<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 August 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 14,885,264.
------------
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, February
1998 1998
------------- -------------
(Unaudited) *
ASSETS
Current Assets:
Cash and cash equivalents $ 31,018,823 $ 10,254,366
Natural gas accounts receivable 60,137,739 47,245,168
Other receivables - related parties 4,793,138 6,026,479
Deferred tax asset 5,982,611 1,238,000
Other current assets (including advances to
employees of $125,500 and $85,700,
respectively) 4,175,759 1,158,035
------------- -------------
Total current assets 106,108,070 65,922,048
Property, plant and equipment, net 663,134 577,058
Long-term receivable - WCTP 7,914,131 4,905,689
Cash in escrow - long- term 112,662,507 --
Construction in progress 35,780,604 4,187,134
Long-term note receivable - WCTP 49,490,535 49,490,535
Deferred charges, net 13,246,725 --
Other assets (including advances to employees
and a director of $575,417 and $730,167,
respectively) 6,419,006 1,929,723
Excess of investment over net assets
acquired, net 278,882 298,568
------------- -------------
Total assets $ 332,563,594 $ 127,310,755
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Natural gas accounts payable $ 56,973,867 $ 44,311,309
Loan payable 20,004,999 --
Accrued expenses and other payables 21,953,083 7,237,081
Accrued income taxes 100,000 88,178
Net liabilities of discontinued operations 10,927,880 3,136,675
------------- -------------
Total current liabilities 109,959,829 54,773,243
Project notes payable 150,000,000 --
Other long-term liabilities 1,187,611 942,146
Deferred revenue and other credits 3,200,500 3,287,000
Deferred tax liability 5,632,100 5,632,100
------------- -------------
Total liabilities 269,980,040 64,634,489
Minority interest in partnership -- 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 15,008,388 and
14,961,438 shares, respective 150,084 149,614
Additional paid-in capital 65,584,324 65,212,681
Accumulated earnings (deficit) (583,375) 4,139,729
------------- -------------
65,151,033 69,502,024
Less:
Treasury stock, at cost (123,124 shares) (1,409,401) (1,409,401)
Notes receivable - sale of common stock (818,980) (6,832,938)
Deferred compensation - ESOP (339,098) (510,761)
------------- -------------
Total stockholders' equity 62,583,554 60,748,924
------------- -------------
Total liabilities and stockholders'
equity $ 332,563,594 $ 127,310,755
============= =============
* 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) (Unaudited)
For the Six Months Ended For the Three Months Ended
August 31, August 31,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Natural gas sales $353,102,102 $ 84,517,406 $184,472,611 $ 54,566,846
Power project services 3,103,347 3,985,414 1,709,545 2,322,756
------------ ------------ ------------ ------------
Total revenues 356,205,449 88,502,820 186,182,156 56,889,602
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of natural gas 347,003,934 84,054,067 180,550,328 53,848,199
Cost of power project services 3,073,096 3,965,202 1,708,760 2,299,282
Selling, general and administrative 4,869,835 4,755,825 2,071,202 2,325,353
Interest income - WCTP (2,254,516) (2,270,777) (1,127,849) (1,136,956)
Interest income (585,405) (142,771) (527,592) (66,913)
Interest expense 1,184,430 21,742 1,178,420 13,369
Other (income) expense (3,154,235) (725,724) (1,590,958) (272,148)
Minority interest in partnership 283,766 285,817 141,960 143,106
------------ ------------ ------------ ------------
Total costs and expenses 350,420,905 89,943,381 182,404,271 57,153,292
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 5,784,544 (1,440,561) 3,777,885 (263,690)
Provision for income taxes 2,603,044 207,739 1,701,592 147,112
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATION 3,181,500 (1,648,300) 2,076,293 (410,802)
Loss from discontinued operations, net (7,904,600) (144,189) (7,547,158) (54,750)
Extraordinary gain, net of tax and
allocation to minority interest -- 5,436,367 -- --
------------ ------------ ------------ ------------
Net income (loss) $ (4,723,100) $ 3,643,878 $ (5,470,865) $ (465,552)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE - BASIC:
Continuing operations $0.22 ($0.12) $0.15 ($0.03)
Discontinued operations ($0.55) ($0.01) ($0.53) --
Extraordinary gain -- $0.39 -- --
------------ ------------ ------------ ------------
Total ($0.33) $0.26 ($0.38) ($0.03)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN COMPUTING BASIC
EARNINGS PER SHARE 14,250,841 13,945,376 14,270,495 13,992,231
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE - DILUTED:
Continuing operations $0.21 ($0.12) $0.14 ($0.03)
Discontinued operations ($0.52) ($0.01) ($0.51) --
Extraordinary gain -- $0.39 -- --
------------ ------------ ------------ ------------
Total ($0.31) $0.26 ($0.37) ($0.03)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS
USED IN COMPUTING DILUTED EARNINGS
PER SHARE 15,090,497 13,945,376 14,675,630 13,992,231
============ ============ ============ ============
</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 SIX MONTHS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1998
------------- -------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income from continuing operations $ 3,181,500 $ (1,648,300)
Adjustments to reconcile net income to net cash generated
by (used in) operating activities:
Depreciation and amortization 158,709 140,149
Amortization of deferred credits (86,500) (86,500)
Amortization of deferred charges 140,247 --
ESOP contribution 333,006 292,386
Deferred tax asset (4,744,611) (91,000)
Changes in operating assets and liabilities:
Increase in receivables (11,659,230) (14,608,265)
