warrants and convertible preferred stock,
excluded in computation of diluted
EPS due to antidilutive effects 4,971,186 215,804
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, requiring computer
software costs associated with internal-use software to be expensed as incurred
until certain capitalization criteria are met. The Company adopted SOP 98-1 for
the period ending December 31, 1999.
In April 1998, the AICPA issued SOP 98-5, Reporting on Costs of Start-up
Activities, requiring all costs associated with preopening, preoperating and
organization activities to be expensed as incurred. The Company has charged all
such costs to operations for the periods ending December 31, 2000 and 1999.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of SFAS No. 133, and in June
2000, issued SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Activities, an amendment to SFAS No. 133. This Statement, SFAS No. 133
as amended, establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133, as amended, is effective for fiscal years beginning after June
15, 2000. The Company completed its review and implementation of SFAS No. 133,
effective January 1, 2001. The Company did not identify any contracts that
qualify as derivatives under SFAS No. 133.
F-29
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
2. TRANSACTION WITH ENRONONLINE
On December 4, 2000, the Company issued 1,781,043 shares of common stock to
Enron Net Works LLC, an affiliate of Enron North America Corp (Enron). Enron
owns and operates EnronOnline, an electronic energy trading platform. The common
stock was issued along with the right for Enron to receive (earn) an additional
763,305 shares of the Company's common stock based upon volumes transacted over
a linked trading platform and warrants to acquire an additional 2,544,347 shares
of the common stock of the Company, at par, within 60 days after the first
anniversary date on which the two sites are electronically connected (Technology
Interface Date). In addition, Enron has the right, at any time prior to the
Company's initial public offering, to purchase common stock offered by the
Company, at the then offering price, in order to avoid dilution of Enron's
ownership in the Company. In exchange, the Company received the right to
establish a link from HoustonStreet's online trading floor to the online trading
floor of Enron. The link allows all offers that are posted by Enron on its
online trading floor to be posted on the HoustonStreet online trading floor as
well. HoustonStreet registered traders will then have access to offers that are
posted by Enron without having to leave the HoustonStreet Web site. The right is
for a two-year period. Enron may extend the initial term for an additional
period of one year upon properly notifying the Company.
The fair value of the common stock issued on December 4, 2000 has been
recorded by the Company in the accompanying consolidated statement of
shareholders' deficit with a corresponding intangible asset of $1,781,043. The
Company is amortizing the asset over the initial two-year period beginning in
December 2000. The balance presented in the accompanying balance sheet is net of
December 2000 amortization of $74,209. This asset will be periodically reviewed
for impairment based on current circumstances and an assessment of future cash
flows.
The right to receive (earn) additional shares will be accounted for as the
trading volume thresholds are met, as defined in the agreement. The warrants, if
exercised, will be accounted for when the final value is fixed on the first
anniversary of the Technology Interface Date.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Expenditures that significantly improve or extend the life of an asset are
capitalized. Computer equipment and software consists of computer hardware,
external software application development costs and costs for upgrades and
enhancements to the system that result in additional functionality. Maintenance
and repairs are charged to expense when incurred. Depreciation of computer
equipment, software, office equipment and furniture is calculated on the
straight-line basis over an estimated useful life of three years.
Property and equipment consist of the following:
DECEMBER 31,
--------------------------------
2000 1999
-------------- ---------------
Computer equipment and software $ 7,460,822 $ 2,965,942
Office equipment and furniture 333,925 132,588
--------------- ---------------
7,794,747 3,098,530
Less--Accumulated depreciation and
amortization (2,752,595) (286,407)
--------------- ---------------
$ 5,042,152 $ 2,812,123
=============== ===============
Depreciation and amortization expense was $7,254,955 (including a $4,714,559
impairment charge in 2000, see Note 1) and $286,407 for the periods ended
December 31, 2000 and 1999, respectively.
F-30
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
--------------------------------
2000 1999
-------------- ---------------
Accrued professional services $ 989,351 $ 102,241
Taxes other than income taxes 17,000 9,142
Accrued employee payroll and vacation
costs 265,454 -
Other accruals 307,464 -
--------------- ---------------
$ 1,579,269 $ 111,383
=============== ===============
5. NOTES PAYABLE
On September 21, 2000, the Company entered into a Promissory Note and
Revolving Credit Agreement with BayCorp in the amount of $7,000,000 at a 10%
annual interest rate, due December 31, 2000. As of December 31, 2000, $7,000,000
was outstanding under this agreement. As this amount has not been repaid as
anticipated, the Company is in default under this agreement as of December 31,
2000. See footnote 12 for further discussion.
On May 25, 1999, the Company entered into a Promissory Note and Revolving
Credit Agreement with BayCorp in the amount of $1,000,000 and at an annual
interest rate equal to the prime rate (7.5% at December 31, 1999) minus 100
basis points. As of December 31, 1999, $1,000,000 was outstanding under this
agreement. The agreement terminated and the outstanding balance was paid in full
in fiscal year 2000.
On October 7, 1999, the Company entered into a Promissory Note and Revolving
Credit Agreement with BayCorp in the amount of $4,000,000, also at an annual
interest rate equal to the prime rate minus 100 basis points. As of December 31,
1999, $3,127,041 was outstanding under this agreement. The agreement terminated
and the outstanding balance was paid in full in fiscal year 2000.
6. STOCK TRANSACTIONS AND SHAREHOLDER'S DEFICIT
AUTHORIZED CAPITAL
At December 31, 2000, the authorized capital stock of the Company consists
of 50,000,000 shares of common stock, $0.01 par value per share, of which
16,922,525 shares were issued and outstanding; 3,760,003 Series A convertible
preferred shares, authorized, issued and outstanding, $0.01 par value per share,
and 2,333,334 Series B convertible preferred shares, $0.01 par value per share,
authorized, 1,083,334 issued and outstanding.
PREFERRED STOCK
Preferred stock may be issued from time to time in one or more series by the
Board of Directors. Any shares of preferred stock that may be redeemed,
repurchased or acquired by the Company may be reissued, except as otherwise
provided by law. Different series of preferred stock shall not be construed to
constitute different classes of shares for the purposes of voting by classes
unless expressly provided.
The Company has authorized for issuance 6,093,337 shares of preferred stock
as of December 31, 2000, of which 3,760,003 shares are designated as Series A
convertible preferred stock (Series A stock) and 2,333,334 shares are designated
as Series B convertible preferred stock (Series B stock).
F-31
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
SERIES A AND B CONVERTIBLE PREFERRED STOCK
The rights, preferences and privileges of the Series A and B stock are as
follows:
DIVIDENDS
The holders of Series A and B stock will be entitled to receive cash
dividends, when and if declared by the Company's Board of Directors. No
cash dividends may be declared or paid on any other class or series of
HoustonStreet stock unless the dividends have been declared and paid on
the Series A and B stock. The Company does not foresee declaring or
paying any dividends in the future.
OPTIONAL CONVERSION
Each share of Series A or B stock may be converted at any time, at the
option of the holder into one share of common stock. This conversion rate
is subject, with certain exceptions, to weighted average antidilutive
adjustment in the event of subsequent issuances of capital stock for less
than $3.75 per share for the Series A stock and $12.00 per share for the
Series B stock. The Company may issue shares of common stock in
connection with a merger or acquisition or to employees, directors and
consultants at any price without triggering an antidilutive adjustment.
This conversion rate is also subject to proportionate adjustment for
stock splits, stock dividends, combinations and similar
recapitalizations.
MANDATORY CONVERSION
Series A and B stock not converted sooner will be automatically converted
into common stock upon the closing of the Company's initial underwritten
qualified public offering of common stock pursuant to an effective
registration statement under the Securities Act of 1933. A qualified
initial underwritten public offering will be deemed to occur when the
Company sells common stock pursuant to an effective registration
statement under the Securities Act, resulting in gross proceeds to the
Company of at least $25.0 million, at a price to the public of at least
$9.50 per share (as adjusted for stock splits, stock dividends,
recapitalizations and similar events). Under automatic conversion, no
adjustments will be made for accrued and unpaid dividends and no accrued
and unpaid dividends will be paid on the Series A or B stock.
VOTING
Each share of Series A and B stock is entitled to a number of votes equal
to the number of shares of common stock into which each such share is
then convertible (initially one). Except as otherwise required by law or
the Company's Certificate of Incorporation, holders of Series A and B
stock vote together with the holders of common stock and all other shares
of capital stock as a single class. Holders of Series A and B stock do
not have cumulative voting rights. The terms of the Series A and B stock
may not be amended so as to affect adversely the Series A and B stock
without the approval of the holders of 75% of the then outstanding shares
of Series A and B stock.
REDEMPTION
Each holder of at least 5% of the then outstanding shares of Series A or
B stock may request that the Company redeem the holder's outstanding
shares of Series A or B stock in three equal annual installments on each
of the fourth, fifth and sixth anniversaries of their initial issuance.
The redemption price is $3.75 per share of Series A stock and $12.00 per
share of Series B stock (subject to appropriate adjustment in the event
of stock dividends, stock splits, combinations or other similar
recapitalizations). This stock's redemption amount is currently equal to
its carrying value. In addition, each holder of at least 5% of the then
outstanding shares of Series A or B stock may request that the Company
redeem the holder's outstanding shares of Series A or B stock at any time
at a price per share equal to the par value of the Series A or B stock
($0.01).
REGISTRATION RIGHTS
The holders of shares of Series A and B stock have certain demand
registration rights that enable them to require the Company to register
their shares at any time after the earlier of (i) the third anniversary
date of their initial issuance or (ii) 180 days after
F-32
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
the closing of the Company's first underwritten public offering. In
addition, holders of Series A and B stock have piggyback registration
rights with respect to offerings by the Company, subject to customary
underwriter cutbacks and other restrictions.
