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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from______________ to______________
Commission file number 0-72
York Research Corporation
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(Exact name of registrant as specified)
Delaware 06-0608633
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
280 Park Avenue, Suite 2700 West, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 557-6200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 pursuant to
Item 405 of Regulation 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. / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of May 20, 1998 was as follows:
Common Stock, $.01 par value - $89,139,914
(Based on a closing price of $7.375 for the common stock on such date).
The number of shares outstanding of the Registrant's classes of common
stock, as of May 20, 1998:
Common Stock, $.01 par value 14,879,782 shares
Documents incorporated by reference: None
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report, including certain statements in the "Business" and
"Management's Discussion And Analysis of Financial Condition and Results of
Operations" sections, contain certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
this Report, the words "believe," "anticipate," "intend," "plan," "seek,"
"will be," "expects," "estimates," "projects" and similar expressions
identify such forward-looking statements. Such statements regarding future
events and/or the future financial performance of the Company are subject to
certain risks and uncertainties which could cause actual events or the actual
future results of the Company to differ materially from any forward-looking
statements. Certain of these risks include changes in the markets in which
the Company operates, price volatility, interest rate volatility, currency
risks (in the case of offshore projects and procurement), changes in
applicable regulations, or change in supply or demand for energy and energy
projects. In light of the significant risks and uncertainties inherent in the
forward-looking statements included herein, the inclusion of such statements
should not be regarded as a representation by the Company or any other person
that the objective and plans of the Company will be achieved.
<PAGE>
PART I
ITEM 1 BUSINESS
A. General
York Research Corporation ("York" or the "Company") is a developer,
owner and marketer of energy related projects and products. York, through its
subsidiaries, partnerships, joint ventures and affiliates, conducts business
in two complementary areas of the energy industry: (i) developing,
constructing and operating energy production facilities, primarily those that
utilize natural gas as fuel to produce thermal and electric power
("cogeneration"), and renewable energy projects that convert wind energy into
transmittable electric power (collectively, "Power Project Development") and
(ii) marketing (purchase and sale) of energy, both electric power and natural
gas, in wholesale markets, and in limited retail markets ("Energy Marketing").
Within its power project development business, the Company has two
currently operating cogeneration facilities in New York City-the 28 Megawatt
("MW") Warbasse facility (the "Warbasse facility") and the 286 MW Brooklyn
Navy Yard facility (the "BNY facility"). The Company has begun
preconstruction development of a 35 MW wind energy facility in Big Spring,
Texas (the "Big Spring project"), scheduled for completion by February 1999.
The Company is also planning construction of a 215 MW natural gas fueled
power project in the Republic of Trinidad and Tobago (the "Trinidad project")
scheduled for completion by the fall of 1999. Other power projects, both
domestic and international, are in earlier stages of development.
The Company's Energy Marketing business has been developed to take
advantage of the evolving deregulation in the electric power and natural gas
industries. York participates in the wholesale energy market through its 85%
owned subsidiary, North American Energy Conservation, Inc. ("NAEC"). NAEC
began to market wholesale electricity in 1994. As one of the first such
federally licensed entities, NAEC has concentrated its activities in the
northeastern United States, a high cost area for electricity. Beginning in
1996, York established a natural gas marketing group in NAEC. NAEC's natural
gas marketing operation is comprised of wholesale and retail marketing and
trading.
York's power project development strategy is to increase its project
development activities selectively around the world, giving priority to
negotiated rather than publicly bid opportunities. The Company believes that
the market for wind energy projects will grow as wind power becomes
increasingly competitive as a source of energy, as a function of its price
and environmental benefits. York plans to retain increased ownership
interests in its developed projects rather than seeking up-front development
fees, as it has in the past, and to expand its marketing activities to blend
power generated by its future projects with supplies purchased from
third-party producers. York's energy marketing strategy seeks to generate
reasonable profit margins while maintaining controlled expansion of its
marketing activities by
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gradually expanding geographically, creating or entering into renewable
energy marketing ventures (including the trading of renewable energy credits
as, and if, such markets develop) and, as retail markets become viable,
developing integrated facilities and services.
Management believes that these areas of current concentration will
allow the Company to capitalize on its strengths and experience while
positioning it for the future. During the past several years, the Company has
invested a significant portion of its capital resources in developing and
nurturing new markets and projects. These efforts and expenditures, which
need to continue at some level in the near term, have not yet reached their
full potential, but management believes their potential rewards warrant the
efforts.
All note references are to Notes to Consolidated Financial
Statements.
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B. Power Project Development
1. The Warbasse Project
Between 1987 and 1989, York, under contract with the project owner,
Warbasse-Cogeneration Technologies Partnership L.P. ("WCTP") (see Item 1.D),
constructed and operated a 7 MW engine powered cogeneration project that
supplied all of the utility services including electricity, heat, hot water
and air conditioning to Amalgamated Warbasse Houses, Inc. ("AWH"), a 10,000
resident middle income housing complex in Brooklyn, New York. During 1989,
York, as agent for the project owner, WCTP, negotiated a 21 MW Power Sale
Agreement between Consolidated Edison Company of New York, Inc. ("Con
Edison") and WCTP based upon expansion of the project. The Power Sale
Agreement required WCTP to replace and expand its facility, converting it
from an engine facility to a larger gas turbine facility, interconnect with
the utility system and achieve commercial operation by the end of 1991, and
to achieve full rated capacity no later than December 31, 1994, all of which
was accomplished ahead of schedule. This Agreement was approved by the New
York State Public Service Commission ("PSC") in October 1989 and includes
capacity, energy and operation and maintenance payments continuing through
the year 2011, with payments indexed to prevailing fuel price levels and
inflation. The Warbasse facility is on land leased from AWH, its thermal host.
The Company and WCTP executed an Agreement to Provide for
Construction of Additional Capacity in 1990, pursuant to which the Company
constructed the expansion of the facility to service the Con Edison contract.
The Company and WCTP also executed an Operations and Maintenance ("O&M")
Agreement in 1989 pursuant to which the Company agreed to operate the
facility for its life (see Note 5).
The Warbasse facility supplies all of the thermal and electric
needs of AWH and the full capacity requirements of its electric power
contract with Con Edison, as dispatched. See Item 13 and Note 5 for
information regarding receivables due to the Company from WCTP and the
operations of the Warbasse facility.
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2. Brooklyn Navy Yard Project
Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), is owned
equally by a subsidiary of Edison Mission Energy ("Mission"), which is an
indirect wholly owned subsidiary of Edison International, and B-41 Associates
L.P. ("B-41LP") (see Item 1.D). BNYLP was formed to develop, construct,
finance, own and operate the 286 megawatt natural gas fired combined cycle
BNY Facility.
The facility has been operational since 1996 and supplies Con Ed
with both electricity and steam under a 40 year contract. Steam is delivered
to Con Ed's New York City district steam system, the world's largest, through
a tunnel under the East River. BNYLP currently provides more than 15% of Con
Ed's total steam in New York City. Electric energy delivered represents about
3% of peak power demand in the service territory. The facility also supplies
energy to the host industrial park and to an adjacent waste water facility.
The project began in 1989 when York executed a lease on the
abandoned navy yard coal fired power plant. In 1990, York and associated
entities submitted bids to Con Ed, and were awarded separate contracts for
three small plants to supply energy to Con Ed. These three successful parties
later combined their interests to form B-41LP (which is 74.7% owned by York)
and began negotiations to supply the power and steam from a single larger
plant by initiating permitting activities and purchasing equipment. In order
to finance further development and construction, B-41LP sold 50% of the
project to Mission. York and Mission proceeded to complete development and
construction of the larger project and negotiated a new 40 year integrated
energy supply contract with Con Ed. The project entered service at the end of
1996. Long-term non-recourse project financing was closed on December 17,
1997 with the sale of $100.0 million aggregate principal amount of Senior
Secured Bonds Due 2020 and $307.0 million aggregate principal amount of New
York City Industrial Development Agency Industrial Development Revenue Bonds
due from 2022 to 2036.
Pursuant to the provisions of the amended and restated partnership
agreement, Mission retains the right to take all the votes on the Management
Committee that controls the day to day operations of BNYLP. If Mission
decides to exercise its right to cast all votes on the BNYLP Management
Committee, B-41LP still remains a 50% general and limited partner in the Navy
Yard project and retains all its other rights, including an equal vote with
Mission on certain material decisions affecting the BNY facility, such as
sale of assets and renegotiation of power contracts.
Like other large projects of this nature, the BNY cogeneration facility
is subject to various risks. There can be no assurance that the facility,
although completed, will operate at sufficient levels to cover all operation
and maintenance expenses and debt service. The Company has no liability for
any such shortfalls, although if the shortfalls occur, they could impact the
general partner and royalty fees to be paid to B-41LP under the amended and
restated partnership agreement (see Note 4), which are subordinate to debt
service.
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3. Big Spring Project
On October 21, 1997, York acquired 100% of the partnership interests
in New World Power Texas Renewable Energy Limited Partnership, which is a
party to a power purchase agreement with Texas Utilities Electric Company
("TU Electric"). York has commenced procurement and other preconstruction
tasks, and currently expects full commercial operation by February 1999. When
completed, the facility is expected to have a capacity of 35 MW and include
46 turbines, including four 1,650 Kilowatt ("kW") wind turbines.
The TU Electric power purchase agreement has an initial term of 15
years. During the initial term, TU Electric will pay a fixed but escalating
price per kilowatt hour ("kWh") for energy delivered up to a specified
maximum. A balancing account adjusts for variable wind years by allowing any
shortfall in production by the project to be carried forward and credited
against excess production over the life of the power purchase agreement. At
the end of the initial term, TU Electric may extend the power purchase
agreement for each of two 5 year periods. If the power purchase agreement is
not extended, York may either sell its output to TU Electric at TU Electric's
then avoided costs or market its energy elsewhere. The owner of the project
(currently 100% York) is entitled to accelerated U.S. Federal income tax
depreciation and to a 1.7 cents per kWh (escalating) wind production tax
credit over the first 10 years of operation. This credit may be applied to
any income subject to U.S. Federal income taxation. York expects thereby to
offset taxable income from Energy Marketing and from other projects. York has
subcontracted turbine supply, delivery, erection and commissioning
(approximately 75% of the project's estimated construction costs) to Vestas
Wind Systems A/S, the largest manufacturer of wind turbines in the world.
There can be no assurance that the Big Spring project will be completed on
the terms and in the manner described above.
4. Trinidad and Tobago Project
The Company is currently in the process of preconstruction
development and negotiating agreements for a 215 MW natural gas fueled
combustion turbine project in the Republic of Trinidad and Tobago. Through a
local subsidiary, York plans to construct the project for commercial
operation by fall 1999. The Trinidad project will sell the bulk of its output
under a 30 year contract signed on February 12, 1998 with Trinidad and Tobago
Electricity Commission ("T&TEC"), Trinidad's government-owned power
distribution utility. Fixed capacity payments, primarily tied to U.S.
inflation rates, will constitute the majority of project revenues. T&TEC will
have the obligation to supply and pay for fuel for the project, thereby
eliminating York's fuel risk on the project. T&TEC's obligations under the
power purchase agreement are expected to be supported by a guarantee of the
Trinidad government. The Trinidad project is also expected to supply energy
to several proposed new industrial developments.
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York has funded development costs to date, may fund initial site
construction, and anticipates funding the balance of project costs through
non-recourse project financing. The power purchase agreement requires York to
retain no less than 51% project ownership for at least ten years. However,
York currently plans to retain a greater percentage of project ownership.
There can be no assurance that the Trinidad project will be completed on the
terms and in the manner described above or that York will be able to obtain
the necessary financing.
5. Other Power and Wind Projects Under Development
York has been funding development work on a variety of large and
small potential projects in the United States, Canada, Mexico, the Caribbean,
Africa, several Mediterranean countries and in Central Asia. There can be no
assurances that any of these projects will be completed or successful.
C. Energy Marketing
During Fiscal 1997, the Company purchased 85% of the outstanding
shares of NAEC (see Note 15). NAEC is engaged in the marketing of electricity
and natural gas in wholesale and retail markets. NAEC's personnel have been
recruited for the most part from utilities, and their background is in the
operational and logistical aspects of energy marketing and arranging for the
efficient transportation of electricity or natural gas.
Wholesale Power
The transmission of electricity in interstate commerce is subject to
regulation by the Federal Energy Regulatory Commission ("FERC"). Currently,
transmission-owning utilities are required to provide comparable and
non-discriminatory transmission service on their systems to power marketers
and others selling electricity. Marketers may buy power from utilities and
other marketers, structure a transmission path, and sell electricity at
negotiated rates at various destinations to other marketers and to consuming
utilities including municipally owned power companies and cooperatives.
In 1997, NAEC's marketing and trading activities increased as other
hubs emerged in the Eastern United States. In order to manage this growing
area, additional support personnel were added to the trading and marketing
staff of NAEC.
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Natural Gas
Deregulation in the United States began more than ten years ago when
the natural gas pipelines were required to begin the process of unbundling.
While the wholesale supply of natural gas has become a commodity marketplace,
transmission, storage, and seasonality provide opportunities for profit in
selected areas. Trading in the wholesale markets principally occurs at market
centers, which are locations where several pipelines meet. Retail
deregulation of natural gas is more advanced than retail deregulation of
electricity, but it is not complete.
Beginning in 1996, and in conjunction with NAEC's acquisition, York
established a natural gas marketing group in NAEC. NAEC's natural gas
marketing operation is comprised of wholesale and retail marketing and
trading. The wholesale group trades with utilities, producers, and marketing
companies, who buy and sell natural gas daily in order to meet fluctuating
market obligations. NAEC does business over approximately 12 to 15 market
centers mainly in the Northeast United States but also at locations in the
Mid-Atlantic and Gulf of Mexico regions. NAEC has buy/sell commitments with
many suppliers and customers.
The wholesale group also purchases natural gas for NAEC's retail
group, which markets it to industrial and commercial accounts in Western and
Central New York. Currently NAEC has approximately 60 contracts (typically
with up to a one year term) with retail customers.
Future Opportunities
As deregulation progresses, the Company anticipates supporting its
Energy Marketing activities from existing projects such as the Warbasse
facility, and new projects which may be developed or acquired by York and
through possible alliances with third party energy producers. In addition,
the Company may seek to capitalize on the future synergy between wholesale
and retail power marketing.
D. Subsidiaries, Partnerships and Joint Ventures
The Company conducts a substantial portion of its business through
subsidiaries, partnerships and joint ventures, in some of which affiliates of
the Company have an interest.
York owns 100% of the outstanding shares of B-41 Management Corp.
("B41MC"), Cogeneration Technologies, Inc. ("Cogen"), and York Internet Power
Services, Inc., all of which are Delaware Corporations; 85% of the
outstanding shares of NAEC, a Delaware Corporation; and 100% of the
outstanding shares of York Research Canada, Inc. ("York Canada"), an entity
incorporated under the laws of Canada. York Canada owns 100% of the
outstanding shares of York Windpower Corp., an entity incorporated under the
laws of Canada.