Net (increase) decrease in notes receivable,
inventory, other current assets, and other assets (13,714,847) 202,372
Net increase in accounts payable, accrued expenses,
deferred revenue, long-term liabilities and
minority interest 25,832,242 15,581,794
Increase (decrease) in accrued taxes 11,822 (758,435)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES OF
CONTINUING OPERATIONS (547,662) (975,799)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS (113,395) 1,507,831
------------- -------------
INVESTING ACTIVITIES:
Construction in progress (31,593,470) --
Cash in escrow (124,612,000) --
Receipts from cash in escrow 11,949,493 --
Repayment of note receivable 275,000 --
Purchase of machinery and equipment (225,099) (169,965)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (144,206,076) (169,965)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from Bond Financing 150,000,000 --
Payment of financing costs (4,495,642) --
Net proceeds from line of credit 20,009,567 --
Payment of due to SBCC -- (2,750,000)
Payment on capital leases (35,564) (3,517)
Proceeds from exercise of stock options and warrants 153,229 266,898
------------- -------------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES 165,631,590 (2,486,619)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS 20,764,457 (2,124,552)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,254,366 11,513,026
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,018,823 $ 9,388,474
============= =============
</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 August 31, 1998, results of operations for the six and
three months ended August 31, 1998 and 1997, and cash flows for the six months
ended August 31, 1998.
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.
Certain amounts in the Fiscal 1998 consolidated financial statements were
reclassified to conform to the Fiscal 1999 presentation (See Note 8). 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. All
periods prior to adoption that are presented have been restated to conform with
SFAS No. 128. 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 (loss) from continuing operations. The following is a reconciliation of
the number of shares used in the basic and diluted computation of earnings per
share for the six and three months ended August 31, 1998 and 1997:
5
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
August 31, August 31,
- -----------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 14,878,810 14,736,215 14,885,208 14,754,033
- -----------------------------------------------------------------------------------------------
Average of unreleased ESOP shares (627,969) (790,839) (614,713) (761,802)
- -----------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding - basic 14,250,841 13,945,376 14,270,495 13,992,231
- -----------------------------------------------------------------------------------------------
Dilution (warrants and options) 839,656 0 405,135 0
- -----------------------------------------------------------------------------------------------
Weighted average number of common
shares and common share equivalents
outstanding - diluted 15,090,497 13,945,376 14,675,630 13,992,231
- -----------------------------------------------------------------------------------------------
</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 2,692,723 shares of common stock were
outstanding at August 31, 1998, ranging from $5.44 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.
The options and warrants, which expire between April 26, 2000 and June 9, 2007,
were still outstanding at August 31, 1998. For August 31, 1997, options and
warrants to purchase 4,353,365 shares of common stock ranging from $3.13 to
$11.00 were not included in the computation of diluted earnings per share
because their effect would be antidilutive.
(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 completed the procurement and permitting process, and construction of
this wind power project is well advanced. York currently expects partial
commercial operation in December 1998, and full commercial operation by February
1999. When completed, the facility will have a capacity of 34 MW and include 46
turbines, including four 1,650 Kilowatt ("kW") wind turbines. At August 31,
1998 and February 28, 1998, the total costs incurred related to the development
and construction of this project were approximately $9,340,000 and $3,002,000,
respectively, which are included in construction in progress.
The Big Spring project will sell all of its renewable energy to Texas
Utilities Electric Company under a 15 year contract with renewal options.
6
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) TRINIDAD PROJECT
On February 12, 1998, InnCOGEN Limited ("InnCOGEN"), a wholly owned
indirect Trinidadian subsidiary of York, signed a power purchase agreement with
Trinidad and Tobago Electricity Commission ("T&TEC"), the government owned
transmission and distribution company, to supply electricity under a 30 year
contract. The Company has substantially completed procurement and other
preconstruction tasks and has begun construction of a 225 MW natural gas fueled
combustion turbine project for commercial operation by fall 1999. At August 31,
1998 and February 28, 1998, the total costs incurred that relate to the
development and construction of this project were approximately $26,441,000 and
$1,185,000, respectively, which are included in construction in progress.
InnCOGEN will sell the bulk of the project output under a 30 year contract with
T&TEC. Duke/Fluor Daniel will construct the Trinidad facility under a turnkey
construction contract with a firm September 1999 completion date. The Trinidad
facility will utilize three General Electric turbines.