LIQUIDATION PREFERENCE
In the event of the voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the holders of Series A stock then outstanding
are entitled to be paid out of the assets of the Company available for
distribution to its stockholders, on a pari passu basis with the holders
of Series B stock then outstanding, after and subject to the payment in
full of all amounts required to be distributed to the holders of capital
stock (if any) ranking on liquidation prior and in preference to the
Series A stock, an amount equal to $3.75 per share and $12.00 per share
for the Series A and B stock, respectively, plus any declared but unpaid
on such shares. After the payment of all liquidation preferences, the
Company's remaining assets available for distribution among stockholders
would be shared by the Company's stockholders holding stock that ranks
junior to the Series A and Series B stock, including common stockholders.
A consolidation or merger of the Company with or into one or more
corporations, or a sale of all or substantially all of the Company's
assets, will be deemed to be a liquidation of the Company. However, each
holder of Series A or B stock may elect otherwise as to that holder's
shares of Series A or B stock.
PREFERRED STOCK OF SUBSIDIARY
At December 31, 2000, the authorized capital stock of HoustonStreet B.V. (HS
B.V.) consists of 20,000,000 ordinary shares authorized, 10,000,000 of which is
issued, outstanding and owned by the Company, 9,999,997 preference A shares
authorized, 1,629,627 issued and outstanding and 1 preference B share, 1
preference C share and 1 preference D share, authorized, issued and outstanding.
Each share has a nominal value of one Euro cent (EUR 0,01).
During 2000, a total of 1,629,630 preference shares were sold, resulting in
proceeds of $7,333,334 to HS B.V.
Preference shares can be converted into ordinary shares as the request of
the holder thereof made by way of a conversion notice, on a one-to-one basis, or
automatically upon the occurrence of a mandatory conversion event. In the event
of an issue of shares each existing shareholder has a preemption right in
respect of the shares to be issued in proportion to the aggregate nominal amount
of his shares.
No holder of preference shares may transfer stock shares without first
giving notice to HS B.V., and the other preference shareholders and providing
them with the opportunity to purchase on a pro rata basis such shares on the
same terms and conditions as the prospective purchaser of such shares.
In the event of dividend being approved and declared by a resolution of the
general meeting based upon a proposal by the Board, the holders of preference
shares then outstanding are entitled to be paid out an amount equal to $4.50 per
share, and after that, the dividend remaining for distribution shall be paid to
all holders of ordinary shares equally per share, up to a limit of $4.50 per
share, after which the dividend then remaining for distribution shall be
distributed to all shareholders equally on a per share basis.
In the event of the voluntary or involuntary liquidation, dissolution or
winding-up of HS B.V., the holders of preference shares then outstanding are
entitled to be paid out of the assets of HS B.V. available for distribution to
its shareholders, an amount equal to $4.50 per share, and after that, an amount
equal to any declared but unpaid dividend to which the holders of preference
shares are entitled. The HS B.V.'s remaining assets available for distribution
among shareholders shall be paid to all holders of ordinary shares equally per
share, up to a limit of $4.50 per share, after which the assets remaining for
distribution shall be paid to all holders of ordinary shares which have paid
$6.00 for those ordinary shares, up to a limit of $1.50 per share, after which
the assets remaining for distribution shall be distributed to all shareholders
equally on a per share basis.
HS B.V. has authorized and approved an Incentive Warrants Plan and a
Performance Warrants Plan. Under the Incentive Warrants Plan, preferred
shareholders may earn up to 125,000 shares each, based on being involved as a
party in certain trading volumes transacted through HS B.V. within a set period
of time. These warrants have an exercise price of $6.00 per share. No such
warrants were issued as of December 31, 2000.
Under the Performance Warrants Plan, preferred shareholders earn warrants
based on meeting certain requirements within a set period of time. Such warrants
have an exercise price of $4.50 per share. No such warrants were issued as of
December 31, 2000.
F-33
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
COMMON STOCK
Except as otherwise required by law or provided in the Company's Certificate
of Incorporation, each share of common stock is entitled to one vote on all
matters to be voted on by stockholders. Holders of common stock do not have
cumulative voting rights. Holders of common stock are entitled to receive such
dividends (if any) as may be declared by the Board of Directors out of funds
legally available therefor. In the event of the voluntary or involuntary
liquidation or dissolution of the Company and after payment of all creditors and
liquidation preferences, including the liquidation preference of any preferred
stock, the holders of common stock are entitled to share the remaining net
assets of the Company.
WARRANTS
In December 2000, the Company issued 60,000 warrants to a consulting company
with an exercise price equal to $0.01 per share, in exchange for consulting
services provided by such company. The company accounted for the issuance of
such warrants in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes the measurement principles for transactions in
which equity instruments are issued in exchange for the receipt of goods or
services. Such transactions are measured at the fair value of the consideration
received or the fair value of the equity instruments issued according to
whichever is more reliably measurable. The Company accounted for such warrants
based on the fair value of the services received. The Company recorded the
expense in the consolidated statements of operations and the corresponding
credit in additional paid-in capital.
7. COMMON STOCK OPTIONS
In June 1999, the Company's Board of Directors (the Board) approved the
Company's 1999 Stock Incentive Plan (the 1999 Plan), which provides for the
grant of incentive and nonqualified stock options for the purchase of up to an
aggregate of 2,000,000 shares of the Company's common stock by management,
employees, consultants, advisors and directors of the Company. On September 7,
2000, the number of shares authorized to be issued pursuant to the 1999 Plan was
increased from 2,000,000 to 3,000,000. As of December 31, 2000, options to
purchase an aggregate of 2,138,708 shares of common stock at a weighted average
option exercise price of $4.16 per share were outstanding under the 1999 Plan.
The 1999 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and nonstatutory stock
options. All of the Company's employees, officers, directors, consultants and
advisors (and any individuals who have accepted an offer for employment) are
eligible to be granted options, restricted stock awards or other stock-based
awards under the 1999 Plan. Under present law, however, incentive stock options
may only be granted to employees.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price subject to other terms and conditions,
as specified, in connection with the option grant. The Board establishes the
exercise price at the time each option is granted. Optionees may pay the
exercise price of their options by cash, check or in connection with a cashless
exercise through a broker, by surrender to the Company of shares of common
stock, by delivery to the Company of a promissory note or by any combination of
the permitted forms of payment.
The Company's Board administers the 1999 Plan. The Board has the authority
to adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions. The Board may delegate
authority under the 1999 Plan to one or more executive officers or committees of
the Board. Subject to any applicable limitations contained in the 1999 Plan, the
Board or any committee to which the Board delegates authority, as the case may
be, selects the recipients of awards and determines (i) the number of shares of
common stock covered by options and the dates upon which the options become
exercisable; (ii) the exercise price of options and (iii) the duration of the
options.
No award may be granted under the 1999 Plan after June 2009, but the vesting
and effectiveness of awards previously granted may extend beyond that date. The
Company's Board of Directors may at any time amend, suspend or terminate the
1999 Plan.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25. However, for pro forma disclosure purposes, the
Company has computed the compensation expense in 2000 and 1999 for all options
granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The fair value of the options granted in 2000 and 1999 is estimated on the date
of grant using the following assumptions: a dividend yield of 0%, and expected
volatility of 0% and an expected life of seven years for each option grant, as
well as a risk-free interest rate of 6.22% for 2000 and 6.12% for 1999.
F-34
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
If the Company had accounted for the Plan in accordance with SFAS No. 123,
the Company's net loss and net loss per share would have been reduced to the
following pro forma amounts:
DECEMBER 31,
--------------------------------
2000 1999
-------------- ---------------
Net loss, as reported.................. $ (40,046,837) $ (3,396,957)
Net loss, pro forma.................... (40,684,799) (3,452,996)
Basic and diluted net loss per common
share, as reported.................. (2.71) (0.34)
Basic and diluted net loss per common
share, pro forma.................... (2.75) (0.35)
At December 31, 2000 and 1999, 801,292 and 1,160,000 shares of common stock
were available for future grant under the 1999 Plan.
The following table summarizes information about options outstanding and
exercisable at December 31, 2000 and 1999:
Weighted
Range of Average
Shares Exercise Prices Exercise Price
-------------- --------------- --------------
Outstanding, inception............... - $ - $ -
Granted........................... 840,000 0.08-1.25 0.87
Exercised......................... - - -
Canceled.......................... - - -
-------------- -------------- --------------
Outstanding, December 31, 1999....... 840,000 0.08-1.25 0.87
Granted........................... 1,410,800 2.75-8.00 5.95
Exercised......................... (60,000 0.08 0.08
Canceled.......................... (52,092) 2.75-8.00 4.39
-------------- -------------- --------------
Outstanding, December 31, 2000....... 2,138,708 $ 0.08-8.00 $ 4.16
============== ============== ==============
Exercisable, December 31, 2000....... 615,032 $ 0.08-8.00 $ 2.73
============== ============== ==============
Exercisable, December 31, 1999....... - - -
============== ============== ==============
Number of Number of
Fair Value at Options Remaining Life Options
Exercise Price Date of Grant Outstanding in Years Exercisable
- -------------- ------------- ----------- -------- -----------
$ 0.08 $ 0.04 210,000 6 67,849
1.25 0.57 570,000 6 269,904
2.75 1.03 449,977 7 150,789
3.75 1.40 80,000 7 21,484
8.00 2.78 828,731 7 105,006
--------------- ---------------
2,138,708 615,032
=============== ===============
F-35
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
HOUSTONSTREET B.V. 2000 STOCK OPTION PLAN
The Company, as the sole shareholder of HoustonStreet B.V. (HS B.V.),
approved and adopted the HS B.V. 2000 Stock Option Plan on October 23, 2000. The
HS B.V. plan authorized the issuance of up to 2,000,000 ordinary shares of the
capital of HS B.V. or the granting of rights to subscribe for such shares, with
a nominal value of EUR 0.01. As of December 31, 2000, 1,156,444 shares had been
granted under this plan with strike prices ranging from $1.25 to $4.00 vesting
in the average over three years and having a term of eight years.
