<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 NOVEMBER 30, 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
14,890,402 .
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------- -------------
(Unaudited) *
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 15,000,696 $ 10,254,366
Natural gas accounts receivable 119,922,260 47,245,168
Other receivables - related parties 6,762,713 6,026,479
Cash in escrow 12,725,882 --
Inventory - natural gas 2,721,182 --
Deferred tax asset 8,159,524 1,238,000
Other current assets (including advances to employees
of $62,000 and $85,700, respectively) 1,598,697 1,158,035
Net assets of discontinued operations 1,344,312 --
------------- -------------
Total current assets 168,235,266 65,922,048
Property, plant and equipment, net 676,879 577,058
Long-term receivable - WCTP 6,657,052 4,905,689
Cash in escrow - long term 65,585,626 --
Construction in progress 65,885,544 4,187,134
Long-term note receivable - WCTP 49,490,535 49,490,535
Deferred charges, net 13,078,336 --
Other assets (including advances to employees
of $760,417 and $615,167, respectively) 6,852,194 2,228,291
------------- -------------
Total assets $ 376,461,432 $ 127,310,755
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Natural gas accounts payable $ 114,805,054 $ 44,311,309
Loan payable 17,234,857 --
Accrued expenses and other payables 22,865,989 7,237,081
Accrued income taxes 100,000 88,178
Net liabilities of discontinued operations -- 3,136,675
------------- -------------
Total current liabilities 155,005,900 54,773,243
Project notes payable 150,000,000 --
Other long-term liabilities 1,312,550 942,146
Deferred revenue and other credits 3,157,250 3,287,000
Deferred tax liability 5,632,100 5,632,100
------------- -------------
Total liabilities 315,107,800 64,634,489
Minority interest in partnership 91,102 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
15,013,526 and 14,961,438 shares, respectively 150,135 149,614
Additional paid-in capital 65,646,659 65,212,681
Accumulated earnings (deficit) (2,118,517) 4,139,729
------------- -------------
63,678,277 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 (187,366) (510,761)
------------- -------------
Total stockholders' equity 61,262,530 60,748,924
------------- -------------
Total liabilities and stockholders' equity $ 376,461,432 $ 127,310,755
------------- -------------
------------- -------------
</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) (Unaudited)
For the Nine Months Ended For the Three Months Ended
---------------------------- ----------------------------
November 30, November 30,
Revenues: 1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Natural gas sales $584,581,204 $192,638,233 $231,479,102 $108,120,827
Power project services 4,713,101 5,707,343 1,609,753 1,721,929
------------ ------------ ------------ ------------
Total revenues 589,294,305 198,345,576 233,088,855 109,842,756
------------ ------------ ------------ ------------
Costs and expenses:
Cost of natural gas 576,765,911 192,608,007 229,761,978 108,553,940
Cost of power project services 4,689,538 5,598,922 1,616,442 1,633,720
Selling, general and administrative 8,165,387 6,607,445 3,295,597 1,851,618
Interest income - WCTP (3,325,418) (3,395,440) (1,070,902) (1,124,663)
Interest income (1,555,724) (199,035) (970,320) (56,312)
Interest expense 3,942,142 28,794 2,757,720 7,100
Other (income) expense (4,617,963) (1,144,931) (1,463,729) (419,207)
Minority interest in partnership 374,874 427,376 91,102 141,559
------------ ------------ ------------ ------------
Total costs and expenses 584,438,747 200,531,138 234,017,888 110,587,755
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY GAIN 4,855,558 (2,185,562) (929,033) (744,999)
Provision (benefit) for income taxes 1,960,345 (1,023,274) (642,700) (1,231,013)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,895,213 (1,162,288) (286,333) 486,014
Loss from discontinued operations, net of income tax benefit (9,153,460) (518,883) (1,248,860) (374,694)
Extraordinary gain, net of tax and allocation to minority interest -- 5,436,367 -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($6,258,247) $3,755,196 ($1,535,193) $111,320
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
EARNINGS (LOSS) PER COMMON SHARE - BASIC:
Continuing operations $0.20 ($0.08) ($0.02) $0.04
Discontinued operations ($0.64) ($0.04) ($0.09) ($0.03)
Extraordinary gain -- $0.39 -- --
------------ ------------ ------------ ------------
Total ($0.44) $0.27 ($0.11) $0.01
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES USED IN
COMPUTING BASIC EARNINGS PER SHARE 14,266,747 13,983,848 14,295,106 14,060,793
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per common share - Diluted:
Continuing operations $0.19 ($0.08) ($0.02) $0.03
Discontinued operations ($0.61) ($0.04) ($0.09) ($0.02)
Extraordinary gain -- $0.39 -- --
------------ ------------ ------------ ------------
Total ($0.42) $0.27 ($0.11) $0.01
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares and
common share equivalents used in computing
diluted earnings per share 14,929,087 13,983,848 14,295,106 15,779,050
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</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 NINE MONTHS ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(Unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) from continuing operations $ 2,895,213 ($ 1,162,288)
Adjustments to reconcile net income to net cash generated
by (used in) operating activities:
Depreciation and amortization 246,192 213,643
Amortization of deferred credits (129,750) (129,750)
Amortization of deferred charges 625,577 --
ESOP contribution 513,725 451,522
Deferred tax asset (6,921,524) (91,000)
Loss on write-off of fixed assets 30,788 --
Changes in operating assets and liabilities:
Increase in receivables (73,413,326) (64,513,046)
Net (increase) decrease in notes receivable, inventory, other current
assets, and other assets (13,082,978) 1,225,325
Net increase in accounts payable, accrued expenses, deferred
revenue, long-term liabilities and minority interest 84,809,428 64,444,177
Increase (decrease) in accrued taxes 11,822 (2,336,244)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES OF CONTINUING OPERATIONS (4,414,833) (1,897,661)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS (13,634,447) 2,002,558
------------- -------------
INVESTING ACTIVITIES:
Construction in progress (61,698,410) (1,653,856)
Cash in escrow (124,612,000) --
Receipts from cash in escrow 46,300,492 --
Repayment of note receivable 275,000 --
Purchase of machinery and equipment (347,272) (190,918)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (140,082,190) (1,844,774)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from Bond Financing 150,000,000 --
Payment of financing costs (4,495,642) --
Net proceeds from line of credit 17,239,425 --
Payment of due to SBCC -- (2,750,000)
Payment on capital leases (52,609) (10,006)
Proceeds from exercise of stock options and warrants 186,626 513,684
------------- -------------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES 162,877,800 (2,246,322)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,746,330 (3,986,199)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,254,366 11,513,026
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,000,696 $ 7,526,827
------------- -------------
------------- -------------
</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 November 30, 1998, results of operations
for the nine and three months ended November 30, 1998 and 1997, and cash flows
for the nine months ended November 30, 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.
Certain amounts in the Fiscal 1998 consolidated financial statements
were reclassified to conform to the Fiscal 1999 presentation. 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 nine and three months ended November 30, 1998 and
1997:
5
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common 14,882,486 14,758,684 14,886,385 14,803,625
shares outstanding
Average of unreleased ESOP shares (615,739) (774,836) (591,279) (742,832)
Weighted average number of common 14,266,747 13,983,848 14,295,106 14,060,793
shares outstanding - basic
Dilution (warrants and options) 662,340 -0- -0- 1,718,257
Weighted average number of common
shares and common share equivalents 14,929,087 13,983,848 14,295,106 15,779,050
outstanding - diluted
</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 3,571,958 shares of common stock
were outstanding at November 30, 1998, ranging from $4.50 to $11.00, but were
not included in the computation of diluted earnings per share for the nine
months because the options' exercise prices were greater than the average market
price of common shares. For the quarter ended November 30, 1998, 5,527,181
options and warrants, ranging from $3.13 to $11.00 were not included in the
computation because their effect would be antidilutive. The options and
warrants, which expire between July 12, 1999 and June 9, 2007, were still
outstanding at November 30, 1998. For November 30, 1997, options and warrants to
purchase 4,297,131 shares of common stock ranging from $3.13 to $11.00 were not
included in the computation of diluted earnings per share for the nine months
because their effect would be antidilutive. For the quarter ended November 30,
1997, 127,183 options were excluded from the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price per share.