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York and its subsidiaries own 74.7% of B-41LP, the 50% partner in
BNYLP, as a result of the following:
B-41MC holds a 5% general partnership interest in B-41LP.
Cogen holds a 22% limited partnership in B-41LP resulting from
assignment of a 40 MW Power Contract to B-41LP.
York holds a 90% limited partnership interest in York Cogen Partners
L.P. ("YCP"), which in turn holds a 53% limited partnership interest in
B-41LP resulting from assignment of a 90 MW power contract to B-41LP.
RV Associates L.P. ("RVA"), an entity controlled by the chairman of the
Company, holds a 5% general partnership interest and a 15% limited
partnership interest in B-41LP, resulting from assignment of a 40 MW
contract to B-41LP, assumption of certain partnership liabilities and
acceptance of a reduced share of development fees and reimbursements.
A portion of B-41LP's partnership interest in BNYLP has been pledged as
collateral to unaffiliated third parties to secure certain obligations
of B-41LP.
York has established several offshore subsidiaries in connection
with the Trinidad project. Each is a wholly owned subsidiary of the company
listed above it. York Holdings (Caymans) L.L.C. is a wholly owned subsidiary
of York Research Corporation
York Holdings (Caymans) L.L.C. is an Exempted Company incorporated in
the Cayman Islands with limited liability.
York Ex International S.R.L. is organized under the Societies with
Restricted Liabilities Act of Barbados, B.W.I.
York Holdings (Barbados) S.R.L. is organized under the Societies with
Restricted Liabilities Act of Barbados, B.W.I.
InnCOGEN, Limited is a corporation incorporated under the laws of the
Republic of Trinidad and Tobago.
In connection with the Big Spring project, the Company has
established two wholly owned subsidiaries, Big Spring Holdings, Inc., and Big
Spring Texas Energy Management, Inc., which in turn own 100% of New World
Power Texas Renewable Energy L.P.
WCTP is a limited partnership whose 25% general partner is RRR'S
Ventures Ltd. ("RRR'S"). The Chairman of the Company is president and a major
shareholder in RRR'S. Entities unaffiliated with the Company or RRR'S own an
aggregate of 75% limited partnership interest in WCTP. RRR'S also holds a 10%
general partnership interest in YCP (see Item 13).
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North American Energy Conservation, Inc. is 15% owned by the Chairman
of the Company.
E. Backlog
The Company does not currently calculate backlog because the revenue
streams are dependent upon a number of variable factors such as inflation,
fuel prices, electric utility rates and utilizations, and natural gas prices
and supply.
F. Patents and Trademarks
The Company and its subsidiaries have no patents or trademarks that can
be considered material to the Company's or its subsidiaries' businesses.
G. Research and Development
Since research and development costs are not significant, the Company
does not account separately for these costs.
H. Raw Materials and Suppliers
The Company and its subsidiaries are not dependent on any single source
of supplies or services for their activities.
I. Marketing
York markets its projects and products through a dedicated sales staff,
supplemented by technical support personnel and management personnel from the
Company, and by representatives internationally.
J. Employees
As of May 12, 1998, the Company and its subsidiaries employed 48 people
on a full-time basis. Most of the Company's executives are technically trained
and actively engaged in the project development and sales areas.
K. Competition
There are many companies with access to greater financial resources
that are active in various aspects of the Company's energy business. These
companies will continue to compete in the energy marketplace. The Company cannot
assess the effect of competition in the future.
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L. Customers
During Fiscal 1998, all of the services revenues were derived from
WCTP and BNYLP. Energy sales were derived from numerous retail customers and
utilities. Each customer accounted for less than 10% of total revenues. Due
to the relatively short-term nature of contracts with customers, the loss of
one of these customers would have no material adverse effect on the Company.
M. Environmental Matters
The Company believes that the various technologies it employs, which
provide for increased efficiency, compared to conventional power generation
facilities, are not environmentally sensitive. The construction of power
generation facilities requires typical environmental impact statements and
permitting procedures which may result in delays. The Company believes that
it is in compliance with federal, state and local laws involving the
protection of the environment. The Company does not believe that continued
compliance will require any material capital expenditures. The Company's
facilities are designed to comply with all applicable environmental laws.
N. Regulation
A subsidiary of the Company operates the Warbasse cogeneration
facility in New York, a qualifying cogeneration facility ("QF") pursuant to
the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The BNY
facility in New York has also obtained QF status.
Cogeneration projects that meet the QF criteria stated in the
federal rules generally are exempt from most of the federal, state and local
regulations that apply to generating facilities which are not QFs. However,
the New York State Public Service Commission ("NYPSC") has determined that it
has the authority to regulate sales of electricity by QFs to retail
customers, though the regulatory regime is less burdensome than that applied
to traditional utilities. Under New York statutes, QFs, like the Warbasse
cogeneration facility, having a maximum generating capacity of less than 80
MW, may distribute electricity to users located at or near a project site and
remain exempt from NYPSC regulation.
One of the criteria for QF status is that a total of no more than 50
percent of the equity interests may be owned by one or more companies that
are electric utility holding companies under the Public Utility Holding
Company Act of 1935 ("PUHCA"). Under PUHCA, an entity which owns 10 percent
or more of the voting securities of, or otherwise controls, an electric
utility company, is an electric utility holding company. An electric utility
company is defined in PUHCA to mean a company that owns or operates physical
facilities for the generation, transmission or distribution of electricity
for sale. QFs are expressly exempt from this definition, and the Company
therefore is not a public utility holding company by virtue of its interests
in QFs.
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The BNY facility intends to operate as an exempt wholesale generator
("EWG"). An EWG must be engaged exclusively in the business of owning or
operating an eligible facility and selling electricity at wholesale. An
eligible facility is a generating facility that is used solely to produce
electricity for sale at wholesale. An EWG is exempt under PUHCA and the
Company would not become a holding company under PUHCA by virtue of it or one
of its subsidiaries or affiliates holding 10% or more of the voting
securities or partnership interests in the BNY facility.
When operated solely as an EWG, the BNY facility would be subject to
the New York Public Service Law and the jurisdiction of the NYPSC with
respect to matters other than the sale of electricity at wholesale. Assuming
that the NYPSC applies the policies that it has applied to other EWGs in
previous cases, the BNY facility will be required to comply with minimal
regulatory requirements regarding financial and organizational matters. The
NYPSC has no jurisdiction over the rates, terms and conditions of the sale of
electricity generated by the BNY facility and sold to Con Edison and Brooklyn
Navy Yard Development Corp. for resale. Further, to the extent operated
solely as an EWG, the BNY facility operates and maintains a steam plant and
would be subject to regulation by the NYPSC as a steam corporation. The NYPSC
has issued a certificate of public convenience and necessity to the BNY
facility as a steam corporation, and has required that the BNY facility
comply with only minimal regulatory requirements regarding financial and
organizational matters.
Power Brokering
A power broker is not considered to be a public utility under the
Federal Power Act ("FPA") and is not subject to regulation by the Federal
Energy Regulatory Commission, which administers the FPA. A power broker
arranges transactions for a buyer and seller and receives a fee for its
services. To date, no company that is a power broker has been found by the
Securities and Exchange Commission ("SEC") to be an electric utility company
under PUHCA. Accordingly, the Company believes that its activities as a
broker of electricity also would not result in its becoming an electric
utility company or an electric utility holding company under PUHCA, and would
not affect the QF status of the Projects.
Power Marketing
NAEC is considered to be a public utility under the FPA and its
transactions are regulated under the FPA. A power marketer takes title to
electricity and resells it at wholesale in interstate commerce. To date, no
company that is a power marketer has been found by the SEC to be an electric
utility company under PUHCA, but there can be no assurance as to the future.
The Company believes that NAEC's activities as a power marketer would not
result in the Company becoming an electric utility company or an electric
utility holding company under PUHCA and would not affect the QF status of the
Projects.
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Natural Gas Sales and Marketing
NAEC does not own or operate any physical facilities for the
transmission of natural gas. NAEC is not considered a natural gas company, as
that term is defined in the Natural Gas Act of 1938, nor by virtue of its
wholesale and retail brokering or marketing of natural gas is it subject to
the jurisdiction of the Federal Energy Regulating Commission. NAEC sells
natural gas in the State of New York at retail. Based on the existing
practice of the NYPSC, the NYPSC's administrative determinations, and
judicial decisions concerning the applicability of the Public Service Law of
the State of New York to gas marketers, NAEC's retail sales of gas are not
subject to the jurisdiction of the NYPSC.
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ITEM 2 PROPERTIES
The Company leases its facilities. The Company considers its facilities
to be suitable and adequate for the purposes for which they are used.
<TABLE>
<CAPTION>
Square
Entity/Location Footage Use
--------------- ------- ---
<S> <C> <C>
York Research Corporation (1) Office
280 Park Avenue
New York, New York
Subsidiaries
Cogeneration Technologies, Inc. (1) Office
280 Park Avenue
New York, New York
York Research Canada, Inc. (2) Office
York Windpower Corp.
1000 De La Gauchetiere
Street West
Montreal, Quebec, Canada
North American Energy Conservation, Inc. (3) Office
100 Clinton Square, Suite 400
126 North Salina Street
Syracuse, New York
InnCogen Ltd. (4) Office
#10 Marine Villas
Columbus Blvd.
West Moorings By the Sea
Trinidad, West Indies
</TABLE>
(1) Total square footage shared by York and Cogen at this location
is currently 12,300. Effective July 1, 1998, the square
footage will be 16,700.
(2) Total square footage shared by York Canada and York Windpower
Corp. at this location is currently 1,650.
(3) Total square footage leased by NAEC at this location is
approximately 12,850, less approximately 4,500 square feet
sublet to three tenants.
(4) Total square footage leased at this location is approximately
2,000 square feet.
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ITEM 3 LEGAL PROCEEDINGS
There is no material litigation directly affecting the Company. See
Note 4 as to certain litigation involving BNYLP.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
MARKET FOR THE REGISTRANTS COMMON STOCK
ITEM 5 AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded in the over-the-counter market
under the symbol "YORK". The following table shows the range of high and low
closing sales prices for the common stock on the NASDAQ National Market System.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Fiscal Year 1998
First Quarter 9-1/4 7
Second Quarter 7-15/16 6
Third Quarter 10 7
Fourth Quarter 8-13/16 7-1/8
Fiscal Year 1997
First Quarter 9-7/8 5-7/8
Second Quarter 10-5/16 8-5/8
Third Quarter 11-5/8 9-3/8
Fourth Quarter 10-1/2 8-7/8
</TABLE>
On May 20, 1998, the Company had 478 holders of record of its common
stock. The Company has not declared any common stock or cash dividends during
the last five years and has no present intention to declare cash dividends.
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ITEM 6 SELECTED FINANCIAL DATA
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
For the Year Ended
------------------------------------------------------------------------
2/28/98 2/28/97 2/28/96 2/28/95 2/28/94
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Total revenues $502,980 $46,327 $14,392 $7,524 $6,494
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Income (loss) before
extraordinary gain $2,670 $7,823 $4,400 $222 ($416)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net income (loss) $8,223 $7,823 $4,400 $222 ($416)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net income (loss) per
common share - Basic $0.59 $0.61 $0.38 $0.02 ($0.03)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Net income (loss) per
common share - Diluted $0.53 $0.52 $0.35 $0.02 ($0.03)
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Total assets $145,488 $84,829 $60,002 $50,685 $29,467
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Limited recourse long-
term liabilities (1) $0 $19,982 $20,232 $20,482 $0
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Other long-term
liabilities $942 $885 $685 $638 $1,155
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Deferred revenue and
other credits $3,287 $3,460 $3,460 $3,478 $4,097
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Stockholders' equity $60,749 $46,990 $32,827 $21,886 $18,742
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
Cash dividends declared
per common share $0 $0 $0 $0 $0
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
</TABLE>
(1) Recourse to certain of B-41LP's cash flow and not recourse to the
Company. This limited recourse obligation was settled subsequent to
February 28, 1997 (see Note 5).
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Brooklyn Navy Yard Project
Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), a joint
venture, was formed on October 19, 1992. BNYLP is owned equally by a
subsidiary of Edison Mission Energy ("Mission"), which is an indirect wholly
owned subsidiary of Edison International, and a limited partnership, B-41
Associates, L.P.("B-41 LP"), in which the Company is the majority partner
(see Note 4).
On November 1, 1996, the BNY facility commenced operations,
generating electricity and steam in accordance with its contracts. In
December, 1997, a $407,000,000 non-recourse financing for the BNY facility
was completed. This financing included tax free Industrial Development
Revenue Bonds with maturities to October 1, 2036, as well as taxable bonds
due in 2020. The Company provided no guarantees with regard to this
financing, and has no obligation to provide funding of any sort, other than
an obligation to reimburse Mission for a portion of certain costs, if any,
related to a legal action (see Note 4). As a result of this financing, and as
compensation for services rendered, the Company received a fee of $6 million
from Mission, which was included in Service Revenues in the fourth quarter of
Fiscal 1998. The Company also expects to receive continuing general partner
and other fees over the 40 year life of the project.
In March 1997, B-41LP settled all its obligations to Sanwa Business
Credit Corp. ("SBCC") for a cash payment of $2,750,000. SBCC, in exchange for
this cash payment gave up all its interest in the future cash flow from the
BNY facility and has no continuing interest in any of the Company's projects
or assets (see Note 4).
Like other large projects of this nature, the BNY facility is subject
to various risks. There can be no assurance that the facility, although
completed and financed, will operate at sufficient levels to cover all
operation and maintenance expenses and debt service. The Company has no
liability for any such shortfalls, but if such shortfalls do occur, it could
impact the continuing fees mentioned above.
Warbasse Project
The Company, through a subsidiary, operates the Warbasse facility,
and since September 1994 has supplied on a continuous basis, all the electric
and thermal energy needs of the host, Amalgamated Warbasse Houses, Inc.
("AWH"), and is supplying up to the full capacity requirements of its
electric power contract with Consolidated Edison Company of New York, Inc.
("Con Ed"), when dispatched.
The Company transferred the completed facility to
Warbasse-Cogeneration Technologies Partnership L.P. ("WCTP") on August 1,
1996. As a result of being a senior secured creditor of WCTP, the Company has
recorded approximately $4,510,000 of interest income on its long-term notes
receivable from WCTP for the year ended February 28, 1998.
18
<PAGE>
Project Finance
The Company is seeking to arrange long-term project financing, in
the form of one or more long-term bond issues, which will provide full
construction and development funding for the Big Spring wind project and the
Trinidad power project, as well as additional funds for general corporate
purposes and future development activities. It is contemplated that these
bond issues will be non-recourse to York but may be secured by cash flow from
BNY and WCTP. There can be no assurance that the bond issuances will be
successfully completed or will be of sufficient size to provide for all
anticipated needs.