8. COMMITMENTS AND CONTINGENCIES
The Company currently leases office and fixed assets under noncancelable
operating leases. Rental expense under operating lease agreements for the year
ended December 31, 2000 and for the period from inception to December 31, 1999
was $128,046 and $26,395, respectively.
Future minimum commitments under these lease agreements as of December 31,
2000 are as follows:
OPERATING
Year Ending December 31, LEASES
- ------------------------ ---------------
2001................. $ 495,100
2002................. 566,924
2003................. 562,424
2004................. 562,424
2005................. 406,684
Thereafter........... 94,324
---------------
Total........... $ 2,687,880
===============
9. INCOME TAXES
Due to losses incurred since Inception, there is no income tax benefit in
the periods presented. As of December 31, 2000, the Company had approximately
$32 million of federal net operating loss carryforwards, which begin to expire
in the year 2014. A full valuation allowance was established for the net
deferred tax asset, as realization of the tax benefit is not assured. In
addition, the Company's utilization of its net operating loss carryforwards may
be limited pursuant to the Tax Reform Act of 1986, due to cumulative changes in
ownership in excess of 50% that have or may occur.
Accumulated deferred income taxes consisted of the following at December 31,
2000 and 1999:
DECEMBER 31,
--------------------------------
2000 1999
--------------- ---------------
Deferred tax assets-
Property and equipment............... $ 3,643,167 $ -
Accruals............................. 103,527 -
Net operating loss carryforwards..... 12,291,358 1,405,313
--------------- ---------------
Total deferred assets.......... 16,038,052 1,405,313
Depreciation......................... - (82,418)
Valuation allowance.................. (16,038,052) (1,322,895)
--------------- ---------------
Net deferred taxes............. $ - $ -
=============== ===============
F-36
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
The total income tax provision set forth above represents 0% in the periods
ended December 31, 2000 and 1999. The following table reconciles the statutory
federal income tax rate to the 0% provision:
DECEMBER 31,
--------------------------------
2000 1999
--------------- ---------------
Loss before taxes...................... $ (40,046,837) $ (3,396,957)
Federal statutory rate................. 34% 34%
Federal income tax benefit at statutory
levels.............................. $ (13,615,925) $ (1,154,965)
(Decrease) increase from statutory
levels-State tax, net of federal
tax benefit......................... (1,099,232) (155,411)
Valuation allowance.................. 14,715,157 1,322,895
Other................................ - (12,519)
--------------- ---------------
Effective federal income tax expense... $ - $ -
=============== ===============
10. RELATED PARTY TRANSACTIONS
On April 27, 1999, the Company entered into a Management and Administrative
Services Agreement with BayCorp. Under this agreement as of December 31, 2000,
approximately seven administrative employees of BayCorp provide to the Company
certain administrative services, including human resources, accounting and
finance management services. The Agreement automatically renews on a yearly
basis, subject to termination by either party upon 30 days' notice. Beginning in
May 1999, the Company paid $53,451 per month to BayCorp for these services. This
amount was renegotiated in May 2000 for the period May through December 2000,
and is subject to negotiation annually thereafter. The management fee for 2001
has been negotiated at $26,000 per month. During the periods ended December 31,
2000 and 1999, the Company recorded interest charges to BayCorp of $175,000 and
$96,095, respectively, in relation to the outstanding notes payable to parent
(see Note 5). As of December 31, 2000 and 1999, the Company owed BayCorp
Holdings $7,000,000 and $4,127,041 for notes payable, $195,600 and $97,000 in
accrued interest on the notes and $394,200 and $0 for management services,
respectively.
For the periods ending December 31, 2000 and 1999, $14,294, or 3%, and
$30,184, or 51%, of total revenue were derived from trades involving Great Bay
Power Corporation, a wholly owned subsidiary of BayCorp.
For the period ending December 31, 2000, approximately 31% of revenue was
from a customer who is also a preferred stock shareholder of the Company.
11. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires financial and
supplementary information to be disclosed on an annual and interim basis of each
reportable segment of an enterprise. SFAS No. 131 also establishes standards for
related disclosures about product and services, geographic areas and major
customers. Operating segments are identified as components of an enterprise
about which separate discrete financial information is available for evaluation
by the chief decision maker, or decision making group, in making decisions how
to allocate resources and assess performance. The Company's chief decision maker
is the chief executive officer.
F-37
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
The Company evaluates its operations in two segments: HoustonStreet Exchange
U.S.A. and HoustonStreet Exchange Europe.
Period Ended December 31,
--------------------------------
2000 1999
--------------- ---------------
Net Sales:
HoustonStreet Exchange Inc. ......... $ 430,525 $ 59,186
HoustonStreet Exchange Europe ....... 92,868 -
--------------- ---------------
$ 523,393 $ 59,186
=============== ===============
Operating Loss:
HoustonStreet Exchange Inc. ......... $ (33,750,330) $ (3,300,862)
HoustonStreet Exchange Europe ....... (6,155,538) -
--------------- ---------------
$ (39,905,868) $ (3,300,862)
=============== ===============
Total Assets:
HoustonStreet Exchange Inc. ......... $ 8,982,493 $ 2,984,415
HoustonStreet Exchange Europe ....... 2,976,131 -
--------------- ---------------
$ 11,958,624 $ 2,984,415
=============== ===============
12. SUBSEQUENT EVENTS
On March 31, 2001, HoustonStreet closed on $3.9 million in additional
funding. Of this amount, $2.9 million was funded on March 30, 2001, including
$450,000 from BayCorp. A subsequent closing will be held at which time the
remaining $1.0 million will be funded. This subsequent closing will occur on the
third business day following the first period of any 30 consecutive calendar
days after beginning operations during which the Company has maintained 90%
platform availability with respect to its natural gas platform and Enron Online
link (except where such platform availability cannot be maintained by the
Company because of the acts or omissions, outside the control of the Company, of
third-party service providers, Web hosting providers, software providers and
other third parties). In addition, the Company's Board of Directors authorized
the Company to raise an additional $1.5 million on the same terms, provided that
such additional financing is closed by April 13, 2001.
This financing involves the sale by HoustonStreet of senior secured notes,
warrants to purchase Series C preferred stock at $0.15 per share and warrants to
purchase the Company's common stock at $2.50 per share. Collectively, these
securities are referred to as the "HoustonStreet Series C Units."
In addition, as part of the initial closing, BayCorp agreed to tender its
$7.0 million note, together with approximately $1.0 million in accrued interest
and penalties on the note and past due management fees as of March 2001 for
approximately $8.0 million of HoustonStreet Series C Units.
F-38
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002 AND DECEMBER 31, 2001 - UNAUDITED
ASSETS
2002 2001
------------ ------------
Current Assets:
Cash and cash equivalents ....................... $ 482,321 $ 405,785
Accounts receivable ............................. 86,104 53,459
Other current assets ............................ 16,813 4,162
------------ ------------
Total current assets ...................... 585,238 463,406
Property and Equipment ............................. 2,403,013 2,403,013
Accumulated Depreciation ........................... (2,403,013) (1,610,057)
------------ ------------
Total property and equipment, net ......... 0 792,956
Total assets .............................. $ 585,238 $ 1,256,362
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable ................................ $ 20,780 $ 181,780
Note Payable - Series C (Note 5) ................ 12,381,532 11,952,296
Accrued expenses ................................ 156,000 2,650,001
------------ ------------
Total current liabilities ................. 12,558,312 14,784,077
Commitments and Contingencies (Note 8)
Series A Preferred Stock; $0.01 par value - (Note 6)
Authorized--3,760,003 shares
Outstanding--3,478,353 shares .................... 14,100,000 14,100,000
Series B Preferred Stock; $0.01 par value - (Note 6)
Authorized 2,333,334 shares
Outstanding--1,083,334 shares .................... 13,000,006 13,000,006
Series C - Preferred Warrants (Note 5) ............ 4,780,929 4,780,929
Preferred Stock of Subsidiary (Note 6) ............. -- 7,333,334
Shareholders' Deficit: (Note 6)
Common stock; $0.01 par value-
Authorized--270,950,000 shares
Issued and outstanding-- 16,973,393 and
16,473,393, respectively ...................... 178,639 173,639
Additional paid-in capital ...................... 12,793,403 5,465,069
Accumulated deficit ............................. (56,826,051) (58,380,693)
------------ ------------
Total shareholders' deficit ............... (43,854,009) (52,741,985)
Total liabilities and shareholders' deficit $ 585,238 $ 1,256,362
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF INCOME
AS OF DECEMBER 31, 2002 AND DECEMBER 31, 2001 - UNAUDITED
2002 2001
------------ ------------
Operating Revenues .............................. $ 1,689,906 $ 1,899,498
Operating Expenses:
Selling and marketing ........................ 546,939 1,353,182
Product development .......................... 392,157 2,327,212
General and administrative ................... 60,000 2,306,717
Depreciation and amortization ................ 792,955 2,924,705
Impairment writedown of assets ............... -- 3,010,333
------------ ------------
Total operating expenses ............... 1,792,051 11,922,149
Operating loss ......................... (102,145) (10,022,651)
Other Income and Expense
Interest Expense .............................. (1,020,676) (5,974,779)
Other Income .................................. 295,463 (134,094)
------------ ------------
Total Other Expense .................... (725,213) (6,108,873)
Net loss before Extraordinary Gain .............. (827,358) (16,131,524)
Extraordinary Gain: Debt Restructuring .......... 2,382,000 1,194,625
------------ ------------
Net Income/(Loss) ............................... $ 1,554,642 $(14,936,899)
============ ============
Basic and Diluted Net Income/(Loss)per Common
Share.......................................... $ .09 $ (0.87)
============ ============
Weighted Average Shares Outstanding ....... 16,723,393 17,076,249
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 - UNAUDITED
COMMON STOCK
------------------------- ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED SHAREHOLDERS'
ISSUED AMOUNT CAPITAL DEFICIT DEFICIT
---------- ------------ ------------ ------------ -------------
Balance, December 31, 2000 ......................... 16,922,525 $ 169,225 $ 5,404,075 $(43,443,794) $(37,870,494)
Issuance of common stock in exchange for an
intangible asset, $0.01 par value - reversal due to
contract default ................................. (890,521) -- -- -- --
Exercise of stock options .......................... 14,722 147 1,079 -- 1,226