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 August 31, 1998 $26.2 million has been
incurred toward these contracts and has been included in construction in
progress on the accompanying balance sheet.
(4) PORTFOLIO PROJECT BOND FINANCING
On August 4, 1998, the Company through various subsidiaries, completed a
$150 million, 12%, portfolio project bond financing due October 30, 2007 (the
"Bond Financing"). Proceeds of the Bond Financing will be used to fund the
balance of construction costs on the two new power projects as well as to
provide additional working capital to York. A portion of the proceeds of the
Bond Financing have been deposited into restricted cash escrow funds to be used
solely to fund construction costs, a $15 million debt service reserve, interest
during construction, and other costs.
The bond financing is non-recourse to York and secured solely by the assets
and future cash flow of the 225MW Trinidad power project, the 34 MW Big Spring
windpower project and certain assets and cash flow related to the Brooklyn Navy
Yard and Warbasse projects. The book value of the secured assets is
approximately $85,600,000 at August 31, 1998. The Trinidad project is expected
to achieve full commercial operation in September 1999, and the Big Spring
Project should begin generating renewable energy in December 1998 with final
completion in February 1999.
An agreement was entered into as of the closing date of the Bond Financing
whereby 10% in the aggregate of the net equity distributions to be received by
any of the projects that pledged cash flow or assets as collateral for the Bond
Financing will be paid to bondholders. In addition, York entered into a
Covenant Agreement with the Bond Trustee, whereby York agreed to certain
limitations, as long as the Bonds are outstanding, on incurring new debt,
granting of new liens, declaring cash dividends in excess of $.01 per share, and
continuing a business or activity that incurs net losses, as defined.
7
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) 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.
In June 1998, The Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133") which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS 133 also specifies
new methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. The Company is currently evaluating the impact that SFAS
133 will have on the Company's consolidated financial statements and
disclosures.
(6) DEFERRED CHARGES
a) DEFERRED FINANCING COSTS
As a result of the Bond Financing, approximately $7,089,000 of deferred
financing costs were incurred. These deferred financing costs are being
amortized over the life of the Bond Financing. Amortization through August 31,
1998 was approximately $56,000.
8
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) RELATED PARTY TRANSACTION
On May 31, 1998 the Chairman paid $275,000 of the long-term note he owed to
the Company.
Also on May 31, 1998, an agreement was reached to facilitate and maximize
the Bond Financing. 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 bondholders.
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 $24 million, which is 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 the life of the Bond Financing, and the
balance over the remaining term of the BNY royalty agreement. Amortization
through August 31, 1998 was approximately $85,000.
(7) 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 $13.1 million less taxes of
approximately $4.3 million and an allocation to the minority interest of
approximately $3.4 million, resulting in a net extraordinary gain to the Company
of $5.4 million.
(8) DISCONTINUED OPERATIONS
During the quarter ended August 31, 1998, unprecedented turmoil in the
electric marketing business was caused in part by widely reported failures of
certain suppliers to deliver contracted power to a multitude of utilities and
marketers, including York's subsidiary, North American Energy Conservation, Inc.
("NAEC"). NAEC and many others were required to scramble to meet existing fixed
price commitments. The resulting turmoil caused prices to instantly skyrocket
from normal prices in the range of $30 per megawatt hour to as much as $7,000
per megawatt hour.
9
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Repercussions from the suppliers' failures caused continuing instability
throughout the summer, as market participants found themselves with unbalanced
portfolios and a shortage of available sources. NAEC met many of its
commitments at substantially increased cost.
As a result, York determined that NAEC should discontinue the electric
marketing business due to the current volatility, lack of liquidity and
unacceptable risk parameters. NAEC will continue, however, to meet existing
contract obligations, which currently extend to December 1999, to its electric
marketing customers and is taking all actions necessary to reduce or eliminate
forward exposure. Operations will cease when all commitments have been met.
NAEC is unable to quantify at this time the impact of liquidating the balance of
its existing portfolio.
The electric marketing operations of NAEC are reflected as discontinued
operations for all periods presented in the Company's Statements of Operations.
The operating results of the discontinued operations are summarized as follows:
For the six months For the three months,
Ended August 31, Ended August 31,
-------------------------- ------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
Revenues $161,891,393 $56,091,371 $108,449,105 $40,279,237
Loss before tax benefit (14,372,000) (241,928) (13,722,106) (91,862)
Tax benefit (6,467,400) (97,739) (6,174,948) (37,112)
Net loss ($7,904,600) ($144,189) ($7,547,158) ($54,750)
Net liabilities of discontinued operations consist mainly of trade accounts
receivable and trade accounts payable.