(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 achieved commercial operation of the
first 16 turbines (Phase 1) in December 1998, and expects full commercial
operation by February or March 1999.
6
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When completed, the facility will have a capacity of 34 MW and include 46
turbines, including four 1,650 Kilowatt ("kW") wind turbines. At November 30,
1998 and February 28, 1998, the total costs incurred related to the development
and construction of this project were approximately $16,316,000 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 two five year
renewal options.
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 the bulk of the project output
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
November 30, 1998 and February 28, 1998, the total costs incurred that relate to
the development and construction of this project were approximately $49,569,000
and $1,185,000, respectively, which are included in construction in progress.
Duke/Fluor Daniel is constructing 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 November 30, 1998 $45.8 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, a $150 million, 12%, portfolio project bond
financing due October 30, 2007 (the "Bond Financing") was completed. 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 $115,376,000 at November 30, 1998. The Trinidad project is
expected to achieve full commercial operation in September 1999, and the Big
Spring Project began generating renewable energy in December 1998 with final
completion expected in February or March 1999.
7
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(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.
8
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 November 30,
1998 was approximately $256,000.
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 forego 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 transferred 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 November 30, 1998 was approximately $370,000.
(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.
9
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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:
<TABLE>
<CAPTION>
For the nine months For the three months,
Ended November 30, Ended November 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 215,044,841 $ 92,225,926 $ 53,153,448 $ 36,134,555
Loss before tax benefit (16,642,655) (870,609) (2,270,654) (628,681)
Tax benefit (7,489,195) (351,726) (1,021,794) (253,987)
Net loss ($ 9,153,460) ($ 518,883) ($ 1,248,860) ($ 374,694)
</TABLE>
Net assets and net liabilities of discontinued operations consist mainly of
trade accounts receivable and trade accounts payable. The losses for the nine
and three months ended November 30, 1998 include a one-time charge of
approximately $1.3 million related to settlement of a disputed receivable.
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
On August 4, 1998, a $150,000,000, 12% portfolio bond financing due
October 30, 2007 was completed. 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 CS First Boston 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 achieved partial commercial operation (16
turbines) in December 1998, and expects full commercial operation by February or
March 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 is constructing 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 the majority partner.
The BNY facility has been generating electricity and steam in
accordance with its contracts since November 1996. 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 future 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 $3,325,000 and $3,395,000 and $1,071,000 and $1,125,000 of
interest income on its long-term notes receivable from WCTP for the nine and
three months ended November 30, 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 November 30, 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 continue to be profitable. In order to support that growth, in
December 1997, NAEC completed a revolving line of credit, currently up to
$25,000,000, 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 nine months ended November 30, 1998 was approximately $4,415,000, as
compared to approximately $1,898,000 used during the nine months ended November
30, 1997. During the current period, net income of approximately $2,895,000 was
decreased by a net decrease in certain operating assets over operating
liabilities of approximately $1,675,000, and the recognition of a deferred tax
benefit of approximately $6,922,000.
13
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
During the nine months ended November 30, 1997, the net loss from
continuing operations was approximately $1,162,000, which was offset by a net
increase of certain operating liabilities over operating assets of approximately
$1,176,000.
Cash used by discontinued operations for the nine months ended
November 30, 1998 was approximately $13,634,000, as compared to cash provided of
approximately $2,003,000 for the nine months ended November 30, 1997.
During the nine months ended November 30, 1998, cash used in
investing activities was approximately $140,082,000. Approximately $61,698,000
was used for construction in progress, and approximately $347,000 was used to
purchase machinery and equipment. Approximately $124,612,000 was invested in
cash in escrow, less receipts of approximately $46,300,000. These uses were
offset by a repayment of a note receivable of $275,000. During the nine months
ended November 30, 1997, approximately $191,000 was used to purchase machinery
and equipment.
During the nine months ended November 30, 1998, cash generated by
financing activities was approximately $162,878,000, as compared to
approximately $2,246,000 used during the nine months ended November 30, 1997.