NAEC
The Company's energy marketing subsidiary, North American Energy
Conservation, Inc. ("NAEC"), has experienced dramatic growth since the
Company acquired it in November 1996. Revenues have increased from
approximately $27 million for the four months ended February 28, 1997 to
approximately $489 million for the year ended February 28, 1998. The Company
expects this business to continue to grow and improve its margins, although
revenues will not continue to grow at the pace experienced in Fiscal 1998,
the first full year of combined natural gas and electric marketing. In order
to support that growth, in December 1997, NAEC completed a $20,000,000
revolving line of credit with Congress Financial Corp., collateralized by
NAEC's receivables and other assets, and guaranteed by York. The Company
believes this line of credit and possible future expansions thereof will be
sufficient to support the capital and credit needs of NAEC.
The Company uses put and call options, and futures contracts
("Instruments") in various combinations, to hedge physical positions in
electricity and natural gas as well as occasionally for trading purposes. All
of these Instruments are settled in the underlying commodity. The ultimate
impact of these Instruments will be determined by the prevailing applicable
market price.
NAEC has sold call options related to the wholesale electric
business and collected premiums totaling approximately $3 million at February
28, 1998. Of this amount, approximately $2.9 million will be recognized as
revenue in Fiscal 1999, offset by approximately $.7 million of prepaid
brokerage fees and call option expense.
General
During the year ended February 28, 1998, cash balances decreased by
approximately $1.3 million. Approximately $5.3 million was generated by
operating activities. Net income from operations generated approximately $2.7
million excluding a non-cash extraordinary gain of approximately $5.6
million. This net increase from operations along with increases in accounts
payable, accrued expenses, other long-term liabilities and accrued taxes of
approximately $62.0 million were offset by increases in receivables of
approximately $59.4 million, and amortization of deferred credits of
approximately $1.7 million. During the year ended February 28, 1997, cash
balances increased by approximately $6.0 million. Net income from operations
generated approximately $7.8 million and increases in accounts payable,
accrued expenses and other long-term liabilities generated approximately $5.2
million. These sources of cash were offset by
19
<PAGE>
an increase in receivables of approximately $11.0 million predominantly due
to the acquisition of NAEC, which principally accounts for cash generated by
operating activities of approximately $2.1 million. During Fiscal 1996, the
Company had net income of approximately $4.4 million offset by approximately
$3.0 million spent on construction of the Warbasse project, and an increase
in receivables of approximately $1.7 million, resulting in cash used in
operating activities of approximately $509,000.
During Fiscal 1998, approximately $4.4 million was used in investing
activities, mostly for construction in progress.
During Fiscal 1998, approximately $2.2 million was used in financing
activities. $2.7 million was used to settle the Company's obligation to SBCC,
offset by proceeds from the exercise of options and warrants of approximately
$.6 million. Approximately $3.9 million was generated by financing activities
during Fiscal 1997, mainly due to proceeds from the exercise of stock options
and warrants of approximately $3.7 million and the repayment by the York
Research Corporation Employee Stock Ownership Trust ("ESOP") of $450,000.
Cash generated by financing activities in Fiscal 1996 was approximately
$4,416,000, due to the repayment by the ESOP of $3,079,000 of the demand
purchase money loans due to the Company, and $1,455,000 due to proceeds from
the exercise of stock warrants and options.
The ESOP purchased from the Company a total of 3,793,500 shares of
the Company's Common Stock between 1988 and February 28, 1996 in exchange for
demand purchase money loans, totaling approximately $14,462,000 (see Note
11). During Fiscal 1996, the ESOP trustee sold 606,000 shares of the
Company's common stock at a profit to the ESOP, and repaid $3,079,000 of the
demand purchase money loan. During Fiscal 1997, the ESOP trustee sold 50,000
shares of the Company's common stock, and repaid $450,000 of the demand
purchase money loan. There were no repayments during Fiscal 1998.
See Note 3 for disclosure of the impact of significant new
accounting pronouncements.
Year 2000 Compliance
The Company has completed a review of its computer systems and
operations to determine the extent to which its systems will be vulnerable to
potential errors and failures as a result of the "Year 2000" problem. The
Year 2000 problem is the result of prior computer programs being written
using two digits, rather than four digits, to define the applicable year. Any
of the Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in major system failure or miscalculations.
The Company has concluded that its significant computer programs and
operations will not be affected by the Year 2000 problem and that the
programs that will be affected can and will be properly modified or replaced
by the end of 1999 at a cost which will not be significant to the Company.
20
<PAGE>
In addition, the Company is unable at this time to assess the extent
to which it will be impacted by the Year 2000 issue with respect to
businesses and other entities who provide data to or receive data from the
Company, or whose financial condition or operational capability is important
to the Company, as suppliers or customers.
Results of Operations
1998 Compared to 1997
In a year to year comparison between Fiscal 1998 and Fiscal 1997,
total revenues increased approximately $456,700,000. This increase is due to
an increase in energy sales by NAEC of approximately $462,600,000. Fiscal
1998 reflects a growth in electric power revenues and the first full year of
combined electric power and natural gas revenues, while Fiscal 1997 reflects
only four months of predominantly electric revenues as a result of the
acquisition of NAEC on November 1, 1996.
Service revenues decreased approximately $6,000,000 as a result of a
number of factors. During Fiscal 1998, B-41LP received a fee of $6,000,000
from Mission related to the closing of the Brooklyn Navy Yard long-term
project financing (see Note 4). Service revenues to WCTP increased
approximately $1,800,000 due to higher fuel and other operating costs. These
increases in service revenues were offset by decreases due to certain
revenues recognized in Fiscal 1997 but not in Fiscal 1998. A decrease of
$11,000,000 resulted from the recognition of revenues during Fiscal 1997
pursuant to a services agreement between WCTP and RVA and the Company (see
Note 14), and a decrease of $2,500,000 resulted from the recognition of
revenues during Fiscal 1997 due to reimbursements by BNYLP for certain
engineering costs, a portion of which had been expensed in prior periods.
Cost of energy increased approximately $462,900,000, predominantly
due to an increase in energy sales. Gross margins on the energy business will
be impacted by changes in unit prices, supply and seasonal factors.
Cost of services, which include fuel and other operations and
maintenance costs, increased approximately $1,800,000, commensurate with
service revenues from WCTP.
Selling, general and administrative expenses increased approximately
$1,700,000. The inclusion of a full year of expenses for NAEC accounted for
an increase of approximately $2,200,000. Expenses also increased by
approximately $300,000 as a result of recognition of the redemption of Class
B Warrants (see Note 10). These increases were offset by a decrease of
approximately $650,000 in expenditures for consulting and professional fees.
Interest income-WCTP increased approximately $1,000,000 due to the
commencement of interest due on the long-term note receivable from WCTP
related to the sale of the Warbasse facility on August 1, 1996. Fiscal 1998
reflects a full year of interest income, while Fiscal 1997 reflects seven
months.
Interest and other income increased approximately $2,000,000. The
commencement in December 1996 of general partner fees received by B-41LP
21
<PAGE>
from BNYLP accounts for approximately $1,000,000 of this increase, since
Fiscal 1998 reflects a full year of general partner fees, while Fiscal 1997
reflects only three months. The balance of the increase was due to the
recognition of approximately $1,100,000 as royalty fees, which commenced in
January 1998, and will continue for four years.
An extraordinary gain of approximately $5,600,000 was recorded in
Fiscal 1998 relating to the settlement of the obligation to SBCC.
1997 Compared to 1996
Total revenues in Fiscal 1997 increased by approximately $31,936,000
over Fiscal 1996, due predominantly to the acquisition of NAEC on November 1,
1996 (see Note 15), which accounted for the increase in energy sales of
approximately $26,571,000. Service revenues increased by approximately
$9,307,000, due mainly to an increase of $11,000,000 as a result of a
services agreement between WCTP and RVA, and the Company (see Note 14), and
an increase of approximately $748,000 in service revenues to WCTP due to
higher fuel costs, and an increase in purchases of supplies, spare parts,
etc. These increases were offset by a decrease in engineering services of
approximately $2,442,000, due mainly to $2,500,000 of reimbursements in
Fiscal 1997 by BNYLP for certain engineering costs a portion of which was
expensed in prior periods versus $5,000,000 of similar reimbursements in
Fiscal 1996. Development and other fees decreased approximately $3,942,000
due to none being earned in Fiscal 1997.
Cost of services, which include fuel and other operations and
maintenance costs, increased approximately $763,000 during Fiscal 1997,
commensurate with service revenues from WCTP.
Cost of energy increased approximately $25,000,000 as a result of
the commencement of energy sales due to the acquisition of NAEC. The gross
margin from energy sales is subject to various market fluctuations and may
vary from year to year.
Selling, general and administrative expenses increased approximately
$1,840,000. The operations of NAEC accounted for approximately $1,135,000 of
the total increase in selling, general and administrative expenses, with the
remaining increase resulting from an additional $470,000 spent on payroll and
employee benefits in Fiscal 1997, due to salary increases and bonuses, and
increased consulting fees of approximately $360,000 for the development of
potential new markets.
Interest income-WCTP increased approximately $1,130,000. This was
mainly due to interest recorded by Cogen due on the note receivable from WCTP
which commenced in August, 1996 (see Note 5).
Interest and other income increased approximately $644,000.
Additional receipts of approximately $168,000 from AWH, recognized as other
income, in payment of certain amounts due to Cogen which were deferred in
prior years, accounted for a portion of this increase. The commencement in
December 1996 of general partner fees received by B-41LP from BNYLP accounted
for an increase in other income of approximately $299,000.
22
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on Page 33.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9 ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
23
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are:
Robert M. Beningson Chairman of the Board, President
and Chief Executive Officer
Michael Trachtenberg Executive Vice President, Chief
Financial and Accounting Officer
and Secretary
Robert C. Paladino Executive Vice President
Vito L. Elefante Vice President
Stanley Weinstein Director
Howard Sommer Director
Mr. Robert M. Beningson, 69, was elected a director of the Company
in October 1981. In February 1982, Mr. Beningson was elected Chairman of the
Board, President and Chief Executive Officer of the Company. Mr. Beningson is
Chief Executive Officer and Chairman of the Board of each of the Company's
subsidiaries. Previously, Mr. Beningson was Chairman of the Board of
Directors of the Company between 1968 and 1979.
Mr. Michael Trachtenberg, 49, a Certified Public Accountant, joined
the Company in January 1987 and was elected Vice President, Chief Financial
Officer and Secretary in March 1987. From November 1985, until joining the
Company, Mr. Trachtenberg was a financial consultant in private practice.
Prior thereto, Mr. Trachtenberg was Vice President-Finance and Chief
Financial Officer of S&S Corrugated Paper Machinery Co., Inc. From 1980 to
1984 Mr. Trachtenberg held various positions with Carter Day Industries,
Inc., an agricultural equipment manufacturer and energy and environmental
systems company, culminating in his appointments as Vice President, Treasurer
and Chief Financial Officer.
Mr. Robert C. Paladino, 47, joined the Company in January 1987 and
was elected Executive Vice President in April 1990. From October 1980 until
joining the Company, Mr. Paladino was Senior Vice President and General
Counsel of NPS Technologies Group, Inc., an engineering and construction
company serving the electric utility industry. From 1974 to 1980, Mr.
Paladino held various positions with the Edison Electric Institute, the
national organization for the investor-owned electric utility industry,
culminating in his appointment as Director of Fossil Fuels and Assistant to
the President.
Mr. Vito L. Elefante, 48, joined the Company in April 1998 and was
then elected Vice President. Prior to joining York, Mr. Elefante was Vice
President of Edison Mission Energy New York, Inc. and Executive Director of
Brooklyn Navy Yard Cogeneration Partners, L.P. Prior to that, Mr. Elefante
worked at Long Island Lighting Company for twenty years, where he was
responsible for independent power generation, purchasing and fuels. Mr.
24
<PAGE>
Elefante is excluded from Items 11 and 12, as he joined the Company
subsequent to February 28, 1998.
Mr. Stanley Weinstein, 72, was elected to the Board of Directors in
May, 1995. Until 1991, Mr. Weinstein was a partner at Deloitte and Touche,
certified public accountants, and since such date, has been an independent
consultant.
Mr. Howard Sommer, 57, was elected to fill a vacancy on the Board of
Directors in September, 1997. In September 1995, Mr. Sommer was elected the
President and Chief Executive Officer of New York Community Investment
Company L.L.C., an equity fund created and funded by eleven major banks in
New York City. Beginning in 1973, as President of U.S. Capital Corporation
and Fundex Capital Corporation, he managed finance and investment company
activities that provided over $100 million in funding to small businesses.
Prior to that time, Mr. Sommer served in a management capacity for IBM and
Xerox Corporation.
Mr. H. Clifton Whiteman, who had served as a Director of the Company
since July, 1991, resigned from the Board of Directors in June, 1997, and has
been excluded from all information on directors included in the Form 10-K for
the year ended February 28, 1998.
None of the directors or executive officers of the Company are
related to each other.
ITEM 11 EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation received by the
Company's Chief Executive Officer and the remaining most highly paid executive
officers for the three fiscal years ended February 28, 1998.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------
Awards Payouts
------------------- -------
Restr All Other
Other Stock Options/ LTIP Compen-
Salary Bonus Compensation Awards SAR's Payouts sation
Name & Principal Position Year ($) ($) ($)(2) ($) (#)(1) ($) ($)(3)
- -------------------------- ---- ------- ------- ------------ ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ROBERT M. BENINGSON 1998 400,681 0 0 0 0 0 18,568
Chairman, President & 1997 400,681 0 0 0 0 0 18,875
Chief Executive Officer 1996 400,681 0 0 0 0 0 12,109
MICHAEL TRACHTENBERG 1998 210,000 0 0 0 0 0 20,044
Executive Vice President & 1997 199,231 100,000 0 0 0 0 23,418
Chief Financial and Accounting 1996 190,000 0 0 0 0 0 14,699
Officer
ROBERT C. PALADINO 1998 210,000 0 0 0 0 0 20,044
Executive Vice President 1997 193,846 100,000 0 0 0 0 23,418
1996 179,538 0 15,000 0 0 0 14,699
</TABLE>
(1) The Company does not grant SAR's.
(2) Forgiveness of indebtedness.
(3) Represents the value of the Company's contribution to the ESOP
allocable to executives' accounts for such year.
25
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information on option grants in Fiscal
1998 to the named executive officers.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
% of Total
Options Alternative
Options Granted to Exercise Grant Date
Granted Employees in Price Expiration Present Value
Name (#) Fiscal Year ($/Share) Date ($)
------ ------- ------------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
ROBERT M. BENINGSON 0 N/A N/A N/A N/A
MICHAEL TRACHTENBERG 0 N/A N/A N/A N/A
ROBERT C. PALADINO 0 N/A N/A N/A N/A
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUE
The following table sets forth information on option exercises in
Fiscal 1998 by the named executive officers and the value of such officers
unexercised options at February 28, 1998.