10
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
PORTFOLIO BOND FINANCING
The Company, through various subsidiaries, on August 4, 1998, completed a
$150,000,000, 12% portfolio bond financing due October 30, 2007. This financing
will provide full funding for construction and completion of the Big Spring
project and the Trinidad project, and fund a debt service reserve, interest
during construction and other costs, as well as additional funds for general
corporate purposes and future development activities. This financing was
underwritten by a major investment bank and is non-recourse to York but is
secured by certain assets and cash flow related to the Brooklyn Navy Yard
("BNY") and Warbasse facilities, as well as cash flow and assets of the Big
Spring and Trinidad projects.
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 completed
the procurement and permitting process for this wind power project, and
construction is well advanced. York currently expects partial commercial
operation in December 1998, and full commercial operation by February 1999.
When completed, the facility will 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 natural gas 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.
TRINIDAD AND TOBAGO PROJECT
The Company has substantially completed procurement, engineering and other
preconstruction development tasks and has begun construction of 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.
11
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
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.
BROOKLYN NAVY YARD ("BNY") FACILITY
The BNY Facility is owned by Brooklyn Navy Yard Cogeneration Partners, L.P.
("BNYLP"), a joint venture 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-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.
The Company transferred the facility to Warbasse-Cogeneration Technologies
Partnership L.P. ("WCTP") upon its completion on August 1, 1996. As a result of
being a senior secured creditor of WCTP, the Company recorded approximately
$2,255,000 and $2,271,000 and $1,128,000 and $1,137,000 of interest income on
its long-term notes receivable from WCTP for the six and three months ended
August 31, 1998 and 1997, respectively.
12
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
NAEC
The Company's subsidiary, North American Energy Conservation, Inc. ("NAEC")
has marketed both electricity and natural gas. As discussed elsewhere, as a
result of the recent unprecedented volatility and turmoil in the electric
marketing business, the Company determined that NAEC should exit this business.
As of August 31, 1998, NAEC has an existing portfolio related to the electric
marketing business. NAEC in unable to quantify at this time the impact of
liquidating the balance of its existing portfolio.
NAEC's natural gas marketing business continues to grow and is expected to
be profitable throughout Fiscal 1999. 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.
Although still subject to market fluctuations, the natural gas marketing
business has been deregulated for many years and is much less volatile than the
electric marketing business currently is. The Company uses put and call
options, and futures contracts ("Instruments") in various combinations, to hedge
physical positions in 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.
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.
GENERAL
Cash used in operating activities of continuing operations during the six
months ended August 31, 1998 was approximately $548,000, as compared to
approximately $976,000 used during the six months ended August 31, 1997. During
the current period net income of approximately $3,182,000 was increased by a net
increase in certain operating liabilities over operating assets of approximately
$458,000. This increase was offset by the recognition of a deferred tax benefit
of approximately $4,700,000.
13
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
During the six months ended August 31, 1997, net loss from continuing
operations was approximately $1,648,000, which was offset by a net increase of
certain operating liabilities over operating assets of approximately $1,176,000.
In addition, the company had a non-cash extraordinary gain of approximately
$5,436,000.
Cash used by discontinued operations for the six months ended August 31,
1998 was approximately $113,000, as compared to cash provided of approximately
$1,508,000 for the six months ended August 31, 1997.
During the six months ended August 31, 1998, cash used in investing
activities was approximately $144,206,000. Approximately $31,593,000 was used
for construction in progress, and approximately $225,000 was used to purchase
machinery and equipment. Approximately $112,663,000 was invested in cash in
escrow, net of receipts of approximately $11,949,000. These uses were offset by
a repayment of a note receivable of $275,000. During the six months ended
August 31, 1997, approximately $170,000 was used to purchase machinery and
equipment.
During the six months ended August 31, 1998, cash generated by financing
activities was approximately $165,632,000, as compared to approximately
$2,487,000 used during the six months ended August 31, 1997. During the current
period, $150,000,000 was generated by the Bond Financing, approximately
$4,496,000 was used for financing costs, approximately $20,000,000 was generated
from the proceeds from a line of credit, and approximately $153,000 was
generated by the exercise of stock options and warrants. During the six months
ended August 31, 1997, $2,750,000 was used to settle an obligation with Sanwa
Business Credit Corp., and approximately $267,000 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, of
which $26.2 has been incurred through August 31, 1998, 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.
14
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
There can be no assurance that the Big Spring and Trinidad projects will be
completed in the manner described above, or that the Bond Financing will provide
for all contingencies.
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.
In addition, the Company is in the process of contacting all 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, to determine the extent to which they will be impacted
by the Year 2000 issue. Based on the responses to date, the Company is not
aware of any problems, but is unable to assess the impact of this issue at this
time.
RESULTS OF OPERATIONS
The increases in natural gas sales of approximately $268,585,000 and
$129,906,000 respectively, for the six and three months ended August 31, 1998 as
compared to the same periods in the prior year, and the increases of
approximately $262,950,000 and $126,702,000 in cost of natural gas when
comparing the same periods is due to an increase in the volume of natural gas
moved this year versus last year as part of the overall growth strategy. The
improvement in gross margin is due in part to tightening of guidelines related
to risk tolerance and trading.
