<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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
---------------------------------------
(Exact name of registrant as specified)
Delaware 06-0608633
-------- ----------
(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
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 557-6200
---------------------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this report
14,882,762.
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, February 28,
1998 1998
--------------- ---------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $8,611,670 $10,254,366
Energy accounts receivable 76,878,634 64,655,498
Other receivables - related parties 7,751,842 6,026,479
Deferred tax asset 1,238,000 1,238,000
Other current assets (including advances to employees and
directors of $95,500 and $85,700, respectively) 1,767,679 1,924,972
--------------- ---------------
Total current assets 96,247,825 84,099,315
Property, plant and equipment, net 672,465 577,058
Long-term receivable - WCTP 6,314,375 4,905,689
Construction in progress 9,923,315 4,187,134
Long-term note receivable - WCTP 49,490,535 49,490,535
Deferred charge 5,696,500 --
Other assets (including advances to an employee and a director
of $725,167 and $730,167, respectively) 1,923,479 1,929,723
Excess of investment over net assets acquired, net 288,725 298,568
--------------- ---------------
Total assets $170,557,219 $145,488,022
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Energy accounts payable $75,973,076 $62,633,944
Loan payable 1,353,324 --
Accrued expenses and other payables 9,346,212 7,237,081
Accrued income taxes 482,016 88,178
Current portion of deferred revenue 3,626,269 2,991,307
--------------- ---------------
Total current liabilities 90,780,897 72,950,510
Other long-term liabilities 1,048,655 942,146
Deferred revenue and other credits 3,243,750 3,287,000
Deferred tax liability 5,632,100 5,632,100
--------------- ---------------
Total liabilities 100,705,402 82,811,756
Minority interest in partnership 2,072,096 1,927,342
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
15,005,886 and 14,961,438 shares, respectively 150,059 149,614
Additional paid-in capital 65,504,269 65,212,681
Accumulated earnings 4,887,492 4,139,729
--------------- ---------------
70,541,820 69,502,024
Less:
Treasury stock, at cost (123,124 shares) (1,409,401) (1,409,401)
Notes receivable - sale of common stock (918,981) (6,832,938)
Deferred compensation - ESOP (433,717) (510,761)
--------------- ---------------
Total stockholders' equity 67,779,721 60,748,924
--------------- ---------------
Total liabilities and stockholders' equity $170,557,219 $145,488,022
--------------- ---------------
--------------- ---------------
</TABLE>
* Derived from audited financial statements as of February 28, 1998
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
For the Three
Months Ended May 31,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues:
Energy sales $221,779,849 $45,762,694
Services 1,393,804 1,662,658
---------------- ----------------
Total revenues 223,173,653 47,425,352
---------------- ----------------
Costs and expenses:
Cost of energy 219,960,369 45,976,249
Cost of services 1,364,338 1,665,920
Selling, general and administrative 3,092,124 2,622,289
Interest income - WCTP (1,126,667) (1,133,821)
Interest and other (income) expense (1,615,085) (521,062)
Minority interest in partnership 141,811 142,711
---------------- ----------------
Total costs and expenses 221,816,890 48,752,286
---------------- ----------------
Income (loss) before income taxes and extraordinary gain 1,356,763 (1,326,934)
Provision for income taxes 609,000 --
---------------- ----------------
Income (loss) before extraordinary gain 747,763 (1,326,934)
Extraordinary gain, net of tax and allocation to minority interest -- 5,436,367
---------------- ----------------
Net income $747,763 $4,109,433
---------------- ----------------
---------------- ----------------
Earnings (loss) per share - Basic:
Per common share before extraordinary gain $0.05 ($0.10)
Extraordinary gain -- 0.39
---------------- ----------------
Per common share $0.05 $0.29
---------------- ----------------
---------------- ----------------
Weighted average number of common shares used in
computing basic earnings per share 14,220,837 13,898,547
---------------- ----------------
---------------- ----------------
Earnings (loss) per share - Diluted:
Per common share before extraordinary gain $0.05 ($0.10)
Extraordinary gain -- 0.39
---------------- ----------------
Per common share $0.05 $0.29
---------------- ----------------
---------------- ----------------
Weighted average number of common shares and common share
equivalents used in computing diluted earnings per share 15,463,157 13,898,547
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income from operations $ 747,764 $ 4,109,433
Adjustments to reconcile net income to net cash generated
by (used in) operating activities:
Extraordinary gain -- (5,436,367)
Depreciation and amortization 74,247 67,921
Amortization of deferred credits (760,488) (43,250)
ESOP contribution 175,507 155,151
Changes in operating assets and liabilities:
Increase in receivables (13,948,499) (11,710,529)
Net (increase) decrease in notes receivable, inventory,
other current assets, and other assets (1,249,717) 606,578
Net increase in accounts payable, accrued expenses, deferred
revenue, long-term liabilities and minority interest 14,085,788 12,749,748
Increase (decrease) in accrued taxes 393,838 (667,851)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (481,560) (169,166)
------------ ------------
INVESTING ACTIVITIES:
Construction in progress (2,737,708) --
Repayment of note receivable 275,000 --
Purchase of machinery and equipment (159,811) (130,552)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,622,519) (130,552)
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from line of credit 1,357,892 --
Payment of due to SBCC -- (2,750,000)
Payment on capital leases (32,536) (3,517)
Proceeds from exercise of stock options and warrants 136,027 196,214
------------ ------------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES 1,461,383 (2,557,303)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,642,696) (2,857,021)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,254,366 11,513,026
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,611,670 $ 8,656,005
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
In the opinion of management, the accompanying consolidated,
unaudited financial statements contain all adjustments necessary to present
fairly York Research Corporation and Subsidiaries' ("York" or the "Company")
consolidated financial position as at May 31, 1998 and results of operations
and cash flows for the three months ended May 31, 1998 and 1997.