<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired Unexercised Options In-the-Money Options
on Value at Fiscal Year End (#) at Fiscal Year End ($) (1)
Exercise Realized ------------------------------- -----------------------------
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
------ -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ROBERT M. BENINGSON 0 0 1,725,000 0 4,093,000 0
MICHAEL TRACHTENBERG 25,000 121,872 214,000 26,000 560,750 86,250
ROBERT C. PALADINO 4,000 15,000 177,000 15,000 478,125 48,125
</TABLE>
(1) Value calculated is the difference between closing price on the date of
exercise or year end, respectively, and the exercise price.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service (2)
Remuneration(1) 10 15 20 25 30 35+
- --------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
50,000 3,200 4,125 5,200 6,250 7,500 8,750
100,000 8,200 11,625 15,200 18,250 21,675 24,175
150,000 13,200 19,125 25,200 30,750 36,675 40,425
200,000 18,200 26,625 35,200 43,250 51,675 56,675
250,000 23,200 34,125 45,200 55,750 66,675 72,925
</TABLE>
(1) Based on highest five year average and includes annual salary and cash
bonus, if any.
(2) The years of credited service for individuals listed in the Summary
Compensation Table are 42 for Robert M. Beningson, 11 for Robert C.
Paladino, and 15 for Michael Trachtenberg.
26
<PAGE>
IRS regulations limit the amount of compensation credited for Pension
Plan purposes to $150,000 per year, subject to cost of living increases.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on its review of Forms 3, 4 and 5 submitted to it by is
Directors and Executive Officers, the Company is not aware of any
non-compliance with the reporting provisions of Section 16 by its Directors
or Executive Officers.
COMPENSATION OF DIRECTORS
Directors receive fees for attending Board or Committee meetings. In
both Fiscal 1998 and Fiscal 1997, Mr. Weinstein received $24,000. Mr. Sommer
received $10,000 in Fiscal 1998.
The Company has not entered into any employment contracts with any of
the herein named Officers or Directors.
SECURITY OWNERSHIP OF
ITEM 12 CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
a. Security Ownership of Certain Beneficial Owners
The following table sets forth the information indicated as of
February 28, 1998, as to all persons known by the Board of Directors to be
the beneficial owners of more than five percent of the Corporation's Common
Stock.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent of
of Beneficial Owner Beneficial Ownership Class (1)
- ------------------- -------------------- ----------
<S> <C> <C>
Robert M. Beningson 3,491,000 (1) (2) 20.9%
280 Park Avenue
New York, NY 10017
Stanley Weinstein 1,020,014 (1) (4) 6.8%
280 Park Avenue
New York, NY 10017
York Research Corp. 980,014 (1) 6.6%
Employee Stock Ownership Plan
280 Park Avenue
New York, NY 10017
</TABLE>
See note references below.
27
<PAGE>
b. Security Ownership of Management
The following table sets forth the information indicated as of
February 28, 1998 with respect to common stock of the Company beneficially
owned by directors and officers of the Company and by directors and officers
as a group:
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (1)
- ---------------- -------------------- ---------
<S> <C> <C>
Robert M. Beningson 3,491,000 (1)(2) 20.9%
Michael Trachtenberg 277,000 (1)(2) 1.8%
Robert C. Paladino 202,000 (1)(5) 1.3%
Stanley Weinstein 1,020,014 (1)(4) 6.8%
Howard Sommer 20,000 (1)(6) (6)
Directors and Officers 5,010,014 (1) 29.2%
as a group (5) persons
</TABLE>
(1) The Percent of Class is based upon 14,961,438 issued and outstanding
shares of common stock at February 28, 1998 plus the shares that
underlie unexercised warrants or options held by the individuals.
(2) Includes 824,000 shares owned directly, plus warrants to purchase
1,150,000 shares of common stock, options to purchase 575,000 shares of
common stock and 942,000 shares owned by RRR'S Ventures, Ltd., a
corporation controlled by Mr. Beningson.
(3) Includes 37,000 shares owned directly by Mr. Trachtenberg and options
to purchase 240,000 shares of common stock.
(4) Includes warrants to purchase 40,000 shares of common stock, and
980,014 shares held by the ESOP of which Mr. Weinstein is the trustee.
(5) Includes 10,000 shares owned directly by Mr. Paladino and options to
purchase 192,000 shares of common stock.
(6) Includes warrants to purchase 20,000 shares of common stock; less than
1% ownership.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Beningson is President and a major shareholder of RRR'S
Ventures, Ltd., a corporation in which the Chief Financial Officer of the
Company is also a minor shareholder, which is 25% general partner in WCTP,
limited partner in RV Associates L.P. ("RVA") (which in turn is a minority
partner in B-41LP), and 10% general partner in York Cogen Partners L.P.
("YCP"), a limited partner in B-41LP (see Note 4). Mr. Beningson is also a
15% shareholder in NAEC.
At February 28, 1998, WCTP was indebted to the Company for
approximately $5,620,000 related to operations and maintenance services and
other related receivables, for approximately $2,651,000 for loans to WCTP and
for professional
28
<PAGE>
services paid for on behalf of WCTP, for approximately $29,369,000 related to
the transfer of the Warbasse Facility, and indebted to YCP for $28,522,000
(see Note 5).
At February 28, 1998, Mr. Beningson was indebted to the Company for
$5,971,500 related to the exercise of warrants and purchase of common shares
in prior years. Mr. Trachtenberg is indebted to the Company for $214,860
related to the exercise of options. Mr. Paladino is indebted to the Company
for $399,000 related to the exercise of options and certain advances. All
these amounts are non-interest bearing and are payable on demand.
In March 1997, B-41LP settled all its obligations to SBCC for a cash
payment of $2,750,000. SBCC, in exchange for this cash payment gave up all
its interest in the future cash flow from the Brooklyn Navy Yard Project and
has no continuing interest in any of the Company's projects or assets. In
settling this obligation, B-41LP caused RVA and its partners to lose tax
benefits that they would have been able to utilize. Therefore, the Company
compensated RVA for its lost tax benefits in the total amount of $4 million.
The form of this non-cash transaction with RVA and its partners was the
exercise of 500,000 pre-existing warrants at $6 per share for a total of
$3,000,000, and the transfer of $1,000,000 of the Company's note receivable
from the Chairman to a nonconsolidated affiliate. This extinguishment of the
SBCC liability resulted in an extraordinary gain of approximately $5.6
million net of taxes, which was reflected in the first quarter of Fiscal 1998.
As of November 1, 1996, the Company acquired 85% of the shares of
NAEC for $1 from NAEC. Prior to the acquisition, all of the stock was owned
by the Company's chairman. The acquisition has been accounted for as a
purchase. In Fiscal 1997, prior to the acquisition, the Company recognized
approximately $924,000 as reimbursement of cost.
In the year ended February 28, 1997, the Company recorded
$11,000,000 of fees for services rendered through February 28, 1997 to WCTP
and RV Associates L.P. ("RVA"), two partnerships of which a company
controlled by the Company's chairman is the general partner. This amount was
included in service revenues. These fees were recorded pursuant to a services
agreement between WCTP, RVA, CTI and York. The services include ongoing
negotiations of consolidation agreements with Con Edison and Edison Mission
Energy, aiding in resolving various contract issues concerning WCTP's and
RVA's power purchase agreements with Con Edison, and various issues related
to the progress of the Brooklyn Navy Yard Project.
The Company recognizes that potential conflicts of interest may
arise by reason of the fact that Mr. Beningson controls RRR'S Ventures, Ltd.
and RVA, and is President and Chief Executive Officer of the Company. Mr.
Beningson has advised the Company that in all transactions between or
affecting any affiliated entity and the Company he will act in the best
interests of the shareholders of the Company, as determined by the Board of
Directors of the Company, excluding himself.
29
<PAGE>
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 14 AND REPORTS ON FORM 8-K
(1)(1) and (a)(2): See Index to Consolidated Financial Statements at Page 33.
(a)(3) Exhibits:
3(a) Certificate of Incorporation of the Company, as amended. (1)
3(a) (I) Certificate of Amendment to the Company's Certificate of
Incorporation as filed with the Secretary of State of the
State of Delaware on May 16, 1988.
3(b) Bylaws of the Company. (1)
4(a) Form of Certificate evidencing Common Stock, $.01 par value
per share, of the Company. (2)
10(o) Agreement for Construction of Additional Capacity, dated May
7, 1990, between Warbasse-Cogeneration Technologies
Partnership, L.P. and York Research Corporation. (3)
10(q) Lease and Energy Sale Agreement, dated December 18, 1989
between the Brooklyn Navy Yard Development Corporation and
Cogeneration Technologies, Inc., a wholly owned subsidiary of
the Company. (4)
10(r) Amended and Restated Limited Partnership Agreement by and
between Mission Energy New York, Inc. and B-41 Associates,
L.P., dated November 1, 1997, with Exhibits thereto. (9)
10(s) Stipulation of Settlement among counsel to plaintiffs in
litigation entitled In Re York Research Corporation Securities
Litigation, United States District Court, Southern District of
New York, Master File No. 91 Civ. 5040 (LJF), and counsel for
all defendants therein, dated January 15, 1993, with Exhibits
thereto. (5)
10(t) Final Judgment of Dismissal with Prejudice, In Re York
Research Corporation Securities Litigation, United States
District Court, Southern District of New York, Master File No.
91 Civ. 5040 (LJF). (5)
10(u) Amended and Restated Agreement of Limited Partnership of B-41
Associates L.P., dated December 26, 1992. (5)
10(bb) Promissory Note, dated November 17, 1994, made by
Warbasse-Cogeneration Technologies Partnership L.P. payable to
the order of Cogeneration Technologies, Inc. (8)
30
<PAGE>
10(cc) Security Agreement, dated as of November 17, 1994, made by
Warbasse- Cogeneration Technologies Partnership L.P. to
Cogeneration Technologies, Inc. (8)
10(dd) Assignment and Security Agreement, dated as of November 17,
1994, made by Warbasse-Cogeneration Technologies Partnership
L.P. to Cogeneration Technologies, Inc. (8)
10(ee) Intercreditor Agreement, dated as of November 17, 1994, by and
among Tomen Power Corporation, B-41 Associates, L.P.,
Cogeneration Technologies, Inc. and Warbasse-Cogeneration
Technologies Partnership L.P. (8)
10(ff) Restructuring Fee Agreement, dated as of November 17, 1994, by
and among Warbasse-Cogeneration Technologies Partnership L.P.,
B-41 Associates, L.P. and Cogeneration Technologies, Inc. (8)
10(gg) Subordinated Promissory Note, dated as of November 17, 1994,
made by Warbasse-Cogeneration Technologies Partnership L.P.
payable to the order of B-41 Associates, L.P. in the principal
amount of $3,000,000. (8)
10(hh) Subordinated Promissory Note, dated as of November 17, 1994,
made by Warbasse-Cogeneration Technologies Partnership L.P.
payable to the order of Cogeneration Technologies, Inc. in the
principal amount of $3,000,000. (8)
10(ii) Agreement of Limited Partnership of York Cogen Partners, L.P.
10(jj) Renegotiation and Payment Agreement dated February 28, 1997 by
and between Sanwa Business Credit Corporation and B-41
Associates, L.P.
10(kk) York Partners Reimbursement Agreement (PMNC) dated as of
November 1, 1997, among B-41 Associates, L.P., Brooklyn Navy
Yard Cogeneration Partners, L.P. and Edison Mission
Energy. (9)
10(ll) Amended and Restated Agreement of Limited Partnership of New
World Power Texas Renewable Energy Limited Partnership dated
as of September 29, 1997. (9)
10(mm) Renewable Resource Energy Purchase Agreement between Texas
Utilities Electric Company and New World Power Texas Renewable
Energy Limited Partnership dated September 13, 1994, and
Amendment No. 1 thereto dated November 25, 1996, Amendment No.
2 thereto dated February 19, 1997 and Amendment No. 3 thereto
dated August 29, 1997. (9)
10(nn) Wind Turbine Equipment Sales and Installation Contract dated
as of March 31, 1998 between York Research Corporation and
Vestas-American Wind Technology, Inc. (9)
21 Subsidiaries of the Company (9)
23 Consent of Independent Certified Public Accountants.
31
<PAGE>
(b) Consolidated Financial Statements
See Index to Consolidated Financial Statements at Page 33.
All other exhibits and financial statement schedules have been omitted
because they have been previously filed or incorporated by reference,
in the Company's Form 10-K for the fiscal year ended September 30,
1990, are inapplicable, or the required information is included
elsewhere in the Consolidated Financial Statements or the notes
thereto.
(c) Reports on Form 8-K
The following reports on Form 8-K were filed during the year ended
February 28, 1998:
None
(1) Previously filed as an Exhibit, under the corresponding exhibit number,
to the Company's Form 10-K for the fiscal year ended September 30,
1982, Commission file number 0-72, and incorporated herein by
reference.
(2) Previously filed as an Exhibit, under the corresponding exhibit number
with Registration Statement No. 33-13899 on April 30, 1987 and
incorporated herein by reference.
(3) Previously filed as an Exhibit with the Company's Form 10-Q for the
quarter ended June 30, 1990 and incorporated herein by reference.
(4) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended September 30, 1990 and incorporated herein by reference.
(5) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended February 28, 1993 and incorporated herein by reference.
(6) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended February 28, 1994 and incorporated herein by reference.
(7) Previously filed as an Exhibit with the Company's Form 10-Q for the
quarter ended August 31, 1994 and incorporated herein by reference.
(8) Previously filed as an Exhibit with the Company's Form 10-Q for the
quarter ended November 30, 1994 and incorporated herein by reference.
(9) To be filed by amendment.
32
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C>
York Research Corporation and Consolidated Subsidiaries:
Report of Independent Certified Public Accountants 34
Consolidated Financial Statements:
Consolidated Balance Sheets - February 28, 1998 and 1997 35
Consolidated Statements of Income for the Years Ended February 28,
1998, February 28, 1997 and February 28, 1996 36
Consolidated Statement of Stockholders' Equity for the Years Ended
February 28, 1998, February 28, 1997 and February 28, 1996 37
Consolidated Statements of Cash Flows for the Years Ended February 28,
1998, February 28, 1997 and February 28, 1996 38
Notes to Consolidated Financial Statements 39
through
65
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
York Research Corporation:
We have audited the accompanying consolidated balance sheets of York
Research Corporation and Subsidiaries as of February 28, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended February 28, 1998.
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 generally accepted auditing
standards. 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 consolidated financial position
of York Research Corporation and Subsidiaries at February 28, 1998 and 1997,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended February 28, 1998, in
conformity with generally accepted accounting principles.