Service revenues and cost of services include fuel and other operations and
maintenance costs. The decreases in service revenues of approximately $882,000
and $613,000, respectively and decreases in cost of services of approximately
$892,000 and $591,000, respectively, for the six and three months ended August
31, 1998, as compared to the same periods in the prior year, were mainly due to
a decrease in fuel costs as a result of increased efficiency in the Warbasse
facility.
15
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
Selling, general and administrative expenses increased approximately
$114,000 and decreased approximately $254,000, respectively, for the six and
three months ended August 31, 1998, as compared to the same periods in the prior
year. Expenses increased approximately $335,000 and $174,000, respectively, as
a result of recognition of the redemption of Class B Warrants, which commenced
in the fourth quarter of Fiscal 1998. During the six months ended August 31,
1998, financing costs increased approximately $122,000 as a result of costs
associated with the revolving line of credit. These increases were offset by
decreases in professional fees of approximately $250,000 for the six and three
months periods.
Interest income increased approximately $443,000 and $461,000,
respectively, for the six and three months ended August 31, 1998, as compared to
the same periods in the prior year, due mainly to increased levels of cash
available for investment due to the Bond Financing.
Interest expense increased approximately $1,163,000 and $1,165,000,
respectively, for the six and three months ended August 31, 1998, as compared to
the same periods in the prior year, due to accrued interest payable to
bondholders as a result of the Bond Financing.
Other income increased approximately $2,429,000 and $1,319,000,
respectively for the six and three months ended August 31, 1998, as compared to
the same periods in the prior year. The commencement in January 1998 of royalty
fees received by B-41LP from BNYLP accounted for an increase in other income of
approximately $2,888,000 and $1,419,000, respectively. These increases were
offset by decreases of approximately $609,000 and $280,000, respectively, due
to a decrease in general partner fees received by B-41LP from BNYLP.
As a result of the Company's decision during the quarter ended August 31,
1998 to discontinue the electric marketing business, all electric operations
have been reflected as discontinued operations. Loss from discontinued
operations were approximately $7,905,000 and $7,547,000, respectively, for the
six and three months ended August 31, 1998, compared to approximately $144,000
and $55,000 respectively, for the same periods in the prior year. These
increased losses were due to unprecedented turmoil in the electric marketing
business caused in part by widely reported failures of certain suppliers to
deliver contracted power to a multitude of utilities and marketers, including
NAEC (see Note 8).
The current and prior periods income tax provisions were based on the
expected annual effective tax rate applied to the income from continuing
operations for the six and three months ended August 31, 1998 and 1997. Tax
benefits from the losses from discontinued operations for the same periods were
calculated in a consistent manner.
During the quarter ended May 31, 1997, the Company recorded an
extraordinary gain in connection with the settlement of its obligation to
SBCC(see Note 7).
16
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(oo) Covenant Agreement dated as of August 4, 1998 between York
Research Corporation and The Bank of New York, as Bond
Trustee.
10(pp) Equity Cash Flow Participation Agreement dated as of August
4, 1998 among Brooklyn Navy Yard Power LLC, Warbasse Power I
LLC, Warbasse Power II LLC, New World Power Texas Renewable
Energy Limited Partnership, York T&T Holdings, Inc., and The
Bank of New York, as administrative agent for the benefit of
certain holders.
(b) There were no reports on Form 8-K filed during the three months ended
August 31, 1998.
17
<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: October 14, 1998 /s/ Robert M. Beningson
-----------------------------
Robert M. Beningson
Chairman of the Board and
President
Dated: October 14, 1998 /s/ Michael Trachtenberg
-----------------------------
Michael Trachtenberg
Executive Vice President
and Chief Financial and
Accounting Officer
18
<PAGE>
Exhibit 10(oo)
COVENANT AGREEMENT
COVENANT AGREEMENT, dated as of August 4, 1998 (this "Agreement") by and
between York Research Corporation, a Delaware corporation ("York") and The Bank
of New York, as bond trustee (in such capacity, together with its successors and
assigns in such capacity, the "Bond Trustee") under the Indenture referred to
below.
WITNESSETH
WHEREAS, York Power Funding (Cayman) Limited, a limited liability company
incorporated under the laws of the Cayman Island ("Funding Company") will issue
$150,000,000 12.0% Senior Secured Bonds due October 30, 2007 (the "Securities")
pursuant to the terms of the Indenture, dated as of the date hereof (the
"Indenture") by and between Funding Company and the Bond Trustee;
WHEREAS, Funding Company intends to loan a portion of the Bond Proceeds to
the BNY Guarantor, the Warble Guarantor, the Big Spring Guarantor and the
Trinidad Project Borrower and to distribute a portion of the Bond Proceeds to
York for its general corporate pur poses; and
WHEREAS, York has agreed to enter into this Agreement setting forth certain
covenants and agreements in favor of the Bond Trustee.