Certain financial information which is normally included in
financial statements prepared in accordance with generally accepted
accounting principles, but which is not required for interim reporting
purposes, has been condensed or omitted. The accompanying financial
statements need to be read in conjunction with the financial statements and
notes thereto included in the Registrant's Form 10-K.
Any adjustments that have been made to the financial statements are
of a normal recurring nature.
(2) 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 quarters ended May 31, 1998 and
1997:
5
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
May 31,
-------
1998 1997
---------- ----------
<S> <C> <C>
Weighted average number of common shares
outstanding 14,862,062 14,718,422
Average of unreleased ESOP shares (641,225) (819,875)
---------- ----------
Weighted average number of common shares
outstanding - basic 14,220,837 13,898,547
Dilution (warrants and options) 1,242,320 -0-
---------- ----------
Weighted average number of common share
and common share equivalents outstanding -
diluted 15,463,157 13,898,547
---------- ----------
---------- ----------
</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 389,300 shares of common stock were
outstanding at May 31, 1998, ranging from $8.00 to $11.00, 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. For the quarter ended May 31, 1997, options and warrants to purchase
4,370,134 shares of common stock ranging from $3.30 to $11.00 were not
included in the computation of diluted earnings per share because their
effect would be antidilutive. The options and warrants, which expire between
April 26, 2000 and September 6, 2006, were still outstanding at May 31, 1998.
(3) Construction In Progress
a) Big Spring 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, including executing a contract with Vestas Wind Systems A/S for the
purchase of wind turbines. York currently expects full commercial operation
by February 1999. When completed, the facility is expected to have a capacity
of 34 MW and include 46 turbines, including four 1,650 Kilowatt ("kW") wind
turbines. At May 31, 1998 and February 28, 1998, the total costs incurred
related to the development and construction of this project were
approximately $7,379,000 and $3,002,000, which are included in construction
in progress.
6
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) Trinidad 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 plans to construct a 225 MW natural gas fueled
combustion turbine project for commercial operation by fall 1999. At May 31,
1998 and February 28, 1998, the total costs capitalized that relate to the
development and construction of this project were approximately $2,543,000
and $1,185,000, which are included in construction in progress.
c) Commitments
In connection with the Big Spring and Trinidad projects, the Company
has entered into various contracts, aggregating approximately $102 million,
related to construction of the facilities. At May 31, 1998 $4.6 million has
been incurred toward these contracts and has been included in construction in
progress on the accompanying balance sheet.
(4) 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 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.
(5) Related Party Transaction
On May 31, 1998 the Chairman paid $275,000 of the long-term note he
owes to the Company.
7
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also on May 31, 1998, an agreement was reached to facilitate and
maximize a potential private placement financing to be used for the
construction and completion of the Big Spring and Trinidad projects. As a
result of the potential financing, funds will also be available for general
corporate purposes such as development of future projects. The agreement was
between the Company, York Cogen Partners, L.P. ("YCP") and the minority
interests in YCP and B-41 Associates, L.P ("B-41LP").
Pursuant to this agreement, the minority interests have agreed to
assign and subordinate their interests in various cash flows from the
Brooklyn Navy Yard and Warbasse facilities to the bond holders.
