<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, 1999
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
14,916,045.
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, February 28,
1999 1999
------------------- -------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $10,123,265 $22,993,285
Trade accounts receivable 94,584,657 118,527,841
Income tax refund receivable 1,680,335 1,601,799
Other receivables - related parties 3,854,770 2,432,913
Cash in escrow 9,256,424 13,315,468
Inventory - natural gas 0 715,059
Deferred tax asset 6,836,000 6,836,000
Other current assets 783,037 2,106,303
Net assets of discontinued operations 4,239,967 3,266,864
------------------- -------------------
Total current assets 131,358,455 171,795,532
Property, plant and equipment, net 43,309,516 688,451
Long-term receivables - WCTP 10,183,729 11,001,027
Construction in progress 82,371,692 98,399,993
Cash in escrow - long-term 15,272,142 33,864,069
Long-term notes receivable - WCTP 57,330,535 57,330,535
Other intangible assets, net 19,002,837 19,821,691
Other assets (including advances to employees of $851,742
and $654,825, respectively) 5,755,646 8,190,937
------------------- -------------------
Total assets $364,584,552 $401,092,235
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Natural gas accounts payable $93,917,659 $112,789,241
Line of credit 21,928,066 18,150,727
Project payables 9,564,808 21,952,531
Accrued expenses and other payables 11,433,152 13,043,783
Current portion of deferred revenue 0 1,981,002
------------------- -------------------
Total current liabilities 136,843,685 167,917,284
Project notes payable 150,000,000 150,000,000
Other long-term liabilities 778,364 1,434,789
Deferred revenue and other credits 3,027,500 3,114,000
Deferred tax liability 9,603,100 11,503,100
------------------- -------------------
Total liabilities 300,252,649 333,969,173
Minority interest in partnership 2,509,835 2,246,362
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 15,039,169 and 15,018,526 shares, respectively 150,392 150,185
Additional paid-in capital 66,833,737 65,866,629
Accumulated earnings (deficit) (2,933,680) 1,147,719
------------------- -------------------
64,050,449 67,164,533
Less:
Treasury stock, at cost (123,124 shares) (1,409,401) (1,409,401)
Notes receivable - sale of common stock (818,980) (818,981)
Deferred compensation - ESOP 0 (59,451)
------------------- -------------------
------------------- -------------------
Total stockholders' equity 61,822,068 64,876,700
------------------- -------------------
=================== ===================
Total liabilities and stockholders' equity $364,584,552 $401,092,235
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX AND THREE MONTHS ENDED AUGUST 31, 1999 and 1998
<TABLE>
<CAPTION>
For the Six Months Ended August 31, For the Three Months Ended August 31,
----------------------------------- -------------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Natural gas sales $ 520,345,259 $ 353,102,102 $ 252,347,135 $ 184,472,611
Power project services 6,602,687 3,103,347 3,137,656 1,709,545
------------- ------------- ------------- -------------
Total revenues 526,947,946 356,205,449 255,484,791 186,182,156
------------- ------------- ------------- -------------
Costs and expenses:
Cost of natural gas 520,271,464 347,003,934 252,192,700 180,550,328
Cost of power project services 3,178,582 3,073,096 1,694,724 1,708,760
Selling, general and administrative 6,596,753 4,869,835 3,144,159 2,071,202
------------- ------------- ------------- -------------
Total costs and expenses 530,046,799 354,946,865 257,031,583 184,330,290
------------- ------------- ------------- -------------
Other income (expenses):
Interest income - WCTP 2,091,110 2,254,516 1,064,172 1,127,849
Interest income 843,510 585,405 307,020 527,592
Interest expense (2,554,640) (1,184,430) (1,162,291) (1,178,420)
Other income 2,870,151 3,154,235 1,555,671 1,590,958
Minority interest in partnership (263,473) (283,766) (133,641) (141,960)
------------- ------------- ------------- -------------
Total other income 2,986,658 4,525,960 1,630,931 1,926,019
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes (112,195) 5,784,544 84,139 3,777,885
Provision (benefit) for income taxes (938,588) 2,603,044 (445,000) 1,701,592
------------- ------------- ------------- -------------
Income from continuing operations 826,393 3,181,500 529,139 2,076,293
Discontinued operations