NOW THEREFORE, in consideration for the premises set forth above and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1: DEFINITIONS; CONSTRUCTION
Section 1. (a) For all purposes of this Agreement capitalized terms used
but not other wise defined herein shall have the meaning set forth in Appendix A
to the Indenture.
(b) The following terms shall have the following meanings:
"CONGRESS FINANCIAL FACILITY" shall mean [ ] (or any
replacement or successor facility).
"CONSOLIDATED NET INCOME" shall mean for any period the consolidated net
income (or loss) of York and its consolidated Subsidiaries for such period
deter mined in accordance with GAAP.
"CONSOLIDATED OPERATING CASH FLOW" shall mean, for any period, the sum of
all receipts of any type, less all disbursements, including, without limitation,
all expenses of York and its consolidated Subsidiaries.
"RATING AGENCY" for purposes of this Agreement, shall mean Standard &
Poor's Ratings Services, a division of McGraw-Hill Companies, Inc., its
successors and assigns.
<PAGE>
"RESTRICTED PAYMENTS" shall mean (a) the declaration or payment of
distributions or dividends made in cash in respect of York's capital stock or
(b) the purchase, redemption, retirement or other acquisition of York's common
stock.
"RESTRICTED SUBSIDIARY" shall mean any Subsidiary of York that is a special
purpose vehicle whose total Indebtedness is without recourse to York or any of
its other Subsidiaries.
Section 2. For all purposes of this Agreement, the principals of
construction set forth in Section 1.1 of the Indenture shall apply.
ARTICLE 2: COVENANTS AND AGREEMENTS
Section 2.1 So long as the Rating Agency maintains a Rating of any Secured
Obligation, York hereby agrees that it shall not, unless the Rating Agency
provides written confirmation to the Bond Trustee that the then current Rating
of the Securities will not be removed or down-graded:
(a) Create, incur, assume or otherwise become or remain directly or
indirectly liable with respect to any Indebtedness or contingently or otherwise
be or become liable, directly or indirectly in connection with any Guarantee
Obligation other than (i) Indebtedness not in excess of $10,000,000, (ii)
Guarantee Obligations with respect to its Subsidiaries (including the Congress
Financial Facility) not in excess of $35,000,000 and (iii) obligations arising
in the ordinary course of business; provided that the aggregate amount of
Indebtedness and Guarantee Obligations incurred pursuant to clauses (i) and (ii)
hereof shall not exceed $35,000,000 until fiscal 1999 at which time such
aggregate amount (including the Congress Financial Facility) shall increase
annually by an amount equal to 25% of the lesser of (x) cumulative Consolidated
Net Income or (y) cumulative Consolidated Operating Cash Flow.
(b) Make any Restricted Payments; provided that York shall be permitted to
make cash dividends on its common stock in an amount not to exceed $0.01 per
share.
(c) Engage in any business activities except (i) the ownership, creation,
development, servicing, management or disposition of Restricted Subsidiaries,
obtaining, arranging or provid ing financing incident to any of the foregoing
and other incidental activities to any of the fore going and (ii) business
activities of York or its Subsidiaries in existence as of the Closing Date.
(d) Create, incur, assume or suffer to exist, directly or indirectly, any
Lien upon or with respect to any assets or property of York or permit any of its
Subsidiaries (including Restricted Subsidiaries) to grant a Lien on any of its
property or assets other than (i) Liens existing as of the Closing Date (or
otherwise contem plated by the Transaction Documents) and (ii) Liens granted to
secure non-recourse Indebtedness of a Restricted Subsidiary which the president
or chief financial officer of York determines in good faith to be required in
order to effect such financing and are not materially more restrictive, taken as
a whole, than Liens, taken as a whole, customar ily accepted (or in the absence
of industry custom, reasonably acceptable) in comparable financ ings or
comparable transactions in the applicable jurisdiction. Any Liens not excepted
by clauses (i) and (ii) of this section (d) shall be promptly terminated or
bonded by York unless such Liens
2
<PAGE>
are Liens of such type which arise in the ordinary course of business and which
are not overdue for a period of more than 60 days or which are being contested
in good faith and by appropriate proceedings.
(e) Continue any operation or business activity of a Subsidiary or a
business segment of York that has suffered a cumulative net loss (as defined in
accordance with GAAP) in excess of $10,000,000.
ARTICLE 3: MISCELLANEOUS PROVISIONS
Section 3.1 TERM. The obligations hereunder shall commence as of the
Closing Date and shall terminate upon the Final Maturity Date or upon the
earlier termination of the Indenture.
Section 3.2. AMENDMENTS/COUNTERPARTS. Any amendment to this Agreement
shall be in writing signed by the parties hereto with notice of such amendment
provided to the Rating Agency. This Agreement and any amendments hereto may be
executed in counterparts, each of which so executed shall be deemed an original,
irrespective of the date of its execution and delivery, and said counter parts
together shall constitute one and the same instrument.