In addition, the minority interests in B-41LP have agreed as of
January 1, 1998 to forgo completely their 25.3% interest in the royalty to be
received from the BNY facility. This royalty will continue through December
31, 2001 at a projected total amount of approximately $6 million per year.
In exchange, the Company has agreed to transfer the balance of the
note due from the Chairman of $5,696,500 to the minority interests. This
transfer resulted in a deferred charge on the Company's balance sheet. The
deferred charge will be amortized partially over a nine year period, the
expected life of the financing, and the balance over the period the royalty
from the BNY facility will be received.
(6) Settlement of Obligation
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
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 RV
Associates L.P. ("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 $5.4 million net of taxes
of approximately $4.4 million and an allocation to the minority interest of
approximately $3.3 million.
8
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
Liquidity and Capital Resources
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 15 year power purchase agreement with Texas Utilities Electric
Company ("TU Electric"), which may be extended for two five year periods.
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 34 MW and include 46 turbines,
including four 1,650 Kilowatt ("kW") wind turbines.
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 in the manner described above.
Trinidad and Tobago Project
The Company has commenced procurement, engineering and other
preconstruction development tasks for a 225 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, as amended, 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 supported by a guarantee of the Trinidad
government. The Trinidad project is also expected to supply energy to several
proposed new industrial developments.
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 in the manner described
above.
9
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
Project Finance
The Company is seeking to arrange a long-term private placement
project financing, which will provide full funding for construction and
completion of the Big Spring project and the Trinidad project, as well as
additional funds for general corporate purposes and future development
activities. This financing will be underwritten by a major investment bank
and be non-recourse to York but will be secured by cash flow generated by the
Brooklyn Navy Yard ("BNY") and Warbasse facilities, as well as cash flow and
assets of the Big Spring and Trinidad projects. There can be no assurance
that this financing will be successfully completed or will be of sufficient
size to provide for all anticipated needs.
Brooklyn Navy Yard ("BNY") Facility
Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), a joint
venture, was formed on October 19, 1992. BNYLP is owned and controlled
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-41LP"), in which the Company is a
majority partner.
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. 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, payable solely out of B-41LP's partnership fees
and distributions from BNYLP. The Company expects to receive continuing
general partner and other fees over the 40 year life of the project.
Like other large projects of this nature, the BNY cogeneration
project 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.,
when dispatched.
10
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
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
recorded approximately $1,127,000 and $1,134,000 of interest income on its
long-term notes receivable from WCTP for the quarters ended May 31, 1998 and
1997, respectively.
NAEC
The Company's energy marketing subsidiary, North American Energy
Conservation, Inc. ("NAEC"), has experienced dramatic revenue growth since
the Company acquired it in November 1996. Revenues have increased from
approximately $46 million in the quarter ended May 31, 1997 to approximately
$222 million in the quarter ended May 31, 1998. The Company expects this
business to continue to grow and improve its margins, although revenue growth
will not be at the pace experienced to date. 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 for trading purposes. All of these
Instruments are settled in the underlying commodity. The ultimate impact of
these Instruments, either positive or negative, 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 $3.6 million as of May
31, 1998. Of this amount, approximately $3.2 million will be recognized as
revenue in the remaining nine months of Fiscal 1999, offset by approximately
$171,000 of prepaid brokerage fees and call option expense.
As with all commodity, marketing and trading businesses, NAEC's
operations are strongly affected by the underlying market conditions.
Although wherever reasonably possible, attempts are made to hedge and
minimize these risks, there can be no assurance that these hedging efforts
will be effective and there can be no assurance that NAEC will not experience
losses from operations from time to time, in some portion of its energy
marketing business. Recently a segment of the electric market has been
unusually volatile. The company cannot determine the overall impact of this
volatility, if any, on NAEC at this time.
General
Cash used in operating activities during the three months ended May
31, 1998 was approximately $207,000, as compared to approximately $169,000
used during the three months ended May 31, 1997. During the current period
net income of approximately $748,000 was offset by a net decrease in certain
operating assets over operating liabilities of approximately $443,000, and
amortization of deferred credits of approximately $760,000.
11
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
During the three months ended May 31, 1997, net income of
approximately $4,109,000 included a non-cash extraordinary gain of
approximately $5,436,000, which was offset by a net increase of certain
operating liabilities over operating assets of approximately $978,000.
During the three months ended May 31, 1998, cash generated by
financing activities was approximately $1,461,000, as compared to
approximately $2,557,000 used during the three months ended May 31, 1997.