Issuance of common stock in exchange for services,
$0.01 par value .................................... 426,667 4,267 59,915 -- 64,182
Net loss ........................................... -- -- -- (14,936,899) (14,936,899)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 ......................... 16,473,393 $ 173,639 $ 5,465,069 $(58,380,693) $(52,741,985)
============ ============ ============ ============ ============
Issuance of Common Stock ........................... 500,000 5,000 (5,000) -- --
Dissolution of Subsidiary
Preferred Stock .................................. -- -- 7,333,334 -- 7,333,334
Net income (loss) .................................. -- -- -- 1,554,642 1,554,642
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 ......................... 16,973,393 $ 178,639 $ 12,793,403 $(56,826,051) $(43,854,009)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
HOUSTONSTREET EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001 - UNAUDITED
2002 2001
--------------- ---------------
Operating Activities:
Net Income (Loss)................................................................ $ 1,554,642 $ (14,936,899)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization ................................................. 792,955 7,726,623
Impairment write down of assets ............................................... -- 3,010,333
Changes in operating assets and liabilities--
Accounts receivable ........................................................... 76,649 1,048,167
Other current assets .......................................................... (28,801) 106,416
Accounts payable .............................................................. (799,865) (7,265,428)
Accrued expenses .............................................................. (1,519,044) 1,773,578
-------------- --------------
Net cash provided by (used in) operating activities ....................... 76,536 (8,537,210)
Investing Activities:
Change in Restricted Cash ........................................................ -- 223,146
Financing Activities:
Proceeds from issuance of common stock ........................................... -- 64,180
Proceeds from exercise of stock options .......................................... -- 1,226
Proceeds from the issuance of Notes .............................................. -- 4,154,977
--------------- ---------------
Net cash provided by financing activities ................................. -- 4,220,383
Net increase (decrease) in cash and cash equivalents ...................... 76,536 (4,093,681)
Cash and Cash Equivalents, beginning of period ..................................... 405,785 4,499,466
--------------- ---------------
Cash and Cash Equivalents, end of year ............................................. $ 482,321 $ 405,785
=============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest ......................................... $ - $ -
=============== ===============
Cash paid during the period for taxes ............................................ $ - $ -
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
DECEMBER 31, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
HoustonStreet, Inc. ("HoustonStreet" or the "Company") was incorporated in
Delaware on April 27, 1999. HoustonStreet developed and operates
HoustonStreet.com, an Internet-based, independent crude oil and refined products
trading exchange in the United States. In 2001, HoustonStreet significantly
downsized its organization and shut down its electricity trading platforms in
the United States and in Europe, shifting it business focus to its crude oil and
refined products trading platforms.
HoustonStreet operates in a very competitive market. Its main competitors
are numerous OTC telephone brokers and several online exchanges such as
IntercontinentalExchange and Tradespark. HoustonStreet believes, however, that
it is currently the only remaining online exchange for the OTC physical crude
oil and refined products markets. Other online exchanges focus primarily on
natural gas, power, and financial crude oil markets such as swaps and options.
HoustonStreet has exited the natural gas and power markets and currently
focuses exclusively on the physical crude oil markets.
HoustonStreet's crude oil platform includes several trading floors,
organized by grade and location. The platform allows for a user-customized view
where the user can specify which markets should appear together on a floor,
regardless of grade, location or type. HoustonStreet's refined products
platform includes several trading floors, organized by commodity, pipeline and
geographic location. Bids and offers are segmented by trading period (month and
cycle) and by grade. Commodities traded include numerous grades of gasoline
and distillates, specifically jet fuel, number 2 heating oil, low sulfur
diesel, regular gas, regular reformulated gas, premium gas and premium
reformulated gas. In 2002, HoustonStreet had trading volumes of over
117 million barrels with a notional value of over $3 billion and revenues of
$935,380. As of March 24, 2003, HoustonStreet had six employees.
HoustonStreet's revenues depend on continued and expanded use of
Internet-based wholesale energy trading platforms. Electronic trading of
wholesale energy is new and evolving, and thus may not achieve widespread market
acceptance or emerge as a sustainable business. In addition, HoustonStreet will
need to enhance trading liquidity in order to increase and sustain revenues. As
a technology dependent business, HoustonStreet's business could suffer due to
computer or communications systems interruptions or failures, technological
change or adverse competitive developments. Further, as electronic commerce
evolves, federal, state and foreign agencies could adopt regulations covering
issues such as user privacy, content and taxation of products and services. If
enacted, government regulations could materially adversely affect
HoustonStreet's business.
The Company has incurred losses of approximately $57 million from
inception through December 31, 2002. These losses have been funded through
borrowings from BayCorp Holdings, Ltd. ("BayCorp") (an affiliated company) and
the sale of common and preferred stock and series C units of the Company and its
subsidiary.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned subsidiaries, HoustonStreet B.V. and
HoustonStreet N.V. The Company determined that the functional and the reporting
currency of its European subsidiaries is the U.S. dollar. The effects of
translation on its financial statements are immaterial to the consolidated
statements as a whole. All significant intercompany balances and transactions
have been eliminated. HoustonStreet B.V. and HoustonStreet N.V. completed
voluntary dissolutions in May 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are carried at cost plus accrued interest, which
approximates fair value. The Company considers all highly liquid
F-43
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
investments with an original maturity date of three months or less to be cash
equivalents.
REVENUE RECOGNITION
Operating revenue consists of commissions for megawatt hours and thousands
of barrels (BBLS) traded on HoustonStreet.com and is recognized once the terms
of the trade have been accepted by both parties.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses include advertising and promotional
expenditures, payroll and expenses related for personnel engaged in marketing,
customer service and related activities.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses include payroll and related expenses for Web
site development and information technology personnel and Web content and design
expenses.
EXTRAORDINARY GAIN
Extraordinary gain reflects debt restructuring in 2002 and 2001. Due to its
significantly reduced operations and limited cash, HoustonStreet negotiated with
its vendors and settled certain accounts payables for less than the recorded
amounts due. In accordance with SFAS 15, the gain has been accounted for as an
extraordinary gain.
INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Under SFAS No. 109, the liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis of
assets and liabilities and are measured using enacted tax rates. A valuation
allowance is established against deferred tax assets unless the Company believes
it is more likely than not that the benefit will be realized.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company reviewed its
software assets, including the Enron Link intangible asset, at December 31, 2001
and determined that there was an impairment of approximately $3.0 million
related to such assets. The related charge is included in operating expenses in
the accompanying consolidated statement of operations for the year ended
December 31, 2001. There were no further impairment charges in 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and notes payable. The
carrying amount of the Company's cash and cash equivalents, accounts receivable
and accounts payable approximates fair value due to the short-term nature of
these instruments. During 2001, the Series C notes payable bore interest at
prime plus 3% and the carrying amount approximated fair value. During 2002, the
Series C notes payable bore interest at prime plus 5%; the carrying
amount
F-44
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
approximated fair value.
2. TRANSACTION WITH ENRON
On December 4, 2000, HoustonStreet entered into an agreement with Enron,
whereby North American electricity and natural gas prices posted on EnronOnline
would have been automatically posted on HoustonStreet. HoustonStreet believes it
satisfied its obligations under its agreement with Enron, but Enron elected to
terminate the agreement in May 2001. HoustonStreet invoked the arbitration
clause for settling disputes in its contract with Enron, but that claim has been
stayed by Enron's Chapter 11. Any recovery is highly uncertain. As a result of
the action taken by Enron, HoustonStreet wrote off its Intangible Investment -
Enron in 2001 and took a charge to earnings in 2001 of $965,000. See Note 1
"Long-Lived Assets and Long-Lived Assets to be Disposed Of."
3. PROPERTY
Property consisted of computer equipment and software of approximately
$2,403,000 as of December 31, 2002 and 2001. Depreciation and amortization
expense was $792,955 for the year ended December 31, 2002 and $2,924,700 for
the year ended December 31, 2001.
In 2001, HoustonStreet recognized impairment to the value of its Property,
reduced the value of certain capitalized software development costs and recorded
an impairment charge of approximately $3.0 million. See Note 1 "Long-Lived
Assets and Long-Lived Assets to be Disposed Of."
4. ACCRUED EXPENSES
Accrued expenses consisted of miscellaneous accrued professional fees of
$56,000 and $150,000 as of December 31, 2002 and 2001, respectively.
5. NOTES PAYABLE
Series C Promissory Notes ("Notes") were issued on March 30, 2001 for cash.
These Notes bear interest on the outstanding principal from the date issued
until the Note is paid in full at three percent above the rate of interest
publicly announced from time to time by FleetBoston in Boston, Massachusetts as
its prime rate. Each Note was due and payable on December 31, 2001, subsequently
amended to January 15, 2004 and the interest rate amended to prime plus five
percent. Accrued interest is payable, at the sole option of the holder, in cash
or in warrants to purchase shares of Series C convertible preferred stock, only
at the time payment of the principal is made or due. These Notes have a first
priority security interest among the holders of the Notes in all the assets of
HoustonStreet.