During the current period, $150,000,000 was generated by the Bond Financing,
approximately $4,496,000 was used for financing costs, approximately $17,239,000
was generated from the proceeds from a line of credit, and approximately
$187,000 was generated by the exercise of stock options and warrants. During the
nine months ended November 30, 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, of
which $45.8 million has been incurred through November 30, 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 Company's ability to successfully construct
and profitably operate new and existing projects; the impact of competition on
the Company's natural gas and other 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 $391,943,000 and
$123,358,000 respectively, for the nine and three months ended November 30, 1998
as compared to the same periods in the prior year, and the increases of
approximately $384,158,000 and $121,208,000 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 $994,000 and $112,000, respectively and decreases in cost of
services of approximately $909,000 and $17,000, respectively, for the nine and
three months ended November 30, 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 as well as generally lower unit costs for
fuel.
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
$1,558,000 and $1,444,000, respectively, for the nine and three months ended
November 30, 1998, as compared to the same periods in the prior year. Of these
increases $1,328,000 and $730,000 for the nine and three months ended November
30, 1998 relate to non-cash amortization of certain items as follows: (1)
expenses increased approximately $509,000 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; (2) as a result of the Bond Financing in
August, 1998, amortization expense of related deferred financing costs caused an
increase of . approximately $449,000 and $271,000, respectively, for the nine
and three months ended November 30, 1998 compared to the same periods in the
prior year; and (3) expenses increased approximately $370,000 and $285,000,
respectively, when comparing the same periods, due to amortization of the
deferred charge resulting from the transfer of a note to minority interests (see
Note 6). In addition to these non-cash expenses, expenses also increased
approximately $507,000 and $109,000, respectively, when comparing these periods
due to additional amounts spent on payroll and employee benefits, as a result of
additional personnel and salary increases. For the nine and three month periods
ended November 30, 1998, expenses increased approximately $391,000 as a result
of increases in certain general and administrative expenses related to
development of new projects and expansion of the Company's business. These
increases were offset by decreases in professional fees of approximately
$530,000 and $72,000, respectively, for the nine and three months periods.
Interest income increased approximately $1,357,000 and $914,000,
respectively, for the nine and three months ended November 30, 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 $3,913,000 and $2,751,000,
respectively, for the nine and three months ended November 30, 1998, as compared
to the same periods in the prior year, as a result of the Bond Financing.
Other income increased approximately $3,473,000 and $1,045,000,
respectively for the nine and three months ended November 30, 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 $4,233,000 and $1,345,000, respectively. These increases
were offset by decreases of approximately $910,000 and $301,000, respectively,
due to a decrease in general partner fees received by B-41LP from BNYLP.
16
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
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. Losses from
discontinued operations were approximately $9,153,000 and $1,249,000,
respectively, for the nine and three months ended November 30, 1998, compared to
approximately $519,000 and $375,000 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) as well as a one-time charge in the
quarter ended November 30, 1998 of approximately $1.3 million related to
settlement of a disputed receivable.
The current and prior periods income tax provisions were based on
the expected annual effective tax rate applied to the domestic income from
continuing operations for the nine and three months ended November 30, 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).
17
<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 November 30, 1998.
18
<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: January 13, 1999 /S/ROBERT M. BENINGSON
------------------------
Robert M. Beningson
Chairman of the Board and
President
Dated: January 13, 1999 /S/ MICHAEL TRACHTENBERG
------------------------
Michael Trachtenberg
Executive Vice President
and Chief Financial and
Accounting Officer
19
<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 NOVEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIREY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 15,000,696
<SECURITIES> 0
<RECEIVABLES> 119,922,260
<ALLOWANCES> 0
<INVENTORY> 2,721,182
<CURRENT-ASSETS> 168,235,266
<PP&E> 1,978,662
<DEPRECIATION> (1,301,783)
<TOTAL-ASSETS> 376,461,432
<CURRENT-LIABILITIES> 155,005,900
<BONDS> 0
0
0
<COMMON> 150,135
<OTHER-SE> 61,112,395
<TOTAL-LIABILITY-AND-EQUITY> 376,461,432
<SALES> 584,581,204
<TOTAL-REVENUES> 589,294,305
<CGS> 576,765,911
<TOTAL-COSTS> 581,455,449
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,855,558
<INCOME-TAX> 1,960,345
<INCOME-CONTINUING> 2,895,213
<DISCONTINUED> (9,153,460)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,258,247)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.42)
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