During the current period, approximately $1,358,000 was generated from the
proceeds from a line of credit, and approximately $136,000 was generated by
the exercise of stock options and warrants. During the quarter ended May 31,
1997, $2,750,000 was used to settle an obligation with Sanwa Business Credit
Corp., and approximately $514,000 was generated by the exercise of stock
options and warrants.
The Company has begun construction and development of its Big Spring
project and its Trinidad project. The Company has no significant capital
commitments other than capital commitments of approximately $102 million
related to these projects.
Forward-Looking Statements
This report may contain certain forward-looking statements regarding
the Company, its business, prospects and results of operations that are
subject to certain risks and uncertainties posed by many factors and events
that could cause the Company's actual business, prospects and results of
operations to differ materially from those that may be anticipated by such
forward- looking statements. Factors that may affect such forward-looking
statements include, without limitation: the Company's ability to successfully
develop and finance new projects and new products; the impact of competition
on the Company's revenues; changes in law or regulatory requirements that
adversely or positively affect the Company; delays in the Company's
development of new projects; and/or changes in unit prices, supply and demand
and the liquidity of the markets for electricity and natural gas.
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.
12
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
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
Total energy revenues increased approximately $176 million, when
comparing the quarter ended May 31, 1998 to the quarter ended May 31, 1997,
predominantly in the natural gas market.
Of the total revenues for the quarter ended May 31, 1998, $169
million related to natural gas and $53 million related to electricity. In the
prior year approximately $30 million of revenues related to the sale of
natural gas and $15.8 million related to the sale of electricity.
Gross margins in the quarter ended May 31, 1998 were $2.2 million
for natural gas and ($.4) million for electricity. The natural gas market is
a stable, highly liquid market that has been fully deregulated for many
years. The electric market is currently in the process of being deregulated
and is much less liquid. Therefore, the Company's natural gas business has
been, and will continue to be two thirds or greater of the total energy
marketing business, and has been and is expected to continue to be more
profitable than the electric business for the foreseeable future. Gross
margins on the energy business will be impacted by changes in unit prices,
supply, liquidity in the markets and seasonal factors.
Service revenues and cost of services, which include fuel and other
operations and maintenance costs, during the three months ended May 31,1998
decreased approximately $302,000 compared to the three months ended May 31,
1997. This was due mainly to a decrease in fuel costs.
Selling, general and administrative expenses increased approximately
$470,000 when comparing the three months ended May 31, 1998 to May 31, 1997.
Payroll and employee benefits increased approximately $81,000, due to
additional personnel and increased insurance costs. Financing costs increased
approximately $138,000, as a result of interest and other costs associated
with the revolving line of credit. Expenses also increased approximately
$161,000 as a result of recognition of the redemption of Class B Warrants.
Professional fees increased approximately $54,000.
Interest and other income increased approximately $1,094,000 for the
three months ended May 31, 1998. The commencement in January 1998 of royalty
fees received by B-41LP from BNYLP accounted for an increase in other income
of approximately $1,469,000. This increase was offset by a decrease in
general partner fees received by B-41LP from BNYLP of approximately $329,000.
13
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
The current period income tax provision of $609,000 was based on the
annual effective tax rate applied to the income for the quarter ended May 31,
1998. There was no provision for income tax in the prior period, as there was
a loss for the quarter ended May 31, 1997.
During the quarter ended May 31, 1997, the Company recorded an
extraordinary gain in connection with the settlement of an obligation.
14
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. Legal Proceedings
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) There were no reports on Form 8-K filed during the three
months ended May 31, 1998.
15
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 13, 1998 /s/Robert M. Beningson
------------------------
Robert M. Beningson
Chairman of the Board and
President
Dated: July 13, 1998 /s/ Michael Trachtenberg
------------------------
Michael Trachtenberg
Executive Vice President
and Chief Financial and
Accounting Officer
16
<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 May 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 8,611,670
<SECURITIES> 0
<RECEIVABLES> 76,878,634
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 96,247,825
<PP&E> 672,465
<DEPRECIATION> (1,236,922)
<TOTAL-ASSETS> 170,557,219
<CURRENT-LIABILITIES> 90,780,897
<BONDS> 0
0
0
<COMMON> 150,059
<OTHER-SE> 67,629,662
<TOTAL-LIABILITY-AND-EQUITY> 170,557,219
<SALES> 221,779,849
<TOTAL-REVENUES> 223,173,653
<CGS> 219,960,369
<TOTAL-COSTS> 1,364,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,356,763
<INCOME-TAX> 609,000
<INCOME-CONTINUING> 747,763
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 747,763
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