Loss from discontinued operations -- (7,904,600) -- (7,547,158)
Estimated loss on disposal (consisting of actual
operating losses during the phase out period) (4,907,794) -- (5,471,048) --
------------- ------------- ------------- -------------
Total loss from discontinued operations (4,907,794) (7,904,600) (5,471,048) (7,547,158)
------------- ------------- ------------- -------------
Net loss ($ 4,081,401) ($ 4,723,100) ($ 4,941,909) ($ 5,470,865)
============= ============= ============= =============
Earnings (loss) per share - Basic:
Continuing operations $ 0.06 $ 0.22 $ 0.04 $ 0.15
Discontinued operations ($ 0.34) ($ 0.55) ($ 0.38) ($ 0.53)
============= ============= ============= =============
Total ($ 0.28) ($ 0.33) ($ 0.34) ($ 0.38)
============= ============= ============= =============
Weighted average number of common shares used
in computing basic earnings (loss) per share 14,446,419 14,250,841 14,482,787 14,270,495
============= ============= ============= =============
Earnings (loss) per share - Diluted:
Continuing operations $ 0.05 $ 0.21 $ 0.03 $ 0.14
Discontinued operations ($ 0.31) ($ 0.52) ($ 0.35) ($ 0.51)
============= ============= ============= =============
Total ($ 0.26) ($ 0.31) ($ 0.32) ($ 0.37)
============= ============= ============= =============
Weighted average number of common shares and
common share equivalents used in computing diluted
earnings (loss) per share 15,486,972 15,090,497 15,506,973 14,675,630
============= ============= ============= =============
</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>
(Unaudited)
1999 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income from continuing operations $826,393 $3,181,500
Adjustments to reconcile net income from continuing operations
to net cash generated by (used in) operating activities:
Depreciation and amortization 154,721 158,709
Deferred taxes (200,000) (4,744,611)
Amortization of deferred credits (86,500) (86,500)
Amortization of deferred charges 1,630,881 140,247
ESOP contribution 356,055 333,006
Minority interest in partnership 263,473 (1,927,342)
Changes in operating assets and liabilities:
(Increase) decrease in receivables 22,521,327 (11,659,230)
Net (increase) decrease in notes receivable, inventory,
other current assets, and other assets 4,459,203 (13,714,847)
Net increase (decrease) in accounts payable, accrued
expenses, deferred revenue and long-term liabilities (40,561,971) 27,759,584
Increase (decrease) in accrued taxes (78,536) 11,822
------------------ ------------------
NET CASH USED IN OPERATING ACTIVITIES
OF CONTINUING OPERATIONS (10,714,954) (547,662)
------------------ ------------------
NET CASH USED IN OPERATING
ACTIVITIES OF DISCONTINUED OPERATIONS, NET OF DEFERRED TAXES (7,580,897) (113,395)
------------------ ------------------
INVESTING ACTIVITIES:
Construction in progress (20,232,104) (124,612,000)
Deposits into cash in escrow (4,900,742) (31,593,470)
Receipts from cash in escrow 27,551,713 11,949,493
Payment of note receivable -- 275,000
Purchase of machinery and equipment (1,426,947) (225,099)
------------------ ------------------
NET CASH GENERATED BY (USED IN) INVESTING ACTIVITIES 991,920 (144,206,076)
------------------ ------------------
FINANCING ACTIVITIES:
Proceeds from Bond Financing -- 150,000,000
Payment of financing costs -- (4,495,642)
Payments on capital leases (14,140) (35,564)
Net borrowings (repayments) from line of credit 3,777,339 20,009,567
Amounts received from ESOP 630,000 --
Proceeds from exercise of stock options and warrants 40,712 153,229
------------------ ------------------
NET CASH GENERATED BY FINANCING ACTIVITIES 4,433,911 165,631,590
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,870,020) 20,764,457
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,993,285 10,254,366
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $10,123,265 $31,018,823
================== ==================
</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 ACompany") consolidated
financial position as at August 31, 1999, results of operations for the six and
three months ended August 31, 1999, and 1998, and cash flows for the six months
ended August 31, 1999 and 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 1999 consolidated financial statements
were reclassified to conform to the Fiscal 2000 presentation. Any adjustments
that have been made to the financial statements are of a normal recurring
nature.