Grant Thornton LLP
New York, New York
May 22, 1998
34
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, February 28,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,254,366 $11,513,026
Energy accounts receivable 64,655,498 7,900,114
Other receivables - related parties 6,026,479 8,298,806
Inventory - natural gas -- 1,312,086
Deferred tax asset 1,238,000 661,000
Other current assets (including advances to
employees of $85,700 and $146,300, respectively) 1,924,972 311,356
------------ ------------
Total current assets 84,099,315 29,996,388
Property, plant and equipment, net 577,058 602,428
Long-term receivable - WCTP 4,905,689 --
Construction in progress 4,187,134 --
Long-term note receivable - WCTP 49,490,535 49,490,535
Advances to minority partner -- 2,000,000
Other assets (including advances to employees and a
former director of $730,167 and $608,267, respectively) 1,929,723 2,402,082
Excess of investment over net assets acquired, net 298,568 337,940
------------ ------------
Total assets $145,488,022 $84,829,373
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Energy accounts payable $ 62,633,944 $ 8,652,263
Accrued expenses and other payables 7,237,081 3,772,284
Accrued income taxes 88,178 765,498
Current portion of deferred revenue 2,991,307 --
------------ ------------
Total current liabilities 72,950,510 13,190,045
Due to SBCC -- 19,982,000
Other long-term liabilities 942,146 884,949
Deferred revenue and other credits 3,287,000 3,460,000
Deferred tax liability 5,632,100 --
------------ ------------
Total liabilities 82,811,756 37,516,994
Minority interest in partnership 1,927,342 321,942
Commitments and contingencies -- --
Stockholders' equity
Common stock, Class A, $.01 par value; authorized
10,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized 50,000,000
shares; issued and outstanding 14,961,438 and
14,256,304 shares in 1998 and 1997, respectively 149,614 142,563
Additional paid-in capital 65,212,681 60,350,127
Accumulated earnings (deficit) 4,139,729 (4,083,050)
------------ ------------
69,502,024 56,409,640
Less:
Treasury stock, at cost (123,124 and 47,124
shares, respectively) (1,409,401) (706,401)
Notes receivable - sale of common stock (6,832,938) (7,960,313)
Deferred compensation - ESOP (510,761) (752,489)
------------ ------------
Total stockholders' equity 60,748,924 46,990,437
------------ ------------
Total liabilities and stockholders' equity $145,488,022 $84,829,373
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FEBRUARY 28,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Revenues:
Energy sales $489,192,939 $26,570,707 $ --
Services 13,786,604 19,756,615 14,391,749
------------ ----------- -----------
Total revenues 502,979,543 46,327,322 14,391,749
------------ ----------- -----------
Costs and expenses:
Cost of energy 488,045,224 25,112,691 --
Cost of services 7,606,762 6,216,115 5,452,869
Selling, general and administrative 9,520,248 7,859,239 6,019,547
Interest income - WCTP (4,510,531) (3,490,122) (2,359,531)
Interest and other (income) expense (2,727,772) (715,154) (70,764)
Minority interest in partnership 567,646 321,942 500,000
------------ ----------- -----------
Total costs and expenses 498,501,577 35,304,711 9,542,121
------------ ----------- -----------
Income before income taxes and extraordinary gain 4,477,966 11,022,611 4,849,628
Provision for income taxes 1,808,000 3,200,000 450,000
------------ ----------- -----------
Income before extraordinary gain 2,669,966 7,822,611 4,399,628
Extraordinary gain, net of tax and allocation to minority interest 5,552,813 -- --
------------ ----------- -----------
Net income $ 8,222,779 $ 7,822,611 $ 4,399,628
------------ ----------- -----------
------------ ----------- -----------
Earnings per share - Basic:
Per common share before extraordinary gain $0.19 $0.61 $0.38
Extraordinary gain 0.40 -- --
------------ ----------- -----------
Per common share $0.59 $0.61 $0.38
------------ ----------- -----------
------------ ----------- -----------
Weighted average number of common shares used in
computing basic earnings per share 14,022,387 12,782,551 11,666,395
------------ ----------- -----------
------------ ----------- -----------
Earnings per share - Diluted:
Per common share before extraordinary gain $0.17 $0.52 $0.35
Extraordinary gain 0.36 -- --
------------ ----------- -----------
Per common share $0.53 $0.52 $0.35
------------ ----------- -----------
------------ ----------- -----------
Weighted average number of common shares and common share
equivalents used in computing diluted earnings per share 15,561,125 15,090,393 12,648,091
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
Shares Paid-in Earnings Treasury Notes Deferred
Issued Amount Capital (Deficit) Stock Receivable Compensation
---------- -------- ----------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1995 12,610,594 $126,106 $49,619,995 $(16,305,289) $(706,401) $(7,393,408) $(3,455,491)
Exercise of options 222,957 2,230 776,045 -- -- (296,379) --
Exercise of warrants 207,727 2,077 970,843 -- -- -- --
Cash receipts -- -- -- -- -- 150,000 3,079,000
Deferred compensation accrual -- -- 263,958 -- -- -- 148,778
Issuance of shares to ESOP 288,500 2,885 1,089,334 -- -- -- (1,092,219)
Tax effect of options and warrants -- -- 1,013,000 -- -- -- --
ESOP third party loans -- -- -- -- -- -- (65,000)
Issuance of warrants -- -- 497,675 -- -- -- --
Net income -- -- -- 4,399,628 -- -- --
---------- -------- ----------- ------------- ---------- ------------ ------------
Balance, February 28, 1996 13,329,778 133,298 54,230,850 (11,905,661) (706,401) (7,539,787) (1,384,932)
Exercise of options 333,800 3,338 1,015,350 -- -- (420,526) --
Exercise of warrants 589,726 5,897 2,743,124 -- -- -- --
Donation of stock 3,000 30 30,345 -- -- -- --
Cash receipts -- -- -- -- -- -- 450,000
Deferred compensation accrual -- -- 342,458 -- -- -- 182,443
Tax effect of options and warrants -- -- 1,988,000 -- -- -- --
Net income -- -- -- 7,822,611 -- -- --
---------- -------- ----------- ------------- ---------- ------------ ------------
Balance, February 28, 1997 14,256,304 142,563 60,350,127 (4,083,050) (706,401) (7,960,313) (752,489)
Exercise of options 117,195 1,172 340,759 -- -- -- --
Exercise of warrants 587,939 5,879 3,491,413 -- -- (262,000) --
Deferred compensation accrual -- -- 351,382 -- -- -- 241,728
Tax effect of options and warrants -- -- 654,000 -- -- -- --
ESOP third party loans -- -- 25,000 -- -- -- --
Settlements of notes receivable -- -- -- -- (703,000) 1,389,375 --
Net income -- -- -- 8,222,779 -- -- --
---------- -------- ----------- ------------- ---------- ------------ ------------
Balance, February 28, 1998 14,961,438 $149,614 $65,212,681 $ 4,139,729 ($1,409,401) ($6,832,938) $(510,761)
---------- -------- ----------- ------------- ---------- ------------ ------------
---------- -------- ----------- ------------- ---------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income from operations $ 8,222,779 $ 7,822,611 $ 4,399,628
Adjustments to reconcile net income from operations to
net cash generated by (used in) operating activities:
Extraordinary gain (5,552,813) -- --
Depreciation and amortization 287,727 160,754 167,185
Deferred income taxes (577,000) 23,000 (684,000)
Non-cash charges 36,375 397,391 25,000
Common shares issued for services and donation -- 30,375 --
Amortization of deferred credits (1,717,897) -- (392,633)
ESOP contribution 593,109 524,901 412,736
Tax benefit of stock options and warrants 654,000 1,988,000 1,013,000
Increase in minority interest payable 1,605,400 -- --
Changes in operating assets and liabilities:
Increase in receivables (59,388,746) (10,988,635) (1,687,043)
Increase in construction in progress -- -- (2,984,374)
Net (increase) decrease in notes receivable, inventory,
other current assets, and other assets (191,251) (3,235,578) (246,483)
Net increase (decrease) in accounts payable, accrued
expenses, deferred revenue and long-term liabilities 62,039,879 5,156,465 (413,744)
Increase (decrease) in accrued taxes (677,320) 246,166 (118,151)
------------ ------------ -----------
NET CASH GENERATED BY (USED IN) OPERATING ACTIVITIES 5,334,242 2,125,450 (508,879)
------------ ------------ -----------
INVESTING ACTIVITIES:
Construction in progress (4,187,134) -- --
Purchase of machinery and equipment (222,985) (158,995) (144,697)
Purchase of NAEC, net of cash acquired -- 128,495 --
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (4,410,119) (30,500) (144,697)
------------ ------------ -----------
FINANCING ACTIVITIES:
Amounts received from ESOP -- 450,000 3,079,000
Proceeds from notes receivable -- -- 150,000
Payments on capital leases (10,006) (31,687) (17,545)
Payment of due to SBCC (2,750,000) (250,000) (250,000)
Proceeds from exercise of stock options and warrants 577,223 3,719,573 1,454,816
------------ ------------ -----------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES (2,182,783) 3,887,886 4,416,271
------------ ------------ -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,258,660) 5,982,836 3,762,695
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,513,026 5,530,190 1,767,495
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10,254,366 $ 11,513,026 $ 5,530,190
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
Non-cash investing and financing activities:
During Fiscal 1998, a non-cash transaction of $3,000,000 occurred as a
result of the exercise of 500,000 warrants at $6 per share, and a non-cash
transfer of $1,000,000 of notes receivable to a nonconsolidated affiliate
was recorded. In addition, the Company received a stock payment in-lieu of
cash as payment of an advance to an employee of $350,000 and a note
receivable of $389,376.
During Fiscal 1998, an advance distribution of $2,000,000 to RVA n a prior
year was offset against minority interest payable.
During Fiscal 1997, $28,808,535 was reclassified from construction in
process, other long-term receivables-WCTP and payment in-lieu of
performance bond-WCTP to notes receivable-WCTP.
During Fiscal 1997, the Company acquired 85% of the common stock of NAEC
for $1. The fair value of assets acquired was $4,587,849, and liabilities
assumed were $4,960,240.
During Fiscal 1997, a capital lease obligation of $211,060 was incurred
when the Company entered into leases for new equipment.
During Fiscal 1996, the Company issued 288,500 shares of common stock to
the ESOP, in exchange for a note receivable for $1,092,219.
During Fiscal 1998, 1997 and 1996, the Company received $262,000, $420,526
and $296,379 of notes receivable - sale of common stock, respectively, for
options exercised.
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
1. Nature of Business
York Research Corporation ("York" or the "Company") is a developer,
owner and marketer of energy related projects and products and through its
subsidiaries, partnerships, joint ventures and affiliates. The Company
currently participates in two broad areas of the energy business -- power
project development and services, including cogeneration and wind energy, and
the marketing of energy and natural gas in the wholesale power markets and
the wholesale and retail natural gas markets.
The principal markets for the Company's products and services
currently are the United States. Revenues are principally derived from
entities that supply, broker or market energy to utilities, residential
complexes, and industrial concerns.
2. 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
the 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.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of York and subsidiaries and
all majority owned partnerships include the accounts of Cogeneration
Technologies, Inc. ("Cogen"), B-41 Associates L.P. ("B-41LP"), B-41
Management Corporation ("B-41MC"), York Cogen Partners L.P. ("YCP"), York
Internet Power Services, Inc., North American Energy Conservation, Inc.
("NAEC"), York Research Canada, Inc. ("York Canada") and York Windpower
Corp., which is 100% owned by York Canada. All material intercompany profits
and transactions have been eliminated in consolidation. In addition, in
Fiscal 1998, new subsidiaries were formed in connection with new projects for
which no significant activity occurred through February 28, 1998.
39
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Revenue Recognition
The Company recognizes service revenues and energy sales in the
period in which the work is performed or the commodity is delivered.
Development fees received, which are included in service revenues, were
either amortized over the related development period, or recognized as
received, based on their nature.
Construction in Progress
Construction in progress includes engineering, professional fees,
equipment procurement costs, and other costs related to the projects under
development through February 28, 1998.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are being
depreciated or amortized on the straight-line method over their estimated
useful lives as follows:
Machinery and equipment 5-10 years
Furniture and fixtures 5-10 years
Motor vehicles 3 years
Leasehold improvements 5-8 years
Income Taxes
The Company utilizes the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under
SFAS No. 109, deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and
liabilities including any net operating loss and alternative minimum tax
credit carryforwards, using the enacted marginal tax rate. Deferred income
tax expense or benefits are based on the changes in the asset or liability
from period to period. Deferred tax assets are recognized to the extent
realization of such benefits are more likely than not.
40
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
Excess of Investment Over Net Assets Acquired, Net
The Company's acquisition of Cogen in 1985 resulted in an $828,000
excess of investment over net assets acquired, which is being amortized on a
straight-line basis over 20 years. Accumulated amortization at February 28,
1998 and 1997 is approximately $529,000 and $490,000, respectively. At each
balance sheet date, the Company evaluates the realizability of goodwill based
upon expectations of nondiscounted cash flows and operating income for each
subsidiary having a material goodwill balance. Based upon its most recent
analysis, the Company believes that no material impairment of goodwill exists
at February 28, 1998.
Long-Term Receivable and Note Receivable-WCTP
The realizability of the long-term receivable and note
receivable-WCTP is evaluated by the Company by review of the present value of
the currently expected future cash flow from the Warbasse facility.
Per Share Data
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
Earnings Per Share, which is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Early adoption of
the new standard was not permitted so SFAS No. 128 was adopted in the fourth
quarter of Fiscal 1998. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share together with disclosure of how the per share amounts were computed
for all periods presented. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average common shares outstanding for the period. Diluted earnings
per share reflects the weighted average common shares outstanding plus the
potential dilutive effect of securities or contracts which are in the money
and convertible to common shares, such as options and warrants, unless
antidilutive based upon income before extraordinary gain. The following is a
reconciliation of the number of basic to diluted shares used in the
computation of earnings per share for the years ended February 28, 1998, 1997
and 1996:
41
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding 14,776,882 13,705,557 12,885,674
Average of unreleased ESOP shares (754,495) (923,006) (1,219,279)
---------- ---------- -----------
Weighted average number of common shares
outstanding - basic 14,022,387 12,782,551 11,666,395
Dilution (warrants and options) 1,538,738 2,307,842 981,696
---------- ---------- -----------
Weighted average number of common share
and common share equivalents outstanding -
diluted 15,561,125 15,090,393 12,648,091
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The amounts shown as average of unreleased ESOP shares and dilution
(warrants and options) reflect the averages for the periods presented.
Options and warrants to purchase 175,000, 50,000 and 25,000 shares
of common stock were outstanding in Fiscal 1998, 1997 and 1996, respectively,
ranging from $9.63 to $11.00, $10.00 to $11.00, and $11.00 per share,
respectively, but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of common shares. The options and warrants, which expire between
April 26, 2000 and September 6, 2006, were still outstanding at February 28,
1998.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts and
other receivables, accrued expenses and accounts payable approximate fair
value, principally because of the short maturity of these items. For the fair
value of Due to SBCC, see Note 5. For long-term receivable and note
receivable-WCTP (see Note 5 for terms) and advances to minority partner (see
Note 14 for terms), there are no quoted market prices, and a reasonable
estimate of fair value could not be made without incurring excessive costs.
42
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
Inventory
Inventory consists of natural gas held in storage. The Company
accounts for its natural gas inventory using lower of cost or market, cost
being determined using the average cost method.