The Notes were issued in units with warrants to purchase 4,019,841 common
shares having an exercise price of $2.50 per share and 80,396,767 Series C
preferred shares having an exercise price $0.15 per share. Both Series C and
Common Stock warrants can be
F-45
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
exercised for cash or by surrender of the Senior Secured Notes that were sold in
units with the warrants. Common Stock warrants may also be exercised by cashless
exercise. The warrants are transferable. The exercise prices of and number of
shares for which the warrants are exercisable are adjusted in the event of stock
dividends or splits. Series C warrants are also subject to adjustment in the
event of diluting issues of common stock (or securities convertible to common
stock) at prices lower than the then existing warrant exercise price to such
lower issuance price. The warrants have no rights to receive dividends or voting
rights. The Common Stock warrants expire March 30, 2006 and Series C Preferred
Stock warrants expire 7 days following payment of the Series C Note. In
accordance with APB 14, we have allocated the proceeds from the Series C Notes
to the notes and warrants based upon their relative fair values, resulting in an
allocation of $6,378,586 to Series C Notes and $4,780,929 to Series C Warrants.
The fair value of the warrants was estimated using the Black Scholes valuation
model with the following assumptions used: expected lives of 3 years, expected
annualized volatility of 60%, annual rate of quarterly dividends of 0 and
discount rate - bond equivalent yield of 4%.
In addition to normal debt covenant requirements, in connection with the
issuance of the Series C Units, HoustonStreet covenanted to:
|X| use commercially reasonable efforts to maintain key man life insurance in
the amount of $5,000,000 on its President and CEO, Frank W. Getman Jr.; and
to
|X| cooperate and use its best efforts to facilitate the imposition of the first
priority lien on all the assets of HoustonStreet as contemplated by the
Senior Secured Note and Warrant Agreement and the ancillary agreements.
The Series C debt has no financial covenants. HoustonStreet is in compliance
with these covenants. Using commercially reasonable efforts, HoustonStreet was
able to secure and currently carries $3,500,000 of insurance on Mr. Getman.
The assets that secure the Series C Units include all of HoustonStreet's
real and personal property, including, without limitation, all of the following:
|X| accounts now owned or hereafter acquired by the Company, including accounts
receivable, contract rights, notes, drafts and other obligations or
indebtedness owed to HoustonStreet;
|X| books and records of HoustonStreet;
|X| equipment owned by HoustonStreet;
|X| general intangibles;
|X| proceeds and all other profits, products, rents or receipts arising from the
collection;
|X| trademarks and trademark licenses.
The Company received cash of $2,928,154 and the Company converted existing
debt in the amount of $8,231,360 into notes upon issuance of the Series C Notes.
Commitments for the initial closing were approximately $2,928,200 and as of
April 13, 2001, HoustonStreet had received these committed funds. Commitments
for the second closing were approximately $1,107,500 and payment was tied to the
successful implementation of a posting agreement between HoustonStreet and
Enron. In 2000, HoustonStreet signed an agreement with Enron to provide a link
with EnronOnline ("EOL") enabling electricity and natural gas prices listed on
EOL to be simultaneously posted on HoustonStreet. Although HoustonStreet
successfully completed the link, Enron provided HoustonStreet with a notice of
termination of the agreement after the link was completed but prior to the link
going live. Accordingly, the second closing has not occurred and is not expected
to occur.
On September 21, 2000, the company entered into a Promissory Note and
Revolving Credit Agreement with BayCorp in the amount of $7,000,000 at a 10%
annual interest rate, due December 31, 2000. In April 2001, BayCorp converted
the $7,000,000 loan made in 2000, along with approximately $1,000,000 in accrued
interest and penalties on the note and past due management fees, into
approximately $8,000,000 of HoustonStreet Series C Units.
6. STOCK TRANSACTIONS AND SHAREHOLDERS' DEFICIT
AUTHORIZED CAPITAL
At December 31, 2002 and December 31, 2001, the authorized capital stock of
the Company consisted of 270,950,000 shares of common stock and 156,134,188
shares of preferred stock, $0.01 par value per share, of which 21,535,800 shares
were issued and outstanding.
PREFERRED STOCK
F-46
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
Preferred stock may be issued from time to time in one or more series by the
Board of Directors. Any shares of preferred stock that may be redeemed,
repurchased or acquired by the Company may be reissued, except as otherwise
provided by law. Different series of preferred stock shall not be construed to
constitute different shares for the purpose of voting by classes unless
expressly provided. The Company has authorized for issuance 156,134,188 shares
of preferred stock as of December 31, 2002, of which there were 3,478,353 Series
A convertible preferred shares, authorized, issued and outstanding, $0.01 par
value per share, and 1,083,334 Series B convertible preferred shares, $0.01 par
value per share, authorized, issued and outstanding. There are no shares of
Series C preferred stock issued and outstanding.
SERIES A AND B CONVERTIBLE PREFERRED STOCK
The rights, preferences and privileges of the Series A and B stock include
the following:
DIVIDENDS
The holders of Series A and B stock will be entitled to receive cash
dividends, when and if declared by the Company's Board of Directors. No
cash dividends may be declared or paid on any other class or series of
HoustonStreet stock unless the dividends have been declared and paid on
the Series A and B stock. The Company does not foresee declaring or
paying any dividends in the future.
OPTIONAL CONVERSION
Each share of Series A or B stock may be converted at any time, at the
option of the holder into one share of common stock. This conversion rate
is subject, with certain exceptions, to weighted average antidilutive
adjustment in the event of subsequent issuances of capital stock for less
than $3.75 per share for the Series A stock and $12.00 per share for the
Series B stock. The Company may issue shares of common stock in
connection with a merger or acquisition or to employees, directors and
consultants at any price without triggering an antidilutive adjustment.
This conversion rate is also subject to proportionate adjustment for
stock splits, stock dividends, combinations and similar
recapitalizations.
MANDATORY CONVERSION
Series A and B stock not converted sooner will be automatically converted
into common stock upon the closing of the Company's initial underwritten
qualified public offering of common stock pursuant to an effective
registration statement under the Securities Act of 1933. A qualified
initial underwritten public offering will be deemed to occur when the
Company sells common stock pursuant to an effective registration
statement under the Securities Act, resulting in gross proceeds to the
Company of at least $25.0 million, at a price to the public of at least
$9.50 per share (as adjusted for stock splits, stock dividends,
recapitalizations and similar events). Under automatic conversion, no
adjustments will be made for accrued and unpaid dividends and no accrued
and unpaid dividends will be paid on the Series A or B stock.
VOTING
Each share of Series A and B stock is entitled to a number of votes equal
to the number of shares of common stock into which each such share is
then convertible (initially one). Except as otherwise required by law or
the Company's Certificate of Incorporation, holders of Series A and B
stock vote together with the holders of common stock and all other shares
of capital stock as a single class. Holders of Series A and B stock do
not have cumulative voting rights. The terms of the Series A and B stock
may not be amended so as to affect adversely the Series A and B stock
without the approval of the holders of 75% of the then outstanding shares
of Series A and B stock.
REDEMPTION
Each holder of at least 5% of the then outstanding shares of Series A or
B stock may request that the Company redeem the holder's outstanding
shares of Series A or B stock in three equal annual installments on each
of the fourth, fifth and sixth anniversaries of their initial issuance.
The redemption price is $3.75 per share of Series A stock and $12.00 per
share of Series B stock (subject to appropriate adjustment in the event
of stock dividends, stock splits, combinations or other similar
recapitalizations). This stock's redemption amount is currently equal to
its carrying value. In addition, each holder of at least
F-47
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
5% of the then outstanding shares of Series A or B stock may request
that the Company redeem the holder's outstanding shares of Series A or B
stock at any time at a price per share equal to the par value of the
Series A or B stock ($0.01).
REGISTRATION RIGHTS
The holders of shares of Series A and B stock have certain demand
registration rights that enable them to require the Company to register
their shares at any time after the earlier of (i) the third anniversary
date of their initial issuance or (ii) 180 days after the closing of the
Company's first underwritten public offering. In addition, holders of
Series A and B stock have piggyback registration rights with respect to
offerings by the Company, subject to customary underwriter cutbacks and
other restrictions.
LIQUIDATION PREFERENCE
In the event of the voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the holders of Series A stock then outstanding
are entitled to be paid out of the assets of the Company available for
distribution to its stockholders, on a pari passu basis with the holders
of Series B stock then outstanding, after and subject to the payment in
full of all amounts required to be distributed to the holders of capital
stock (if any) ranking on liquidation prior and in preference to the
Series A stock, an amount equal to $3.75 per share and $12.00 per share
for the Series A and B stock, respectively, plus any declared but unpaid
on such shares. After the payment of all liquidation preferences, the
Company's remaining assets available for distribution among stockholders
would be shared by the Company's stockholders holding stock that ranks
junior to the Series A and Series B stock, including common stockholders.
A consolidation or merger of the Company with or into one or more
corporations, or a sale of all or substantially all of the Company's
assets, will be deemed to be a liquidation of the Company. However, each
holder of Series A or B stock may elect otherwise as to that holder's
shares of Series A or B stock.
SERIES C CONVERTIBLE PREFERRED STOCK
There are no shares of Series C preferred stock issued and outstanding. The
rights, preferences and privileges of the Series C stock include the following:
DIVIDENDS
The holders of Series C Preferred Stock will be entitled to receive cash
dividends, before any cash dividends shall be declared and paid upon or
set aside for the Common Stock in any fiscal year and on a pari passu
basis with the Series A and B Preferred Stock, when and if declared by
the Company's Board of Directors.