(2) Per Share Data
--------------
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, 1999 and 1998:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
August 31, August 31,
-------------------------------------------- ------------------------------------ ----------------------------------
1999 1998 1999 1998
-------------------------------------------- ----------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 14,910,574 14,878,810 14,914,045 14,885,208
Average of unreleased ESOP shares (464,460) (627,969) (431,867) (614,713)
Weighted average number of common
shares outstanding - basic 14,446,419 14,250,841 14,482,787 14,270,495
Dilution (warrants and options) 1,040,553 839,656 1,024,186 405,135
Weighted average number of common
shares and common share equivalents
outstanding - diluted 15,486,972 15,090,497 15,506,973 14,675,630
-------------------------------------------- ----------------- ------------------ ---------------- -----------------
</TABLE>
5
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
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 approximately 1,627,000 shares of
common stock were outstanding at August 31, 1999, ranging from $5.88 to $11.00,
but were not included in the computation of diluted earnings per share for the
six and three months because the exercise prices were greater than the average
market price of common shares. The options and warrants expire between April,
2000 and June, 2007. For the six and three months ended August 31, 1998,
approximately 2,693,000 options and warrants ranging from $5.44 to $11.00 were
excluded from the computation of diluted earnings per share because the exercise
prices were greater than the average market price per share.
(3) 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 ("PPA") with Texas Utilities Electric
Company. York achieved commercial operation of this wind power project in May
1999 in accordance with the PPA. The facility has a capacity of 34 MW and
includes 46 turbines, including four 1,650 Kilowatt (AkW@) wind turbines. At
August 31, 1999, the total costs capitalized related to the development and
construction of this project were approximately $42.5 million, which is
reflected in fixed assets.
The Big Spring project sells all of its renewable energy to Texas
Utilities Electric Company under a 15 year contract with two five year renewal
options.
(4) Trinidad Project
-----------------
On February 12, 1998, InnCOGEN Limited (AInnCOGEN@), a wholly owned
indirect Trinidadian subsidiary of York, signed a PPA with Trinidad and Tobago
Electricity Commission (AT&TEC@), the government owned transmission and
distribution company, to supply the bulk of the project output under a 30 year
contract. The Company constructed a 215 MW natural gas fueled combustion turbine
project, which achieved commercial operation in September 1999 in accordance
with the PPA. At August 31, 1999, the total costs incurred that relate to the
development and construction of this project were approximately $81,772,000
which are included in construction in progress. Duke/Fluor Daniel constructed
the Trinidad facility under a turnkey construction contract. The Trinidad
facility utilizes three General Electric turbines.
(5) West Texas Project
------------------
On February 26, 1999, West Texas Renewables Limited Partnership ("West
Texas L.P.") signed a PPA with Texas Utilities Electric Company ("TU Electric")
for 6.6MW of capacity from a wind energy facility located on property adjacent
to the Big Spring facility.
6
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The new PPA requires TU Electric to buy all of the power generated by
the facility for 15 years plus options for two additional five year periods, in
a similar manner to the Big Spring facility.
West Texas LP, is a partnership in which a subsidiary of York is a 1%
general partner and Primesouth Inc., a subsidiary of SCANA Corporation, is a 99%
limited partner. The Company accounts for its general partner interest on the
equity method. Primesouth, Inc. purchased its limited partnership interest for a
capital contribution which was used to fund York's construction of the wind
turbine facility. The total amount earned during the six months ended August 31,
1999 was approximately $1,946,000. Approximately $751,000 of the amount earned
was recognized during the three months ended August 31, 1999. The West Texas
wind facility was completed in June 1999, achieved commercial operation and was
transferred to its owner.