Reclassifications
Certain amounts in the 1997 and 1996 consolidated financial
statements were reclassified to conform to the 1998 presentation.
Significant New Accounting Pronouncements
The Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), governing the reporting and display of comprehensive income
and its components, and Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
No. 131"), requiring that all public businesses report financial and
descriptive information about their reportable operating segments. The
Company will implement SFAS 130 and SFAS 131 as required in Fiscal 1999. The
impact of adopting SFAS No. 130 is not expected to be material to the
consolidated financial statements or notes to consolidated financial
statements. Management is currently evaluating the effect of SFAS No. 131 on
consolidated financial statement disclosures.
The American Institute of Certified Public Accountant's Accounting
Standards Executive Committee recently issued Statement of Position 98-5
("SOP 98-5"), "Reporting on the Costs of Start-Up activities". SOP 98-5
requires that costs of start-up activities, including organization costs, be
expensed as incurred. Start-up activities are broadly defined and include
one-time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new
process in an existing facility, commencing some new operation, and
organizing a new entity. SOP 98-5 is generally effective for financial
statements for fiscal years beginning after December 15, 1998, with initial
application reported as the cumulative effect of a change in accounting
principle. The Company is currently evaluating the impact that SOP 98-5 will
have on the Company's financial statements.
43
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
4. Brooklyn Navy Yard
Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP") is owned
equally by a subsidiary of Edison Mission Energy ("Mission"), which is an
indirect wholly-owned subsidiary of Edison International, and B-41LP. BNYLP
was formed to develop, construct, finance, own and operate the 286 megawatt
("MW") natural-gas-fired, combined-cycle Brooklyn Navy Yard ("BNY") facility.
The facility has been operational since 1996 and supplies
Consolidated Edison of New York, Inc. ("Con Ed") with both electricity and
steam under a 40 year contract. Steam is delivered to Con Ed's New York City
district steam system. The facility also supplies energy to the host
industrial park and to an adjacent waste water facility.
The project began in 1989 when York executed a lease on the
abandoned Navy Yard coal fired power plant. In 1990, York and associated
entities submitted bids to Con Ed, and were awarded separate contracts for
three small plants to supply energy to Con Ed. These three successful parties
later combined their interests (totaling 170 MW) to form B-41LP (which is
74.7% owned by York) and began negotiations to supply the power and steam
from a single larger plant by initiating permitting activities and purchasing
equipment. In order to finance further development and construction, B-41LP
sold 50% of the project to Mission. York and Mission proceeded to complete
development and construction of the larger project and negotiated a new 40
year integrated energy supply contract with Con Ed. The project entered
service at the end of 1996.
B-41LP was formed to more effectively develop and manage the
original partners' investments in the BNY facility. The profit sharing and
ownership percentages in the B-41LP partnership agreement, as amended, are as
follows:
1. RV Associates L.P. ("RVA"), whose limited partner, RRR'S
Ventures Ltd., and general partner are controlled by the
Chairman of the Company, is a 5% general partner. B-41MC, a
wholly-owned subsidiary of York, is also a 5% general partner.
2. RVA is also a 15% limited partner. RVA contributed a power
purchase agreement totaling 40 MW.
44
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
3. Cogen, a wholly-owned subsidiary of York, is a 22% limited
partner. Cogen contributed a power purchase agreement totaling
40 MW.
4. YCP is a 53% limited partner. RRR'S Ventures Ltd. is the 10%
general partner of YCP, and York is the 90%
limited partner in YCP. YCP contributed a power
purchase agreement totaling 90 MW.
For tax purposes, depreciation, operating losses and capital
transactions are subject to other sharing percentages.
The BNYLP partnership agreement as amended contains provisions,
among other things, with respect to the allocation of cash flow and tax
depreciation under various circumstances, profits and losses both before and
after Mission's advances have been repaid, management of the Partnership, and
dispute resolution. B-41LP and Mission have amended the Partnership agreement
to reflect certain changes pertaining to funding obligations, management, and
operations.
Upon formation of BNYLP, all of the project-related assets, contract
rights, leases or other intangible assets that had been accumulated by the
Company and B-41LP during the pre-joint venture development period, as well
as all related liabilities, were transferred to BNYLP. Although BNYLP
accounts for B-41LP's contribution at an agreed upon value of $7,000,000,
B-41LP recorded its investment in BNYLP at the historical carrying value of
the assets contributed of zero. B-41LP accounts for its investment in BNYLP
under the equity method.
For the years ended February 28, 1997 and 1996, BNYLP's only
activity was the construction, testing and operation of the BNY facility. As
capacity payments from Con Edison did not start until March 1997, BNYLP did
not recognize any revenues, expenses, or operating profits or losses prior to
that date. The summarized financial information of BNYLP as of and for the
years ending February 28, 1998 and 1997 is as follows:
45
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1998 1997
------------- -------------
<S> <C> <C>
Current assets $ 20,283,000 $ 23,797,000
Noncurrent assets $494,515,000 $454,747,000
Current liabilities $ 20,679,000 $204,234,000
Noncurrent liabilities $501,942,000 $253,926,000
Net assets $ (7,823,000) $ 20,384,000
Total revenues $128,259,000 $ 0
Net loss $(28,142,000) $ 0
</TABLE>
On November 1, 1996, the BNY facility commenced operations,
generating electricity and steam in accordance with its contracts. Long-term
project financing was completed on December 17, 1997 with the sale of $100.0
million aggregate principal amount of Senior Secured Bonds Due 2020 and
$307.0 million aggregate principal amount of New York City Industrial
Development Agency Industrial Development Revenue Bonds due from 2022 to
2036. The Company provided no guarantees with regard to this financing, and
has no obligation to provide funding of any sort. As a result of this
financing, and as compensation for services rendered, the Company received a
fee of $6 million from Mission, which was included in Service Revenues in the
fourth quarter of Fiscal 1998. The Company also expects to receive continuing
general partner and other fees over the 40 year life of the project.
In March 1997, the Company settled all of its obligations related to
this project with a financing entity for $2,750,000, plus other consideration
(see Note 5).
In consideration for certain development services for the BNY
facility performed by the Company, RVA has assumed the obligation for certain
loans from Mission totaling $9,750,000 which are repayable only from amounts
received from third party BNYLP financings or BNY facility operations. In
addition, RVA has also accepted a reduced share of development fees and
reimbursements.
As of February 28, 1998, the Company and B-41LP have received a
total of $21,541,000 for development fees, a nonrefundable commission from a
vendor in connection with the procurement of certain BNYLP equipment, and for
reimbursement of development costs net of related liabilities assumed by
BNYLP. In Fiscal 1996, the Company recognized development fee revenue of
$3,267,000. At February 28, 1998, revenues of $3,287,000 were deferred, which
is one half of the nonrefundable commission deferred until the equipment was
placed in service, less $173,000 recognized in Fiscal 1998. The deferred
balance will be
46
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
recognized over the remaining estimated useful life of the related equipment
of twenty years.
In accordance with the joint venture agreement, the Company provides
engineering services for BNYLP. During Fiscal 1998, 1997 and 1996, the
Company recognized revenue from engineering services of approximately
$465,000, $838,000 and $780,000, respectively, which are reflected in service
revenues and cost of services. During Fiscal 1997 and 1996, the Company also
recognized reimbursements of $2,500,000 and $5,000,000, respectively, for
certain engineering and other costs a portion of which had been expensed in
prior periods. At February 28, 1998 and 1997, the Company had receivables
from BNYLP of approximately $50,000 and $280,000, respectively, related to
engineering services. These amounts are included in other receivables and
were fully collected subsequent to the respective year ends.
Commencing December 1, 1996 through December 31, 1997, BNYLP paid
general partner fees to B-41LP equal to 2.5% of gross monthly revenues of the
Brooklyn Navy Yard project. B-41LP in turn paid a general partner fee of
1.25% of gross monthly revenues to each of B-41MC and RVA. Pursuant to the
amended partnership agreement, the general partner fee was reduced to .5% of
gross revenues for the four years commencing January 1, 1998. In the years
ended February 28, 1998 and 1997, B-41MC recognized general partner fees of
approximately $1,355,000 and $299,000, respectively, with receivables of
approximately $420,000 and $167,000 at February 28, 1998 and 1997,
respectively. Royalty fees of approximately $1,078,000 were recognized during
Fiscal 1998. These royalties, which are equal to 4.5% of gross revenues,
commenced in January 1998, and will continue for four years. RVA has agreed
not to share in these royalties.
Pursuant to the provisions of the partnership agreement, Mission
retains the right to take all the votes on the Management Committee that
controls the day to day operations of BNYLP. If Mission decides to exercise
its right to cast all votes on the BNYLP Management Committee, B-41LP still
remains a 50% general and limited partner in the Navy Yard project and
retains all its other rights.
In February 1997, the general contractor of the Brooklyn Navy Yard
facility brought an action in California against BNYLP seeking damages of
$137 million for amounts owed under the turnkey contract and denying
liability under various claims. BNYLP responded to the complaint, denying all
the allegations contained therein and commenced an action in New York against
the general contractor denying any liability under the turnkey contract and
seeking damages in excess of
47
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
$13 million pursuant to various counterclaims. In addition, BNYLP has been
named as one of the defendants in another action relating to the construction
activity of the Brooklyn Navy Yard facility. Although it is a general partner
of BNYLP, B-41LP was not served in these complaints and is not a party to any
of the actions. Mission has agreed to indemnify both BNYLP and B-41LP against
any costs resulting from the Contractor's action. B-41LP has agreed to
reimburse Mission for 25% of the excess over $10 million of such costs, if
any, with an aggregate limit of $10 million, payable solely out of B-41LP's
partnership fees and distributions and further limited to $1 million per year
for 1998, 1999 and 2000, and $2 million per year thereafter.
Like other large projects of this nature, the BNY cogeneration
facility is subject to various risks. There can be no assurance that the
facility, although completed, will operate at sufficient levels to cover all
operation and maintenance expenses and debt service. The Company has no
liability for any such shortfalls, although if the shortfalls occur, they
could impact the general partner and royalty fees mentioned above.
5. Warbasse Project
In May 1990, an agreement was entered into between
Warbasse-Cogeneration Technologies Partnership L.P. ("WCTP") (see Note 14)
and the Company whereby the Company agreed to construct the expansion of the
Warbasse facility converting it from the engine facility previously
constructed for WCTP by the Company, to a larger gas turbine facility (the
"Warbasse Project") to enable it to service Con Edison pursuant to the
existing contract between WCTP and Con Edison.
The Company also contracted with WCTP to provide operations and
maintenance services for the Warbasse Project at its direct cost. The
services agreement includes providing fuel, operating, manning and
maintaining the facility. The Company operates the Warbasse Facility,
supplying on a continuous basis all the thermal and electric energy needs of
the host, Amalgamated Warbasse Houses, Inc., and supplying up to the full
capacity requirements of its electric power contract with Con Edison, when
dispatched. During Fiscal 1998, 1997 and 1996, the Company recognized
approximately $7,200,000, $5,400,000 and $4,700,000, respectively, for
operations and maintenance services revenues, which has been reflected in
service revenues. Cost of services for the same periods was approximately
$7,200,000, $5,400,0000 and $4,700,000, respectively.
48
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
On July 27, 1994, B-41LP purchased from Sanwa Business Credit Corp.
("SBCC") the note obligation of WCTP to SBCC together with all related
collateral and ancillary rights owned by SBCC. In payment, SBCC would have
received a share of the cash flow, if any, from the BNY project. The note
obligation of WCTP to B-41LP (the "B-41LP Note") has been recorded as a
Long-term note receivable - WCTP and has a face value of $28,522,000, which
includes accrued interest. This obligation is payable from a portion of the
net operating cash flow of the Warbasse project. On December 1, 1996, this
note obligation of WCTP (herein after referred to as the YCP Note) was
assigned to YCP by B-41LP. The YCP Partnership Agreement was amended to
provide that the amounts received by YCP in respect of the note obligation
shall be distributed 74.7% to York and 25.3% to RRR'S, its minority partner,
which are the same distribution percentages as were held by York and
affiliates of RRR'S in B-41LP.
The YCP Note has been reflected in the consolidated balance sheet at
an amount equal to the initial obligation to SBCC. The $7,840,000 difference
between the face amount of the note and the amount reflected will be adjusted
to income over time as principal payments of the long-term note receivable
are made by WCTP.
The obligation of B-41LP to SBCC had been recorded as Due to SBCC of
$20,682,000, which was the net present value of the maximum annual amount
payable to SBCC, over 30 years discounted at 7%. In March 1997, B-41LP
settled all its obligations to SBCC for a cash payment of $2,750,000. SBCC,
in exchange for this cash payment, gave up all its interest in the future
cash flow from the Brooklyn Navy Yard Project and has no continuing interest
in any of the Company's projects or assets. In settling this obligation,
B-41LP caused RVA and its partners to lose tax benefits that they would have
been able to utilize. Therefore, the Company compensated RVA for its lost tax
benefits in the total amount of $4 million. The form of this non-cash
transaction with RVA and its partners was the exercise of 500,000
pre-existing warrants at $6 per share for a total of $3,000,000, and the
transfer of $1,000,000 of the Company's note receivable from the Chairman to
a nonconsolidated affiliate. This extinguishment of the SBCC liability
resulted in an extraordinary gain of approximately $5.6 million net of taxes
of $4.3 million and minority interest of approximately $3.4 million, which
was reflected in the first quarter of Fiscal 1998.
On November 17, 1994, the YCP Note due from WCTP was restructured
along with other long-term debt of WCTP. Such other long-term debt of WCTP
includes a note payable to Tomen Power Corporation ("Tomen") and
49
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
includes a note payable to Cogen. The three notes will share in the net
operating cash flow of WCTP, as defined, pro rata in proportion to the
principal balances of the notes, and would share pari passu in the collateral
of WCTP in the event of a default. Management expects that all three notes
will be paid from the operations of WCTP, and each note carries an interest
rate of LIBOR plus 2%. In addition, YCP and Cogen will receive a
restructuring fee of $3,000,000 each, to be paid the year after the three
notes are fully paid.
The Company completed construction of the project, and on August 1,
1996, the Warbasse Facility was transferred by Cogen to WCTP, in exchange for
a Note Receivable of $28,808,535. The Note Receivable represents the total
construction cost of the facility plus (1) the unpaid balance of
approximately $1,530,000 in Other long-term receivables-WCTP at February 28,
1996, which related to operation and maintenance services performed for WCTP
in prior periods, (2) a $500,000 payment made to WCTP in lieu of a
performance bond and (3) an accrual for the remaining construction tasks
which generally relate to improving efficiency and operational control.
Therefore, the caption Long-term note receivable-WCTP on the balance sheet
consists of:
<TABLE>
<S> <C>
YCP Note $20,682,000
Cogen Note 28,808,535
-----------
$49,490,535
-----------
-----------
</TABLE>
Interest income on these notes amounted to approximately $4,510,000,
$3,490,000 and $2,360,000 for Fiscal 1998, 1997 and 1996, respectively.