OPTIONAL CONVERSION
Each share of Series C stock may be converted, at the option of the
holder at any time into one share of common stock. This conversion rate
is subject, with certain exceptions, to a weighted average antidilutive
adjustment in the event of subsequent issuances of capital stock for less
than the applicable Series C conversion price in effect immediately prior
to the issuance or deemed issuance of such additional shares.
MANDATORY CONVERSION
Series C stock not converted sooner will be automatically converted into
common stock upon the earlier of (i) the closing of the Company's initial
underwritten public offering of common stock with gross proceeds of at
least $25.0 million, at a price to the public of at least $9.50 per share
or (ii) at such time as less than 25% of the Series C shares initially
issued are outstanding.
VOTING
Each share of Series C stock is entitled to a number of votes equal to
the number of shares of common stock into which each share is
convertible. Except as otherwise required by law or the Company's
Certificate of Incorporation, holders of Series C stock vote together
with the holders of common stock and all other shares of capital stock as
a single class. The terms of the Series C stock may not be amended so as
to affect adversely the Series C stock without the approval of not less
than a majority of the shares of Series C Preferred Stock.
F-48
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
REDEMPTION
Each holder of at least 2% of the Series C stock may request that the
Company redeem in three annual installments equal to 33%, 50% and 100%
(cumulatively) on each of March 31, 2004, 2005 and 2006. The redemption
price is $0.15 per share of Series C stock (subject to appropriate
adjustment in the event of stock dividends, stock splits, combinations or
other similar recapitalizations). In addition, each holder of at least 2%
of the Series C stock may request that the Company redeem the holder's
shares of Series C stock from time to time at a price per share equal to
the par value of the Series C stock ($0.01).
REGISTRATION RIGHTS
The holders of shares of Series C stock have certain demand registration
rights that enable them to require the Company to register their shares
at any time after the earlier of (i) the third anniversary date of their
initial issuance or (ii) 180 days after the closing of the Company's
first underwritten public offering. In addition, holders of Series A and
B stock have piggyback registration rights with respect to offerings by
the Company, subject to customary underwriter cutbacks and other
restrictions.
LIQUIDATION PREFERENCE
In the event of the voluntary or involuntary liquidation, dissolution or
winding-up of the Company, the holders of shares of Series C Preferred
stock shall be entitled to be paid out of the assets of the Company
available for distribution to its stockholders, on a pari passu basis
with the holders of Series A and Series B Preferred Stock, before any
payment shall be made to the holders of Common Stock or any other class
or series of stock of the Company ranking on liquidation junior to the
Series C Preferred Stock. A consolidation or merger of the Company with
or into one or more corporations, or a sale of all or substantially all
of the Company's assets, will be deemed to be a liquidation of the
Company. However, each holder of Series C stock may elect otherwise as to
that holder's shares of Series C stock.
PREFERRED STOCK OF SUBSIDIARY
At December 31, 2001, the authorized capital stock of HoustonStreet B.V. (HS
B.V.) consisted of 20,000,000 ordinary shares authorized, 10,000,000 of which
was issued, outstanding and owned by the Company, 9,999,997 preference A shares
authorized, 1,629,627 issued and outstanding and 1 preference B share, 1
preference C share and 1 preference D share, authorized, issued and outstanding.
Each share had a nominal value of one Euro cent (EUR 0,01).
Preference shares could have been converted into ordinary shares at the
request of the holder thereof made by way of a conversion notice, on a
one-to-one basis, or automatically upon the occurrence of a mandatory conversion
event. In the event of an issue of shares each existing shareholder had a
preemption right in respect of the shares to be issued in proportion to the
aggregate nominal amount of his shares.
In the event of dividend being approved and declared by a resolution of the
general meeting based upon a proposal by the Board, the holders of preference
shares then outstanding were entitled to be paid out an amount equal to $4.50
per share, and after that, the dividend remaining for distribution was to be
paid to all holders of ordinary shares equally per share, up to a limit of $4.50
per share, after which the dividend then remaining for distribution was to be
distributed to all shareholders equally on a per share basis.
In the event of the voluntary or involuntary liquidation, dissolution or
winding-up of HS B.V., the holders of preference shares then outstanding were
entitled to be paid out of the assets of HS B.V. available for distribution to
its shareholders, an amount equal to $4.50 per share, and after that, an amount
equal to any declared but unpaid dividend to which the holders of preference
shares were entitled. HS B.V.'s remaining assets available for distribution
among shareholders were to be paid to all holders of ordinary shares equally per
share, up to a limit of $4.50 per share, after which the assets remaining for
distribution were to be paid to all holders of
F-49
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
ordinary shares, which had paid $6.00 for those ordinary shares, up to a limit
of $1.50 per share, after which the assets remaining for distribution were to be
distributed to all shareholders equally on a per share basis.
In May 2002 HoustonStreet B.V. and HoustonStreet N.V. commenced and
completed voluntary liquidations. The holders of the preferred shares then
outstanding were not paid anything as there were no amounts available for
distribution to its shareholders.
COMMON STOCK
Except as otherwise required by law or provided in the Company's Certificate
of Incorporation, each share of common stock is entitled to one vote on all
matters to be voted on by stockholders. Holders of common stock do not have
cumulative voting rights. Holders of common stock are entitled to receive such
dividends (if any) as may be declared by the Board of Directors out of funds
legally available therefore. In the event of the voluntary or involuntary
liquidation or dissolution of the Company and after payment of all creditors and
liquidation preferences, including the liquidation preference of any preferred
stock, the holders of common stock are entitled to share the remaining net
assets of the Company. There were 16,473,393 shares of common stock issued and
outstanding as of December 31, 2002.
7. COMMON STOCK OPTIONS
In June 1999, the Company's Board of Directors (the Board) approved the
Company's 1999 Stock Incentive Plan (the 1999 Plan), which provides for the
grant of incentive and nonqualified stock options for the purchase of up to an
aggregate of 2,000,000 shares of the Company's common stock by management,
employees, consultants, advisors and directors of the Company. In 2000, the
number of shares authorized to be issued pursuant to the 1999 Plan was increased
from 2,000,000 to 4,000,000. On March 21, 2001, the number of shares authorized
to be issued pursuant to the 1999 Plan was increased to 40,000,000. As of
December 31, 2001, options to purchase an aggregate of 12,154,083 shares of
common stock at a weighted average option exercise price of $0.39 per share were
outstanding under the 1999 Plan.
The 1999 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and nonstatutory stock
options. All of the Company's employees, officers, directors, consultants and
advisors (and any individuals who have accepted an offer for employment) are
eligible to be granted options, restricted stock awards or other stock-based
awards under the 1999 Plan. Under present law, however, incentive stock options
may only be granted to employees.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price subject to other terms and conditions,
as specified, in connection with the option grant. The Board establishes the
exercise price at the time each option is granted. Optionees may pay the
exercise price of their options by cash, check or in connection with a cashless
exercise through a broker, by surrender to the Company of shares of common
stock, by delivery to the Company of a promissory note or by any combination of
the permitted forms of payment.
The Company's Board administers the 1999 Plan. The Board has the authority
to adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions. The Board may delegate
authority under the 1999 Plan to one or more executive officers or committees of
the Board. Subject to any applicable limitations contained in the 1999 Plan, the
Board or any committee to which the Board delegates authority, as the case may
be, selects the recipients of awards and determines (i) the number of shares of
common stock covered by options and the dates upon which the options become
exercisable; (ii) the exercise price of options and (iii) the duration of the
options.
No award may be granted under the 1999 Plan after June 2009, but the vesting
and effectiveness of awards previously granted may extend beyond that date. The
Company's Board of Directors may at any time amend, suspend or terminate the
1999 Plan.
The Company has elected to account for its stock-based compensation plans
under APB Opinion No. 25. However, for pro forma disclosure purposes, the
Company has computed the compensation expense in 2000 and 1999 for all options
granted using the Black-Scholes option pricing model prescribed by SFAS No. 123.
The fair value of the options granted in 2000 and 1999 is estimated on the date
of grant using the following assumptions: a dividend yield of 0%, and expected
volatility of 0% and an expected life of seven years for each option grant, as
well as a risk-free interest rate of 6.22% for 2000 and 6.12% for 1999.
F-50
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
8. COMMITMENTS AND CONTINGENCIES
The Company was not a party to any operating leases as of December 31, 2001
or as of December 31, 2002. The Company leased office space until August 1, 2001
at which time the operating lease was cancelled. Rental expense under the
operating lease for the year ended December 31, 2001 was $152,065.
9. INCOME TAXES
Due to losses incurred since inception, there is no income tax benefit in
the periods presented. As of December 31, 2002, the Company had approximately
$40 million of federal net operating loss carryforwards, which begin to expire
in the year 2014. A full valuation allowance was established for the net
deferred tax asset, as realization of the tax benefit is not assured. In
addition, the Company's utilization of its net operating loss carryforwards may
be limited pursuant to the Tax Reform Act of 1986, due to cumulative changes in
ownership in excess of 50% that have or may occur.
The following table reconciles the statutory federal income tax rate to the
0% provision:
DECEMBER 31,
-------------------------------
2002 2001
------------ ------------
Income (Loss) before taxes .................. $ 1,554,642 $(14,936,899)
Federal statutory rate 34% 34%
Federal income tax benefit at statutory
levels ................................... $ 528,578 $ (5,078,500)
(Decrease) increase from statutory levels-
State tax, net of federal tax benefit .... 41,975 (410,000)
Valuation allowance ....................... 570,553 4,668,500
Other ..................................... - -
------------ ------------
Effective federal income tax expense ........ $ - $ -
============ === ========
10. RELATED PARTY TRANSACTIONS
On April 27, 1999, the Company entered into a Management and Administrative
Services Agreement with BayCorp. Under this agreement as of December 31, 2002,
approximately seven administrative employees of BayCorp provide to the Company
certain administrative services, including human resources, accounting and
finance management services. The Agreement automatically renews on a yearly
basis, subject to termination by either party upon 30 days' notice. Beginning in
May 1999, the Company paid $53,451 per month to BayCorp for these services. This
amount was renegotiated in May 2000 for the period May through December 2000,
and is subject to negotiation annually thereafter. The management fee for 2001
was $165,000 and for 2002 was $60,000.