(6) Debt Obligations
----------------
(a) Portfolio Project Bond Financing
--------------------------------
On August 4, 1998, a $150 million, 12%, portfolio project bond
financing due October 30, 2007 (the ABond Financing@ or the "Bonds") was
completed by York Power Funding (Cayman) Limited ("the Funding Company"), a
special purpose unaffiliated limited liability company formed for the purpose of
issuing the Bonds. Through the issuance of project notes to the Funding Company,
approximately $102 million of the proceeds of the Bond Financing are being used
to fund the balance of construction costs on two power projects. The remaining
$48 million is being used as follows: (a) $15 million was placed in escrow to
fund a debt service reserve fund, (b) $4.5 million was placed in escrow to fund
a contingency reserve subfund, (c) approximately $3.25 million was placed in
escrow to be used to fund interest during the construction period, (d) $4.5
million was used to fund financing costs related to the offering, and (e) $20.75
million was paid to the Company for general corporate purposes and future
development activities.
The terms of the project notes are identical to the terms of the Bonds.
The Bond Financing is non-recourse to York and collateralized by all of the
assets and future cash flow of the 215MW Trinidad power project and 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 collateralized
assets is approximately $182 million at August 31, 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, if any,
to be received by certain York subsidiaries from 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. Pursuant to the Bond Financing, the Funding
Company was obligated to register the bonds. Failure to register the bonds could
result in an additional .5% interest on the bonds and the project notes payable.
7
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the Bond Financing, approximately $7,982,000 of deferred
financing costs were incurred. These deferred financing costs are being
amortized over the life of the Bond Financing. Accumulated amortization through
August 31, 1999 was approximately $858,000.
(b) Line of Credit
--------------
North American Energy Conservation, Inc. ("NAEC") has a revolving line
of credit of $25,000,000, which is collateralized by its assets, and further
guaranteed by the Company. The line of credit, which expires in December 1999,
bears interest at one quarter percent per annum over the prime rate. It is the
Company's intention to renew or replace this line of credit upon expiration. At
August 31, 1999 and February 28, 1999, the loan payable was approximately $22
million and $18 million, respectively. The amount available under this line of
credit is based on net qualified accounts receivable. Under the line of credit,
NAEC is required to meet certain covenants including minimum net worth.
(7) Significant New Accounting Pronouncements
-----------------------------------------
The American Institute of Certified Public Accountant=s Accounting
Standards Executive Committee issued Statement of Position 98-5 (ASOP 98-5"),
AReporting 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. The adoption of SOP 98-5 had no
material impact on the companies consolidated financial statements.
In June 1998, The Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", (ASFAS 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, 2000. The Company is currently evaluating the impact
that SFAS 133 will have on the Company=s consolidated financial statements and
disclosures.
In December 1998, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached consensus on Issue No. 98-10, "Accounting for
Contracts involved in Energy Trading and Risk Management Activities" ("EITF
98-10"). EITF 98-10 is effective for fiscal years beginning after December 15,
1998 and requires energy trading contracts to be recorded at fair value on the
balance sheet, with the changes in fair value included in earnings. The Company
has determined that based on its operations EITF 98-10 does not apply.
8
<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, NAEC. NAEC and many others were required
to immediately meet existing fixed price commitments. The resulting turmoil
caused prices to immediately increase 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, in August 1998, York determined that NAEC should
discontinue the electric marketing business due to the volatility, lack of
liquidity and unacceptable risk parameters. NAEC will continue, however, to meet
existing contract obligations, which 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. The operating results of the discontinued
operations are summarized as follows:
<TABLE>
<CAPTION>
For the Six Months Ended August 31, For the Quarter Ended August 31,
----------------------------------- --------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 41,075,327 $ 161,891,393 $ 25,034,746 $ 108,449,105
------------ ------------- ------------ -------------
Loss before tax benefit (6,272,778) (14,372,000) (7,171,048) (13,722,106)
------------ ------------- ------------ -------------
Tax benefit (1,364,984) (6,467,400) (1,700,000) (6,174,948)
------------ ------------- ------------ -------------
Net loss ($ 4,907,794) ($ 7,904,600) ($ 5,471,048) ($ 7,547,158)
------------ ------------- ------------ -------------
</TABLE>
Net assets and net liabilities of discontinued operations consist
mainly of trade accounts receivable and trade accounts payable.