6. Receivables - Related Parties
Other receivables - related parties at February 28, 1998 and 1997
consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Service and other receivables - WCTP $4,479,165 $8,019,190
Engineering service and general
partner and royalty fee receivables -
BNYLP 1,547,314 279,616
----------- ----------
$6,026,479 $8,298,806
----------- ----------
----------- ----------
</TABLE>
Included in long-term receivable-WCTP are receivables related to
operations and maintenance services and certain advances. These amounts are
non-interest bearing.
50
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
7. Property, Plant and Equipment
Property, plant and equipment at February 28, 1998 and 1997 consist
of the following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Machinery and equipment $ 1,094,629 $ 925,099
Furniture and fixtures 254,209 249,980
Motor vehicles 315,448 315,448
Leasehold improvements 85,290 36,064
------------ -----------
1,749,576 1,526,591
Less: accumulated depreciation (1,172,518) (924,163)
------------ -----------
$ 577,058 $ 602,428
------------ -----------
------------ -----------
</TABLE>
8. Construction in Progress
a) Big Spring Wind Project
On October 21, 1997, York acquired 100% of the partnership
interests in New World Power Texas Renewable Energy Limited Partnership,
whose significant asset was a power purchase agreement with Texas Utilities
Electric Company. York has commenced procurement and other preconstruction
tasks, and currently expects full commercial operation by February 1999. When
completed, the facility is expected to have a capacity of 35 MW and include
46 turbines, including four 1,650 Kilowatt ("kW") wind turbines. Through
February 28, 1998, the total costs incurred related to the development and
construction of this project were approximately $3,002,000, which is included
in construction in progress.
b) Trinidad Power Project
On February 12, 1998, InnCogen Ltd., a wholly owned indirect
subsidiary of York, signed a power purchase agreement with Trinidad and
Tobago Electricity Commission ("T&TEC") to supply electricity under a 30 year
contract. The Company has plans to construct a 215 MW natural gas fueled
combustion turbine project. Through February 1998, the total costs
capitalized that relate to the development and construction of this project
were approximately $1,185,000, which is included in construction in progress.
51
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
9. Accrued Expenses and Other Payables
Accrued expenses and other payables at February 28, 1998 and 1997
include:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable other
than energy $3,013,000 $2,113,000
Professional fees 1,190,000 537,000
Taxes other than income 780,000 445,000
Accrued pension cost 376,000 398,000
Other 1,878,000 279,000
---------- ----------
Total accrued expenses and
other payables $7,237,000 $3,772,000
---------- ----------
---------- ----------
</TABLE>
10. Stockholders' Equity
Common Stock - The Company has authorized 50,000,000 shares of
common stock. In addition, the Company has authorized 10,000,000 shares of
Class A common stock, none of which have been issued. Each Class A common
share has one/hundredth of a vote as compared with the regular common stock
and is entitled to a $.20 dividend priority before any dividends are payable
on the full voting common stock.
Incentive Stock Option ("ISO") Plan - In 1982, the Company
authorized 1,400,000 qualified stock options, which have all been granted.
The 1982 Plan expired on April 26, 1992. In September 1993, the Company
adopted the 1993 ISO Plan, authorizing a total of 3,000,000 qualified and
nonqualified stock options, of which 2,045,500 qualified stock options were
granted to employees, and 41,000 nonqualified stock options were granted to
two consultants to the Company.
Options granted under both plans may not be granted at a price less
than the fair market value of the Common Stock on the date of grant (or 110%
of fair market value in the case of persons holding 10% or more of the voting
stock of the Company). Options granted under the Stock Option Plans will
expire not more than ten years from the date of grant.
In Fiscal 1998 and 1997, the Company granted 451,500 and 150,000
options, respectively, to employees of the Company. No options were granted
in Fiscal 1996. The exercise price of the options is equal to the fair market
value of the common stock at the date of the grant. These options vest over
five and three year periods, respectively.
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, Accounting for Stock Based Compensation (FAS
52
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
123). It applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans and does
not recognize compensation expense for its stock based compensation plans. If
the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed by FAS 123, the Company's net income and income per
share would be decreased to the pro forma amounts indicated below for the
year ended February 28, 1998 and 1997:
<TABLE>
<CAPTION>
As reported Proforma
----------- ----------
<S> <C> <C>
Year ended February 28, 1998
Net Income:
Net income before
extraordinary item $2,669,966 $2,077,669
Net income $8,222,779 $7,630,482
Income per share:
Basic:
Income before
extraordinary item $0.19 $0.15
Net income $0.59 $0.54
Diluted:
Income before
extraordinary item $0.17 $0.13
Net income $0.53 $0.49
Year ended February 28, 1997
Net Income $7,822,611 $7,698,490
Income per share
Basic $0.61 $0.60
Diluted $0.52 $0.51
</TABLE>
53
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before March 1, 1995. The fair value of these options was estimated
at the date of grant using Black-Scholes option-pricing model with the following
weighted-average assumptions for the years ended February 28, 1998 and 1997:
<TABLE>
<CAPTION>
For the year ended February 28,
1998 1997
---------- ----------
<S> <C> <C>
Volatility 71% 79%
Risk free rate 6.77% 6.98%
Expected life 10 years 10 years
Forfeiture rate 8% 33%
</TABLE>
The weighted average fair value of options granted during Fiscal
1998 and 1997, for which the exercise price equals the market price on the
grant date, was $5.61 and $7.64, respectively, and the weighted average
exercise price was $6.88 and $8.96, respectively.
Stock option activity during Fiscal 1998, 1997 and 1996 is summarized
below:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Balance, February 28, 1995 2,216,900 $4.37
Exercised (222,957) 4.24
Canceled (23,543) 4.23
----------
Balance, February 28, 1996 1,970,400 4.36
Granted 150,000 8.96
Exercised (333,800) 3.79
Canceled (40,773) 4.17
----------
Balance, February 28, 1997 1,745,827 4.90
Granted 451,500 6.88
Exercised (154,219) 4.36
Canceled (40,000) 7.44
----------
Balance, February 28, 1998 2,003,108 $5.34
----------
----------
</TABLE>
At February 28, 1998, 1997 and 1996, 1,460,980, 1,361,313 and
1,496,252, options, respectively, were exercisable.
54
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
Weighted-Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
- -------- ----------- ---------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.00-$4.50 685,223 6.44 $3.19 638,023 $3.20
$4.51-$6.75 627,085 4.91 $5.36 599,885 $5.36
$6.76-$10.00 690,800 8.12 $7.45 223,072 $8.05
----------- -----------
2,003,108 1,460,980
----------- -----------
----------- -----------
</TABLE>
Warrants - All warrants are exercisable upon grant, although the
underlying shares may not necessarily be registered, and the warrants expire
up to ten years. The exercise prices of the warrants are the NASDAQ closing
prices of the Company's common stock at the dates of grant.
In February and March 1988, the Company's Chairman exercised
warrants to purchase 850,000 shares of common stock in exchange for cash and
a noninterest bearing note totaling $3,531,250. In September 1989, the
Company's Chairman exercised warrants to purchase 625,000 shares of common
stock in exchange for cash and a noninterest bearing note payable on demand
totaling $3,706,250. In Fiscal 1992, the Company's Chairman repaid $600,000.
In Fiscal 1998, $1,000,000 of the Company's note receivable from the Chairman
was transferred to a nonconsolidated affiliate (see Note 5). These notes,
which total $5,971,500 and $6,971,500, respectively, at February 28, 1998 and
1997 are included in Notes receivable - sale of common stock. In June, 1996,
the Company's Chairman gifted 100,000 warrants to various third parties.
The following table presents Mr. Beningson's total number of
warrants outstanding as of February 28, 1998 (see Note 5):
<TABLE>
<CAPTION>
Date of # Warrants Price Per
Grant Held Share
- -------- ---------- ---------
<S> <C> <C>
1/91 350,000 $6.00 (reset from $8.00 on 7/16/93)
7/93 800,000 $6.00
---------
1,150,000
---------
---------
</TABLE>
In July 1995, Stanley Weinstein, a director of the Company, was
granted warrants to purchase 20,000 shares of the Company's common stock at
$5.44 per share through 2005. In September, 1997, warrants to purchase 20,000
shares of the Company's common stock at $7.31 per share were granted each to
Stanley Weinstein and Howard Sommer directors of the Company.
In Fiscal 1997, a former director of the Company exercised warrants
to purchase a total of 300,000 shares of the Company's common stock in
exchange for $1,387,500. In Fiscal 1996, this former director exercised
warrants to purchase a total of 200,000 shares in exchange for $925,000. At
February 28, 1998, this former Director holds warrants to purchase 700,000
shares of common stock which expire in 2002 and specify a purchase price of
$4.63.
55
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
During Fiscal 1998, a vice president of Cogen exercised warrants to
purchase 50,000 shares of common stock in exchange for cash and a note for
$262,000.
In July 1993, warrants were granted to purchase 75,000 shares of the
Company's common stock at a purchase price of $6.00 per share to three
entities that have performed various consulting services for the Company. In
September 1995, December 1995 and March 1996, warrants were granted at prices
ranging from $5.13 to $5.88 to purchase 30,000, 32,500 and 20,000 shares,
respectively, of the Company's common stock, to consultants that have
performed various services for the Company. During Fiscal 1997, 10,000
warrants were exercised for $51,250, and 25,000 warrants were exercised for
$137,500.
The Company has outstanding two classes of common stock purchase
warrants, which were issued in connection with the settlement of litigation
in 1993, as amended. As of February 28, 1998, there were outstanding Class B
Warrants evidencing the right to purchase 131,180 shares, which have the
following attributes: (i) an Exercise Price of $6.15; (ii) the Company has
the right to reduce the Exercise Price at any time; (iii) pursuant to an
agreement dated October 31, 1997, the Company redeemed 10% of outstanding B
Warrants in April, 1998 at $11.50 per warrant, and has agreed to redeem an
additional 10% on April 1, 1999 and the balance on April 1, 2000 at $11.50
per Warrant share and (iv) the redemption obligation is secured by a 17.5%
limited partnership interest in BNYLP, held by B-41LP. During the year ended
February 28, 1998, the Company recorded an expense of approximately $301,000
relating to this redemption. As of February 28, 1998, there were also
outstanding Class C Warrants evidencing the right to purchase 91,834 shares
at an exercise price of $6.50 per share, which Warrants expire between
September 27, 1998 and October 4, 1998, and have no redemption provisions.
In the aggregate, at February 28, 1998, warrants to purchase
2,707,391 shares of the Company's common stock at prices ranging from $4.50
to $11.00 were outstanding, expiring through 2005.
11. Employee Benefit Plans
Employee Savings Plan
During 1988, the Company adopted the York Research Corporation
401(k) Plan ("401(k) Plan"). The 401(k) Plan allows employees of the Company
to defer a portion of their earnings on a pre-tax basis through contributions
to the 401(k) Plan. The Company may at its discretion make a contribution to
the 401(k) Plan. To date the Company has elected not to contribute to the
401(k) Plan.
Defined Benefit Plan
The Company has a defined benefit pension plan covering
substantially all employees not covered by a collective bargaining agreement.
The benefits are based on years of service and the highest consecutive five
years of the employees' compensation. The Company's funding policy is to
contribute annually the amount necessary to satisfy the Internal Revenue
Service's funding standards. Contributions are intended to provide, not only
for benefits attributed to service to date, but also for those expected to be
earned in the future.
56
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
Pension cost for the years ended February 28, 1998, 1997 and 1996
include the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Service cost -
benefits earned during
the current period $ 33,967 $ 30,756 $ 28,568
Interest cost on projected
benefit obligation 109,857 104,757 87,520
Actual return on plan assets (38,453) (39,633) (36,716)
Net amortization and deferral (9,966) (4,263) 4,178
-------- -------- -------
Net pension cost $ 95,405 $ 91,617 $83,550
-------- -------- -------
-------- -------- -------
</TABLE>
For all periods presented, the weighted average discount rate was
8.5% and rate of increase in future compensation levels was 3% used in
determining the actuarial present value of the projected benefit obligation.
The expected long-term rate of return on plan assets is 8.5%.
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheet as of February 28, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation $1,084,852 $1,195,570
----------- ----------
----------- ----------
Accumulated benefit obligation $1,065,017 $1,216,018
----------- ----------
----------- ----------
Projected benefit obligation $1,115,731 $1,292,437
Plan assets at fair value 693,325 860,810
----------- ----------
Unfunded obligation 422,406 431,627
Unamortized net transition obligation (97,440) (111,949)
Unrecognized net (gain) loss 102,832 78,357
----------- ----------
Accrued pension cost $427,798 $398,035
----------- ----------
----------- ----------
</TABLE>
Employee Stock Ownership Plan
During 1988, the Company adopted an Employee Stock Ownership Plan
("ESOP") that covers substantially all employees. Effective March 1, 1994,
the Company adopted the provisions of Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). The following
table presents the number of shares of common stock, which were unregistered
at the time and subsequently registered, the ESOP purchased from the Company,
at prices which represented 70% of the NASDAQ closing prices at the date of
purchase:
57
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
<TABLE>
<CAPTION>
Purchased in # Shares Purchase
Fiscal Year Purchased Price
- ------------- --------- -----------
<S> <C> <C>
1996 288,500 $ 1,092,219
1993 and prior 3,500,000 13,370,000
--------- -----------
3,788,500 $14,462,219
--------- -----------
--------- -----------
</TABLE>
Management believes the valuation represented the fair market value
of the unregistered shares on those dates.
The Company contributed approximately $593,000, $525,000 and
$413,000 to the ESOP during Fiscal 1998, 1997 and 1996, respectively. The
Company makes annual contributions to the ESOP as determined by the Board of
Directors and subject to certain limitations dictated by tax regulations.
To purchase the shares from the Company, the ESOP borrowed funds
from the Company. Repayment of these loans has been and is expected from
employer contributions, borrowing by the ESOP from third parties, and by sale
of unreleased ESOP shares to third parties. The Company has recorded all
amounts loaned to the ESOP as deferred compensation, a contra-equity account,
and has included the third party loans to the ESOP in other long-term
liabilities. Certain of the unreleased ESOP shares are used as collateral for
a third party loan to the ESOP.
During the quarter ended August 31, 1993, the ESOP borrowed
$1,150,000 from third parties. These funds, along with an additional
$12,987,000 generated through February 28, 1998 by the sale of the Company's
stock owned by the ESOP, were used to repay the demand purchase money loans
due to the Company. The $1,150,000 initially borrowed by the ESOP was
included in other long-term liabilities and as deferred compensation, a
contra-equity account, and had a balance of approximately $511,000 and
$626,000 at February 28, 1998 and 1997 as a result of repayments by the ESOP.
The ESOP incurred interest expense of approximately $43,000, $72,500 and
$65,000, respectively, related to these loans during Fiscal 1998, 1997 and
1996.