For the period ending December 31, 2002, approximately 45% of revenues were
from two customers who are also preferred stock shareholders of the Company.
For the period ending December 31, 2001, approximately 21% of revenue was
from a customer who is also a preferred stock shareholder of the Company.
11. SEGMENT INFORMATION
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision maker is the
chief executive officer. The Company evaluated its operations in two segments in
2002: HoustonStreet U.S.A and HoustonStreet Europe. HoustonStreet Europe was
dissolved in May 2002.
F-51
HOUSTONSTREET, INC.
NOTES TO FINANCIAL STATEMENTS ---- Continued
2002 2001
--------- -----------
Net Sales
- -------------------------- ---------- -----------
HoustonStreet Inc. $935,380 $1,627,606
- -------------------------- ---------- -----------
HoustonStreet Europe 754,526 271,892
- -------------------------- ---------- -----------
Net Income (Loss):
- -------------------------- ---------- -----------
HoustonStreet Inc. $1,041,267 ($12,996,212)
- -------------------------- ---------- -----------
HoustonStreet Europe 513,375 (1,940,687)
- -------------------------- ---------- -----------
Total Assets:
- -------------------------- ---------- -----------
HoustonStreet Inc $585,238 $1,435,566
- -------------------------- ---------- -----------
HoustonStreet Europe 0 109,412
F-52
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.
BAYCORP HOLDINGS, LTD.
March 31, 2003 By:
/s / Frank W. Getman Jr.
------------------------
Frank W. Getman Jr.
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Frank W. Getman Jr. President, Director and March 31, 2003
- ---------------------------------- Chief Executive Officer (principal
Frank W. Getman Jr. executive officer, principal
financial officer and principal
accounting officer)
/s/ Alexander Ellis III Director March 31, 2003
- ----------------------------------
Alexander Ellis III
/s/ Stanley I. Garnett II Director March 31, 2003
- ----------------------------------
Stanley I. Garnett II
/s/ James S. Gordon Director March 31, 2003
- ----------------------------------
James S. Gordon
/s/ Michael R. Latina Director March 31, 2003
- ----------------------------------
Michael R. Latina
/s/Lawrence M. Robbins Director March 31, 2003
- ----------------------------------
Lawrence M. Robbins
/s/ John A. Tillinghast Director March 31, 2003
- ----------------------------------
John A. Tillinghast
CERTIFICATIONS
I, Frank W. Getman Jr., President and Chief Executive Officer of BayCorp
Holdings, Ltd., certify that:
1. I have reviewed this annual report on Form 10-K of BayCorp Holdings, Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared.
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and at the audit
committee of registrant's board of directors (or person performing the
equivalent functions):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.
Date: March 31, 2003 By: /s/ Frank W. Getman Jr.
--------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
(principal executive officer)
Date: March 31, 2003 By: /s/ Frank W. Getman Jr.
--------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
(principal financial officer)
I, Patrycia T. Barnard, Vice-President and Treasurer of BayCorp Holdings, Ltd.
certify that:
1. I have reviewed this annual report on Form 10-K of BayCorp Holdings, Ltd;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state material fact necessary to make
the statements made, in a light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the"Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or person's performing the equivalent
functions):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.
Date: March 31, 2003 By: /s/ Patrycia T. Barnard
------------------------
Patrycia T. Barnard
Vice-President Finance and Treasurer
(chief accounting officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Purchase and Sale Agreement for the Seabrook Nuclear Power Station
by and among North Atlantic Energy Corporation, The United
Illuminating Company, Great Bay Power Corporation, New England Power
Company, The Connecticut Light and Power Company, Canal Electric
Company, Little Bay Power Corporation and New Hampshire Electric
Cooperative, Inc. as Sellers and North Atlantic Energy Service
Corporation and FPL Energy Seabrook, LLC as Buyer dated April 13,
2002, filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q (SEC File No. 001-12527) on May 15, 2002 and incorporated
herein by reference.
3.1 Certificate of Incorporation of BayCorp Holdings, Ltd., filed as
Exhibit 3.1 to the Registration Statement on Form S-4 of BayCorp
Holdings, Ltd. (Registration Statement 333-3362) filed on April 11,
1996 and incorporated herein by reference.
3.2 By-laws of BayCorp Holdings, Ltd., filed as Exhibit 3.2 to the
Registration Statement on Form S-4 of BayCorp Holdings, Ltd.
(Registration Statement 333-3362) filed on April 11, 1996 and
incorporated herein by reference.
10.1 Purchased Power Agreement between Unitil Power Corp. and Great Bay
Power Corporation, dated April 26, 1993, filed as an exhibit to the
Registration Statement on Form S-1 of Great Bay Power Corporation
(Registration No. 33-88232) declared effective on April 17, 1995 and
incorporated herein by reference.
10.2 Power Purchase Option Agreement between Unitil Power Corp. and Great
Bay Power Corporation, dated December 22, 1993, filed as an exhibit
to the Registration Statement on Form S-1 of Great Bay Power
Corporation (Registration No. 33-88232) declared effective on April
17, 1995 and incorporated herein by reference.
10.3 Agreement to Amend between Unitil Power Corp. and Great Bay Power
Corporation, dated as of July 23, 2002.
10.4 Amended and Restated Purchase Power Agreement between Unitil Power
Corp. and Great Bay Power Corporation, dated as of November 1, 2002.
10.5 Registration Rights Agreement between Great Bay Power Corporation
and the Selling Stockholders, dated April 7, 1994, filed as an
exhibit to the Registration Statement on Form S-1 of Great Bay Power
Corporation (Registration No. 33-88232) declared effective on April
17, 1995 and incorporated herein by reference.
10.6 Amendment to Registration Rights Agreement between Great Bay Power
Corporation and the Selling Stockholders, dated November 23, 1994,
filed as an exhibit to the Registration Statement on Form S-1 of
Great Bay Power Corporation (Registration No. 33-88232) declared
effective on April 17, 1995 and incorporated herein by reference.
10.7 Stock and Subscription Agreement among Great Bay Power Corporation
and the Selling Stockholders, dated April 7, 1994, filed as an
exhibit to the Registration Statement on Form S-1 of Great Bay Power
Corporation (Registration No. 33-88232) declared effective on April
17, 1995 and incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.8 Acknowledgement and Amendment to Stock and Subscription Agreement,
dated November 23, 1994, filed as an exhibit to the Registration
Statement on Form S-1 of Great Bay Power Corporation (Registration
No. 33-88232) declared effective on April 17, 1995 and incorporated
herein by reference.
10.9 Settlement Agreement by and among Great Bay Power Corporation, the
Official Bondholders' Committee and the Selling Stockholders, dated
September 9, 1994, filed as an exhibit to the Registration Statement
on Form S-1 of Great Bay Power Corporation (Registration No.
33-88232) declared effective on April 17, 1995 and incorporated
herein by reference.
10.10 Letter Agreement, dated December 20, 1994, between Great Bay Power
Corporation and the Selling Stockholders amending Registration
Rights Agreement, as previously amended on November 23, 1994, filed
as an exhibit to the Registration Statement on Form S-1 of Great Bay
Power Corporation (Registration No. 33-88232) declared effective on
April 17, 1995 and incorporated herein by reference.
10.11 Letter Agreement, dated March 29, 1995, between Great Bay Power
Corporation and the Selling Stockholders amending Registration
Rights Agreement, as previously amended on November 23, 1994 and
December 20, 1994, filed as an exhibit to the Registration Statement
on Form S-1 of Great Bay Power Corporation (Registration No.
33-88232) declared effective on April 17, 1995 and incorporated
herein by reference.
10.12 1996 Stock Option Plan of BayCorp Holdings, Ltd., as amended, filed
as Annex III to the Prospectus on Form 424B3 of BayCorp Holdings,
Ltd. (Registration Statement 333-3362) filed on June 12, 1996 and
incorporated herein by reference.*
10.13 2001 Non-Statutory Stock Option Plan of BayCorp Holdings, Ltd.,
filed as Exhibit 99 to the Registration Statement on Form S-8 of
BayCorp Holdings, Ltd. (Registration Statement 333-71976) filed on
October 22, 2001 and incorporated herein by reference.*
10.14 Employment Agreement between Frank W. Getman Jr. and BayCorp
Holdings, Ltd., dated May 25, 2000, filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-K (File No. 1-12527) for the year
ended December 31, 2000 and incorporated herein by reference.*
10.15 Employment Agreement between Frank W. Getman Jr. and HoustonStreet
Exchange, Inc., dated September 1, 2000, filed as Exhibit 10.20 to
the Company's Annual Report on Form 10-K (File No. 1-12527) for the
year ended December 31, 2000 and incorporated herein by reference.*
10.16 Incentive Stock Option Agreement, dated as of August 1, 1995, by and
between Frank W. Getman Jr. and Great Bay Power Corporation, filed
as an exhibit to the Quarterly Report on Form 10-Q of Great Bay
Power Corporation for the quarter ended March 31, 1995 (File No.