Section 3.3. NOTICES. All notices, payments, requests, reports,
information and other communications between the parties hereto shall be
addressed in accordance with the addresses set forth on Schedule III to the
Indenture or to such other address as any party may from time to time specify in
writing to the other parties.
Section 3.4. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
the conflict of law rules thereof (other than Section 5-1401 of the New York
General Obligations Law).
Section 3.5. ASSIGNMENT. This Agreement may not either party without the
prior written consent of the parties hereto.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed by their duly authorized officers as of the date first written above.
YORK RESEARCH CORPORATION
By:
---------------------------------
Name: Michael Trachtenberg
Title: Executive Vice President
THE BANK OF NEW YORK, as Bond Trustee
By:
--------------------------------
Name:
Title:
4
<PAGE>
Exhibit 10(pp)
EQUITY CASH FLOW PARTICIATION AGREEMENT
EQUITY CASH FLOW PARTICIPATION AGREEMENT, dated as of August 4, 1998 (this
"AGREEMENT"), among BROOKLYN NAVY YARD POWER LLC (the "BNY GUARANTOR"), WARBASSE
POWER I LLC ("Warbasse I"), WARBASSE POWER II LLC ("Warbasse II" and together
with Warbasse I, the "Warbasse Guarantor"). NEW WORLD POWER TEXAS RENEWABLE
ENERGY LIMITED PARTNERSHIP (the "Big Spring Guarantor"). YORK T&T HOLDINGS,
INC. ("York T&T" and together with the BNY Guarantor the Warbasse Guarantor and
the Big Spring Guarantor, the "Assignors") and THE BANK OF NEW YORK, as
administrative agent hereunder for the benefit of the Holders listed on Schedule
I hereto (the "Agent"). Capitalized terms used by not otherwise defined herein
shall have the meanings set forth in the Purchase Agreement referred to below.
WHEREAS, York Power Funding (Cayman) Limited ("Funding Company") is a
limited liability company established for the sole purpose of issuing the
Securities in its individual capacity as principal and as agent acting on behalf
of the U.S. Guarantors pursuant to the Indenture and to make loans to the
Project Borrowers pursuant to the Project Loan Agreement;
WHEREAS, Funding Company, the U.S. Guarantors and Credit Suisse First
Boston Corporation ("CSFBC") have entered into the Purchase Agreement, dated as
of July 30, 1998 (the "Purchase Agreement"), pursuant to which CSFBC has agreed
to purchase the Securities; and
WHEREAS, the Holders wish to purchase $150,000,000 of the Securities from
CSFBC.
NOW, THEREFORE, for and in consideration of the premises and mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, do hereby covenant and agree as follows:
1. The Assignors hereby assigns to the Agent on behalf of the Holders
(and their assignees hereunder), on a joint and several basis, 10% in the
aggregate (the "HOLDERS' PERCENTAGE") of the aggregate amount of distributions
received by the Assignors pursuant to, either directly or indirectly, the
Depositary Agreements (or any successor agreement entered into with any
refinancing). The benefits hereunder shall be represented by a single global
Equity Cash Flow Participation Certificate, which shall be held by the Agent on
behalf of each of the Holders or their assignees. The Agent shall distribute
the Holders' Percentage to the Holders (or their assignees hereunder) on a pro
rata basis (based on such Holder's respective percentage as set forth on
Schedule I) as promptly as practicable upon receipt of the Holders' Percentage
from the Assignors. In order to facilitate the receipt and payment of the
Holders' Percentage hereunder, the Agent shall establish a non-interest bearing
trust account (the "Agent's Account"). No investments will be made by the Agent
from the funds deposited in the Agent's Account.