ESOP shares are released and allocated to participant accounts based
upon Company contributions and certain payments made to reduce ESOP debt to
the Company. The Company reports compensation expense as shares are committed
to be released equal to the current market price of the shares, and the
shares then become outstanding for earnings-per-share ("EPS") computations.
58
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
A summary of the ESOP shares as of February 28, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Allocated shares 608,002 551,649
Shares released for allocation 74,665 56,353
Unreleased shares 714,530 867,995
---------- ---------
1,397,197 1,475,997
---------- ---------
---------- ---------
Fair value of unreleased shares
at February 28, 1998 and 1997 $5,061,711 $8,028,954
---------- ---------
---------- ---------
</TABLE>
12. Income Taxes
The provision (benefit) for income taxes for each of the three years
ended February 28, 1998 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal $ 833,000 $ 602,000 $ 75,000
State and local 898,000 587,000 46,000
----------- ---------- ---------
1,731,000 1,189,000 121,000
----------- ---------- ---------
Deferred:
Federal (475,000) (89,000) (399,000)
State and local (102,000) 112,000 (285,000)
----------- ----------- ----------
(577,000) 23,000 (684,000)
----------- ----------- ----------
Tax benefits allocated directly to
additional paid-in capital:
Federal 590,000 1,577,000 275,000
State and local 64,000 411,000 738,000
----------- ----------- ---------
654,000 1,988,000 1,013,000
----------- ----------- ---------
Provision $1,808,000 $3,200,000 $450,000
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
Through the fiscal year ended September 30, 1994, the Company filed
its tax returns based on a September year-end. On July 18, 1995, the Internal
Revenue Service granted the Company permission to file its tax returns on a
February year-end, effective February 28, 1995. At February 28, 1998, the
Company had the following net operating loss carryforwards for federal income
tax purposes:
<TABLE>
<CAPTION>
Year of Expiration Amount
- ------------------ ---------
<S> <C>
September 30, 2007 $ 936,000
September 30, 2009 155,000
----------
$1,091,000
----------
----------
</TABLE>
During the year ended February 28, 1997, the Company utilized all of
its alternative minimum tax net operating loss carryforwards. The difference
between these loss carryforward amounts is attributable to adjustments
required in the alternative minimum tax computation.
59
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
Internal Revenue Code Section 382 places a limitation on the
utilization of carryforwards when an ownership change, as defined in the tax
law, occurs. Generally, an ownership change occurs when there is a greater than
50 percent change in ownership. If such a change should occur, the actual
utilization of carryforwards, for tax purposes, would be limited annually to a
percentage, approximately 5%, of the fair market value of the Company at the
time of such change.
The reconciliation between the effective tax rate and the statutory
federal income tax rate for each of the three years ended February 28, 1998
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Amount computed using the
statutory rate $1,523,000 $ 3,748,000 $ 1,646,000
Increase (reduction) in taxes
resulting from:
Increase (utilization) of
federal loss carryforwards -- (1,248,000) (1,391,000)
Reduction in valuation allowance
for loss carryforwards -- (434,000) (684,000)
Imputed interest income on
loans (4,000) 153,000 171,000
Nondeductible expenses 391,000 207,000 194,000
Foreign losses 80,000 6,000 325,000
Litigation settlement -- (45,000) 169,000
Intangibles (49,000) -- --
Valuation allowances on other
temporary differences (658,000) (522,000) (383,000)
State and local taxes, net
of federal tax benefit
and state loss carryforwards 567,000 733,000 329,000
Alternative minimum tax 20,000 602,000 75,000
Other (62,000) -- (1,000)
----------- ------------ -----------
$1,808,000 $3,200,000 $ 450,000
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
60
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
The components of the net current deferred tax asset and long-term
deferred tax liability as of February 28, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current deferred tax asset
Loss carryforwards $ 1,565,000 $ 1,624,000
Credit carryovers 694,000 675,000
Accrued expenses 247,000 26,000
----------- -----------
2,506,000 2,325,000
Less: Valuation allowance (903,000) (1,337,000)
----------- -----------
Total current deferred
tax asset 1,603,000 988,000
----------- -----------
Current deferred tax liability
Partnership items 419,000 338,000
Other (54,000) (11,000)
----------- -----------
Total current deferred
tax liability 365,000 327,000
----------- -----------
Net current deferred
tax asset 1,238,000 661,000
Long-term deferred tax liability
Long-term note receivable -
WCTP (5,632,100) --
----------- -----------
Net deferred tax asset
(liability) $(4,394,100) $ 661,000
----------- -----------
----------- -----------
</TABLE>
During the year ended February 28, 1998, the reduction in the
valuation allowance of $434,000 was the result of current utilization of net
operating losses of $95,000, current additions for other deferred tax assets
of $27,000, and the recognition of $366,000 of additional deferred tax asset,
based on the Company's expectation of future taxable income.
The deferred tax asset relating to net operating loss carryforwards
for February 28, 1998 and 1997 include tax benefits of $287,000 for stock
options and warrants that were allocated directly to additional paid-in
capital in 1997.
The Company paid income taxes for:
Year ended February 28, 1998 $1,192,000
Year ended February 28, 1997 $ 608,000
Year ended February 28, 1996 $ 298,000
61
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
13. Lease Obligations
Future minimum annual rental payments for real property, required
under leases and having terms of more than one year at February 28, 1998, are
as follows:
<TABLE>
<CAPTION>
Operating
Leases
----------
<S> <C>
1999 $ 660,000
2000 614,000
2001 619,000
2002 619,000
2003 619,000
Thereafter 356,000
----------
Total minimum lease payments $3,487,000
----------
----------
</TABLE>
In July 1990, in connection with a lease for office space, the
Company received from the prior tenant a rent subsidy equal to the difference
between the market rate for the premises and the rental provided for in the
lease. This subsidy, which totaled $625,000, was paid to the Company in April
1991 and was being amortized over the life of the lease as a monthly
reduction to rent expense. At February 28, 1995, the unamortized balance was
$126,000. In May 1995, the lease was restructured and the remaining
unamortized balance of $72,000 was recognized. The restructuring of the lease
extended the life to 2003 at a reduced expense, and added another 2,500
square feet of office space.
Total rent expense for operating leases was approximately $513,000
in Fiscal 1998, $505,000 in Fiscal 1997, and $623,000 in Fiscal 1996.
The Company leases equipment under leases that have been classified
as capital leases for financial statement purposes. As of February 28, 1998,
included in property, plant and equipment are the following assets held under
capital leases:
<TABLE>
<S> <C>
Machinery and equipment $378,525
Accumulated depreciation 111,385
--------
$267,140
--------
--------
</TABLE>
62
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
Future minimum lease payments for assets under capital leases at
February 28, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 56,788
2000 56,788
2001 56,788
2002 37,820
2003 --
--------
208,184
Less: Amount representing
Interest 34,489
--------
Present value and net
minimum lease payments $173,695
--------
--------
</TABLE>
14. Related Party Transactions
In Fiscal 1998 and 1997, the Company paid Mr. Weinstein $24,000 for
directors fees, and in Fiscal 1998 and Fiscal 1996, granted warrants to
purchase 20,000 shares of the Company's common stock at $7.31 and $5.44 per
share, respectively. During Fiscal 1998, the Company paid Mr. Sommer $10,000
for directors fees, and granted warrants to purchase 20,000 shares of the
Company's common stock at $7.31 per share
Mr. Beningson is President and a major stockholder of RRR'S, which
is a 25% general partner of WCTP, limited partner of RVA, and a 10% general
partner of YCP. In Fiscal 1998 and 1997, RVA was allocated approximately
$568,000 and $322,000, respectively, of the interest income on the YCP Note
(see Note 5). In Fiscal 1996, RVA received $500,000 which was the minority
portion of the income of B-41LP. In Fiscal 1993, RVA received an advance
distribution of $2,000,000 from B- 41LP, which was charged against capital,
concurrent with the allocation of income during Fiscal 1998.
As discussed in Note 5, WCTP contracted with the Company to procure,
construct, design and place in operation a cogeneration facility. The
Company's Chairman and Chief Financial Officer are shareholders of the
general partner of WCTP. The general partner of WCTP receives a general
partners fee of 1% of WCTP revenues and an administrative services payment of
4% of WCTP revenues. The limited partners are not related parties to the
Company. The general partner may have the potential for substantial future
distributions from WCTP.
In the year ended February 28, 1997, the Company recorded
$11,000,000 of fees for services rendered through February 28, 1997 to WCTP
and RVA. This amount was included in service revenues. These fees were
recorded pursuant to a services agreement between WCTP, RVA, CTI and York.
The services included ongoing negotiations of consolidation agreements with
Con Edison and Edison
63
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
Mission Energy, aiding in resolving various contract issues concerning WCTP's
and RVA's power purchase agreements with Con Edison, and various issues related
to the progress of the Brooklyn Navy Yard Project.
Mr. Beningson is president and was previously the sole shareholder
of NAEC. The Company had an agreement with NAEC which provided for the
Company to be reimbursed for all costs associated with its activities related
to NAEC and the Company received a fee mutually agreed upon based on level of
activity. In Fiscal 1997, prior to acquisition of 85% of the shares of NAEC
(see Note 15), the Company recognized approximately $924,000 as reimbursement
of costs, and no power brokerage fees. In Fiscal 1996, the Company recognized
$1,200,000 as reimbursement of costs, and power brokerage fees of $675,000.
15. Acquisition of NAEC
As of November 1, 1996, the Company acquired 85% of the shares of
NAEC for $1 from NAEC. Prior to the acquisition, all of the stock was owned
by the Company's chairman. The acquisition has been accounted for as a
purchase and the operations of NAEC have been reflected as of the acquisition
date.
The following table reflects unaudited pro forma combined results of
operations for the Company and NAEC on the basis that the acquisition had
taken place at the beginning of the fiscal year:
<TABLE>
<CAPTION>
For the Year Ended
February 28,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues $70,048,380 $32,006,011
----------- -----------
Net Income $7,388,152 $ 2,717,124
----------- -----------
Net Income per Common Share $0.49 $0.18
----------- -----------
Shares Used in Computation 15,487,779 15,512,011
----------- -----------
</TABLE>
In managements' opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of the periods presented or of
future operations of the combined companies under the ownership and management
of the Company.
64
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------
16. Significant Customers and Contracts and Commitments
Energy sales were derived from numerous retail customers and utilities.
Each customer accounted for less than 10% of total revenues during Fiscal 1998.
Two utilities accounted for approximately 20% and 15%, respectively, of the
total revenues in Fiscal 1997.
As part of its marketing operations, the Company routinely enters into
commitments for the purchase of electric and gas energy. The Company obtains
similar commitments from its customers.
The Company uses put and call options, and futures contracts
("Instruments") in various combinations, to hedge physical positions in
electricity and natural gas as well as occasionally for trading purposes. All
of these Instruments are settled in the underlying commodity. The ultimate
impact of these Instruments will be determined by the prevailing applicable
market price.
NAEC has sold call options related to the wholesale electric
business and collected premiums totaling approximately $3 million at February
28, 1998. Of this amount, approximately $2.9 million will be recognized as
revenue in Fiscal 1999, offset by approximately $.7 million of prepaid
brokerage fees and call option expense.
NAEC has a revolving line of credit of $20,000,000, which is
guaranteed by its assets, and further guaranteed by the Company. The line of
credit bears interest at one quarter percent per annum over the prime rate.
At February 28, 1998, there was no loan amount outstanding.
On March 31, 1998, York executed a contract with Vestas Wind Systems
A/S totaling approximately $31 million for the purchase of wind turbines for
the Big Spring project.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
YORK RESEARCH CORPORATION
- --------------------------
(Registrant)
/s/ Robert M. Beningson /s/ Michael Trachtenberg
- ---------------------------------- ------------------------------
Robert M. Beningson Michael Trachtenberg
President, Chief Executive Officer Executive Vice President;
Chairman of the Board Chief Financial and Accounting
May 27, 1998 Officer; Secretary
May 27, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
/s/ Robert M. Beningson
- -----------------------------
Robert M. Beningson
Director
May 27, 1998
/s/ Stanley Weinstein
- -----------------------------
Stanley Weinstein
Director
May 27, 1998
/s/ Howard Sommer
- -----------------------------
Howard Sommer
Director
May 27, 1998
66
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated May 22, 1998 accompanying the consolidated
financial statements included in the Annual Report of York Research
Corporation and Subsidiaries on Form 10-K for the year ended February 28,
1998. We hereby consent to the incorporation by reference of said report in
the Registration Statements of York Research on Forms S-3 (File No. 33-36056,
effective August 16, 1990; File No. 33-73616, effective November 2, 1994;
File No. 33-89418, effective February 22, 1995; File No. 33-90654, effective
April 6, 1995; File No. 333-10035, effective August 29, 1996; and File No.
333-14151, effective October 24, 1996) and on Forms S-8 (File No. 33-63730,
effective June 3, 1993; File No. 33-67616, effective August 20, 1993; File
No. 33-75850, effective March 2, 1994; File No. 33- 74730, effective July 2,
1994; and File No. 333-11781, effective September 11, 1996).
GRANT THORNTON LLP
New York, New York
May 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AS OF AND FOR
THE PERIODS ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 10,254,366
<SECURITIES> 0
<RECEIVABLES> 64,655,498
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,099,315
<PP&E> 577,058
<DEPRECIATION> 1,172,518
<TOTAL-ASSETS> 145,488,022
<CURRENT-LIABILITIES> 72,950,510
<BONDS> 0
0
0
<COMMON> 149,614
<OTHER-SE> 60,599,310
<TOTAL-LIABILITY-AND-EQUITY> 145,488,022
<SALES> 489,192,939
<TOTAL-REVENUES> 502,979,543
<CGS> 488,045,224
<TOTAL-COSTS> 17,127,010
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,477,966
<INCOME-TAX> 1,808,000
<INCOME-CONTINUING> 2,669,966
<DISCONTINUED> 0
<EXTRAORDINARY> 5,552,813
<CHANGES> 0
<NET-INCOME> 8,222,779
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.53
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Consolidated Balance Sheets and Consolidated Statements of Operations as of and
for the periods ended February 28, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-1-1996
<PERIOD-END> FEB-28-1997
<CASH> 11,513,026
<SECURITIES> 0
<RECEIVABLES> 7,900,114
<ALLOWANCES> 0
<INVENTORY> 1,312,086
<CURRENT-ASSETS> 29,996,388
<PP&E> 602,428
<DEPRECIATION> (924,163)
<TOTAL-ASSETS> 84,829,373
<CURRENT-LIABILITIES> 13,190,045
<BONDS> 0
0
0
<COMMON> 142,563
<OTHER-SE> 46,847,874
<TOTAL-LIABILITY-AND-EQUITY> 84,829,373
<SALES> 26,570,707
<TOTAL-REVENUES> 46,327,322
<CGS> 25,112,691
<TOTAL-COSTS> 31,328,806
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,022,611
<INCOME-TAX> 3,200,000
<INCOME-CONTINUING> 7,822,611
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,822,611
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.52
</TABLE>