0-25748) on May 9, 1995 and incorporated herein by reference.*
10.17 Incentive Stock Option Agreement, dated as of September 17, 1996, by
and between Frank W. Getman Jr. and Great Bay Power Corporation,
filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K
(File No. 1-12527) for the year ended December 31, 1996 and
incorporated herein by reference.*
10.18 Incentive Stock Option Agreement, dated July 30, 1999, by and
between Frank W. Getman Jr. and BayCorp Holdings, Ltd., filed as
Exhibit 10.35 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 1999 and incorporated
herein by reference.*
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.19 Non-Statutory Stock Option Agreement, dated May 2, 2001, by and
between Frank W. Getman Jr. and BayCorp Holdings, Ltd., filed as
Exhibit 10.25 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.20 Stock Option Agreement, dated May 25, 2000, by and between Anthony
M. Callendrello and BayCorp Holdings, Ltd., filed as Exhibit 10.26
to the Company's Annual Report on Form 10-K (File No. 1-12527) for
the year ended December 31, 2001 and incorporated herein by
reference.*
10.21 Non-Statutory Stock Option Agreement and related Incentive Stock
Option Agreement, each dated May 2, 2001, by and between Anthony M.
Callendrello and BayCorp Holdings, Ltd., filed as Exhibit 10.27 to
the Company's Annual Report on Form 10-K (File No. 1-12527) for the
year ended December 31, 2001 and incorporated herein by reference.*
10.22 Non-Statutory Stock Option Agreement, dated October 22, 2001 by and
between Frank W. Getman Jr. and BayCorp Holdings, Ltd., filed as
Exhibit 10.28 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.23 Non-Statutory Stock Option Agreement, dated October 22, 2001, by and
between Anthony M. Callendrello and BayCorp Holdings, Ltd., filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.24 Non-Statutory Stock Option Agreement, dated October 22, 2001, by and
between Patrycia T. Barnard and BayCorp Holdings, Ltd., filed as
Exhibit 10.30 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.25 Retention and Incentive Agreement, dated November 21, 2001, by and
between Patrycia T. Barnard and BayCorp Holdings, Ltd., filed as
Exhibit 10.31 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.26 Retention and Incentive Agreement, dated November 30, 2001, by and
between Anthony M. Callendrello and BayCorp Holdings, Ltd.+*
10.27 Retention and Incentive Agreement, dated December 3, 2001, by and
between Frank W. Getman Jr. and BayCorp Holdings, Ltd.+*
10.28 Promissory Note, dated March 7, 2002, by John A. Tillinghast in
favor of BayCorp Holdings, Ltd., filed as Exhibit 10.34 to the
Company's Annual Report on Form 10-K (File No. 1-12527) for the year
ended December 31, 2001 and incorporated herein by reference.*
10.29 Stock Pledge Agreement, dated March 7, 2002, by and between John A.
Tillinghast and BayCorp Holdings, Ltd., filed as Exhibit 10.35 to
the Company's Annual Report on Form 10-K (File No. 1-12527) for the
year ended December 31, 2001 and incorporated herein by reference.*
10.30 1999 Stock Incentive Plan of HoustonStreet Exchange, Inc., filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 1999 and incorporated
herein by reference.*
10.31 Amended and Restated Incentive Stock Option Agreement, dated as of
July 30, 1999, by and between Frank W. Getman Jr. and HoustonStreet
Exchange, Inc. (first of two identically titled and dated
agreements), filed as Exhibit 10.25 to the Company's Annual Report
on Form 10-K (File No. 1-12527) for the year ended December 31, 1999
and incorporated herein by reference.*
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.32 Amended and Restated Incentive Stock Option Agreement, dated as of
July 30, 1999, by and between Frank W. Getman Jr. and HoustonStreet
Exchange, Inc. (second of two identically titled and dated
agreements), filed as Exhibit 10.26 to the Company's Annual Report
on Form 10-K (File No. 1-12527) for the year ended December 31, 1999
and incorporated herein by reference.*
10.33 Consulting Agreement by and between BayCorp Holdings, Ltd. and
Michael Latina dated April 24, 2002.*
10.34 Series A Convertible Preferred Stock Purchase Agreement, dated as of
February 2, 2000, as amended, by and among HoustonStreet Exchange,
Inc. and the Purchasers (as defined therein), filed as Exhibit 10.30
to the Company's Annual Report on Form 10-K (File No. 1-12527) for
the year ended December 31, 1999 and incorporated herein by
reference.
10.35 Form of Omnibus Signature Page dated as of March 6, 2000 relating to
the preceding exhibit, filed as Exhibit 10.34 to the Company's
Annual Report on Form 10-K (File No. 1-12527) for the year ended
December 31, 1999 and incorporated herein by reference.
10.36 Fourth Amended and Restated Stockholders' Voting Agreement, dated as
of March 30, 2001, by and among BayCorp Holdings, Ltd.,
HoustonStreet Exchange, Inc. and the Purchasers (as defined
therein), filed as Exhibit 10.44 to the Company's Annual Report on
Form 10-K (File No. 1-12527) for the year ended December 31, 2001
and incorporated herein by reference.
10.37 Amended and Restated Investor Rights Agreement dated as of March 30,
2001, by and among BayCorp Holdings, Ltd., HoustonStreet Exchange,
Inc. and the other parties named therein, filed as Exhibit 10.45 to
the Company's Annual Report on Form 10-K (File No. 1-12527) for the
year ended December 31, 2001 and incorporated herein by reference.
10.38 Third Amended and Restated Rights of First Refusal and Co-Sale
Agreement dated as of March 30, 2001, by and among BayCorp Holdings,
Ltd., HoustonStreet Exchange, Inc. and the other parties named
therein, filed as Exhibit 10.46 to the Company's Annual Report on
Form 10-K (File No. 1-12527) for the year ended December 31, 2001
and incorporated herein by reference.
10.39 Senior Secured Note and Warrant Purchase Agreement, dated as of
March 30, 2001, by and among BayCorp Holdings, Ltd., HoustonStreet
Exchange, Inc. and the Purchasers (as defined therein), filed as
Exhibit 10.47 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.
10.40 Series C Preferred Stock Warrant Agreement, dated as of March 30,
2001, by and among BayCorp Holdings, Ltd., HoustonStreet Exchange,
Inc. and the Holders (as defined therein), filed as Exhibit 10.48 to
the Company's Annual Report on Form 10-K (File No. 1-12527) for the
year ended December 31, 2001 and incorporated herein by reference.
10.41 Common Stock Warrant Agreement, dated as of March 30, 2001, by and
among BayCorp Holdings, Ltd., HoustonStreet Exchange, Inc. and the
Holders (as defined therein), filed as Exhibit 10.49 to the
Company's Annual Report on Form 10-K (File No. 1-12527) for the year
ended December 31, 2001 and incorporated herein by reference.
10.42 Senior Secured Promissory Note, dated March 30, 2001, by
HoustonStreet Exchange, Inc. in favor of BayCorp Holdings, Ltd.,
filed as Exhibit 10.50 to the Company's Annual Report on Form 10-K
(File No. 1-12527) for the year ended December 31, 2001 and
incorporated herein by reference.
10.43 Series C Warrant No. W-C001, dated March 30, 2001, issued by
HoustonStreet Exchange, Inc. to BayCorp Holdings, Ltd., filed as
Exhibit 10.51 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.44 Series C Warrant No. W-C006, dated March 30, 2001, issued by
HoustonStreet Exchange, Inc. to James S. Gordon, filed as Exhibit
10.52 to the Company's Annual Report on Form 10-K (File No. 1-12527)
for the year ended December 31, 2001 and incorporated herein by
reference.*
10.45 Series C Warrant No. W-C010, dated March 30, 2001, issued by
HoustonStreet Exchange, Inc. to Omega Advisors, Inc., filed as
Exhibit 10.53 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.46 Common Stock Warrant No. W-001, dated March 30, 2001, issued by
HoustonStreet Exchange, Inc. to BayCorp Holdings, Ltd., filed as
Exhibit 10.54 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.
10.47 Common Stock Warrant No. W-006, dated March 30, 2001, issued by
HoustonStreet Exchange, Inc. to James S. Gordon, filed as Exhibit
10.55 to the Company's Annual Report on Form 10-K (File No. 1-12527)
for the year ended December 31, 2001 and incorporated herein by
reference.*
10.48 Common Stock Warrant No. W-010, dated March 30, 2001, issued by
HoustonStreet Exchange, Inc. to Omega Advisors, Inc., filed as
Exhibit 10.56 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.49 Senior Secured Promissory Note, dated March 30, 2001, by
HoustonStreet Exchange, Inc. in favor of James S. Gordon, filed as
Exhibit 10.57 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.*
10.50 Senior Secured Promissory Note, dated March 30, 2001, by
HoustonStreet Exchange, Inc. in favor of Omega Advisors, Inc., filed
as Exhibit 10.58 to the Company's Annual Report on Form 10-K (File
No. 1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.
16.1 Letter dated January 16, 2003 of Deloitte & Touche LLP, filed as
Exhibit 16.1 to the Company's Current Report on Form 8-K (File No.
1-12527) on January 16, 2003 and incorporated herein by reference.
16.2 Letter dated January 16, 2003 of Vitale, Caturano & Company, filed
as Exhibit 16.2 to the Company's Current Report on Form 8-K (File
No. 1-12527) on January 16, 2003 and incorporated herein by
reference.
21 List of Subsidiaries of BayCorp Holdings, Ltd.
23.1 Consent of Arthur Andersen LLP, filed as Exhibit 23.1 to the
Company's Annual Report on Form 10-K (File No. 1-12527) for the year
ended December 31, 2001 and incorporated herein by reference.
23.2 Consent of Vitale, Caturano & Company.
99.1 Letter to the Commission from BayCorp Holdings, Ltd. dated March 19,
2002 relating to representations of Arthur Andersen LLP, filed as
Exhibit 99.1 to the Company's Annual Report on Form 10-K (File No.
1-12527) for the year ended December 31, 2001 and incorporated
herein by reference.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
+ Confidential materials omitted and filed separately with the Commission.
* Management contract or compensation plan or arrangement required to be filed
as an exhibit pursuant to Item 15(c) of Form 10-K.