2. The Holders shall list on Schedule I all relevant information as the
Agent may request, including the correct names, addresses, taxpayer
identification numbers and payment instructions sufficient to enable the Agent
to maintain its books and records with respect to the
<PAGE>
Holders. Holders may assign the benefits hereunder, either in whole or in part,
without the consent of the Assignors or any other Person: PROVIDED, that each
Holder hereby agrees that any such assignment shall comply with the terms and
conditions set forth under the heading "TRANSFER RESTRICTIONS" in the Offering
Circular and for all purposes herein, any references to "Securities" herein
shall be deemed to be a reference to the benefits hereunder and the Holders
further agree that any assignee shall agree to be bound by the terms and
conditions of this Agreement. The representations, terms and conditions and
agreements set forth under the heading "TRANSFER RESTRICTIONS" in the Offering
Circular are incorporated herein in their entirety. The Holders shall promptly
notify the Agent of any such assignment and all relevant information of such
assignee entitled to the benefits hereunder based on information furnished to
it. Each Holder further acknowledges that the rights hereunder shall not be
included in any Registration Statement filed with respect to the Securities, do
not have the benefits of any registration rights and shall not be eligible for
trading in the PORTAL market or any other similar market and may be sold only in
accordance with the terms set forth under the heading "TRANSFER RESTRICTIONS" in
the Offering Circular. Each Holder and the Agent hereby agree that any
instrument of transfer with respect to the benefits hereunder shall bear a
legend substantially similar to the legend set forth on this Agreement
3. The Holders hereby appoint THE BANK OF NEW YORK as their agent
hereunder and authorize the Agent to administer the Holders' Percentage in
accordance with the terms set forth herein. The Holders jointly and severally
agree to compensate and reimburse the Agent upon its request for all expenses,
disbursements and advances incurred or made by the Agent in accordance with any
provision of or otherwise in connection with this Agreement (including the
reasonable compensation and the expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its gross negligence or bad faith, and to indemnify the Agent
for, and to hold it harmless against, any and all loss, liability, claim,
damage, or expense (including Taxes other than Taxes based on the income of the
Agent) incurred without gross negligence, willful misconduct or bad faith on its
part, arising out of or in connection with the acceptance or administration of
the trust or trusts hereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. All indemnifications and
releases from liability granted hereunder to the Agent shall extend to its
officers, directors, employees, agents, successors and assigns. Further rights,
benefits, privileges and immunities of the Agent shall be as set forth in the
"Terms and Conditions" stated in Schedule II attached hereto.
4. Each of the parties hereto acknowledges that CSFBC is not acting as
underwriter in any capacity with respect to this Agreement and makes no
representations whatsoever with respect to this Agreement.
5. This Agreement may be executed in any number of counterparts, all of
which, taken together, shall constitute one and the same instrument and any of
the parties hereto may execute this Agreement by signing any such counterpart.
6. This Agreement is a contract made under the laws of the State of New
York of the United States and shall for all purposes be governed by and
construed in accordance with the
2
<PAGE>
laws of such State without regard to the conflict of law rules thereof (other
than Section 5-1401 of the New York General Obligations Law).
EACH HOLDER UNDERSTANDS THAT THE BENEFITS HEREUNDER HAVE NOT BEEN AND WILL NOT
BE REGISTERED UNDER THE SECURITIES ACT AND THAT SUCH BENEFITS MAY ONLY BE
OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) INSIDE THE UNITED
STATES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (B)
OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION COMPLYING WITH
THE PROVISIONS OF RULE 904 UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES
ACT") AND SUBJECT TO THE FUNDING COMPANY'S AND THE BOND TRUSTEE'S RIGHT PRIOR TO
ANY SUCH REOFFER, RESALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATION OR OTHER INFORMATION REASONABLY SATISFACTORY TO EACH OF
THEM THAT SUCH REOFFER, RESALE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES
ACT AND OTHER APPLICABLE LAWS, AND (C) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER RULE 144 OF THE SECURITIES ACT (IF AVAILABLE).
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed by their duly authorized officers, all as of the date first written
above.
BROOKLYN NAVY YARD POWER LLC
By: B-41 ASSOCIATES, L.P.,
its Managing Member
By: B-41 MANAGEMENT CORPORATION
its General Partner
By:
------------------------------
Name:
Title:
WARBASSE POWER LLC
By: COGENERATION TECHNOLOGIES, INC.
its General Partner
By:
------------------------------
Name:
Title:
3
<PAGE>
WARBASSE POWER LLC
By: YORK COGEN PARTNERS, L.P.
its General Partner
By: RRR'S VENTURES, LTD.
its General Partner
By:
------------------------------
Name:
Title:
NEW WORLD POWER TEXAS RENEWABLE ENERGY
LIMITED PARTNERSHIP
By: BIG SPRINGS TEXAS ENERGY
MANAGEMENT, INC.
Managing General Partner
By:
------------------------------
Name:
Title:
YORK T&T HOLDINGS, INC.
By:
------------------------------
Name:
Title:
THE BANK OF NEW YORK,
as Agent
By:
------------------------------
Name:
Title:
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AS OF AND FOR
THE PERIODS ENDED AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-31-1998
<PERIOD-END> AUG-31-1998
<CASH> 31,018,823
<SECURITIES> 0
<RECEIVABLES> 60,137,739
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 106,108,070
<PP&E> 1,974,675
<DEPRECIATION> (1,311,541)
<TOTAL-ASSETS> 332,563,594
<CURRENT-LIABILITIES> 109,959,829
<BONDS> 0
0
0
<COMMON> 150,084
<OTHER-SE> 62,433,470
<TOTAL-LIABILITY-AND-EQUITY> 332,563,594
<SALES> 353,102,102
<TOTAL-REVENUES> 356,205,449
<CGS> 347,003,934
<TOTAL-COSTS> 350,077,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,784,544
<INCOME-TAX> 2,603,044
<INCOME-CONTINUING> 3,181,500
<DISCONTINUED> (7,904,600)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,723,100)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.31)
</TABLE>