During the six months ended August 31, 1999, the Company recorded
$1,700,00 of deferred taxes relating to discontinued operations.
The line of credit (See Note 6b) was utilized in Fiscal 1999 and
subsequent to solely finance losses incurred by the discontinued operations.
Accordingly, interest expense of approximately $461,000 and $287,000 has been
allocated to discontinued operations in the six and three months ended August
31, 1999, respectively, and $293,500 and $0 was allocated in the six and three
months ended August 31, 1998, respectively.
9
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
At August 31, 1999 and February 28, 1999, included in net assets from
discontinued operations is a net amount receivable of approximately $3.7
million. NAEC is suing the debtor to recover the amounts receivable, and NAEC is
being countersued by the debtor for matters relating to the obligation to
deliver power. The Company believes the amounts are fully recoverable, and no
additional amounts are expected to be paid under the countersuit.
(9) Segment Information
-------------------
The Company has two reportable segments: Greenpower and Energy
Marketing.
The Greenpower segment conducts business by developing, constructing
and operating cogeneration and wind energy facilities. The Company operates two
cogeneration facilities in New York City, and owns and operates a wind energy
facility in Big Spring, Texas, which began to generate revenues in Fiscal 1999.
The customers for these projects are major utilities.
The Energy Marketing segment is engaged in the marketing (purchase and
sale) of natural gas in wholesale and retail markets. The wholesale group's
customers are utilities, producers, and marketing companies, who buy and sell
natural gas daily in order to meet fluctuating market obligations. This segment
does business over approximately 12-15 market centers mainly in the Northeast
United States, but also at locations in the Mid-Atlantic and Gulf of Mexico
regions. The retail group markets to industrial and commercial customers in
Western and Central New York.
Intersegment revenues are recorded at cost.
Assets in foreign countries at August 31, 1999 were approximately $81.8
million, and are located in the Republic of Trinidad and Tobago.
Segment information for continuing operations for the six and three
months ended August 31, 1999 and 1998 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
------------------------ --------------------------
August 31, August 31,
---------- ----------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from external customers:
Energy Marketing $ 520,345 $ 353,102 $ 252,347 $ 184,472
Greenpower 6,603 3,103 3,138 1,710
--------- --------- --------- ---------
Total Revenues
$ 526,948 $ 356,205 $ 255,485 $ 186,182
========= ========= ========= =========
Intersegment revenues:
Energy Marketing $ 284 $ 0 $ 0 $ 0
--------- --------- --------- ---------
Total intersegment revenues $ 284 $ 0 $ 0 $ 0
========= ========= ========= =========
Income (loss) from continuing operations
before income taxes:
Energy Marketing $ (1,778) $ 4,396 $ (726) $ 3,174
Greenpower 3,439 4,048 1,930 1,920
General corporate expenses (1,773) (2,660) (1,120) (1,316)
--------- --------- --------- ---------
Consolidated income (loss) from continuing
operations before income taxes:
$ (112) $ 5,784 $ 84 $ 3,778
========= ========= ========= =========
</TABLE>
10
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(10) Income Taxes
------------
In the six and three months ended August 31, 1999 the Company
recognized a tax benefit of approximately $939,000 and $445,000,respectively,
primarily related to federal wind tax credits generated by the Big Spring
Facility.
11
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Introduction
- ------------
The Company conducts business in two complementary segments of the
energy industry: (a) Greenpower, which includes developing constructing and
operating Greenenergy production facilities, including those that utilize
natural gas as fuel to produce thermal and electric power ("cogeneration") or
renewable energy projects primarily converting wind energy into transmittable
electric power, and (b) energy marketing, which involves the purchase and sale
of natural gas in the wholesale and retail markets.
Within our Greenpower business, we have three currently operating
facilities: in New York City, a 38MW Warbasse cogeneration facility (the
"Warbasse facility") and a 286MW Brooklyn Navy Yard cogeneration facility (the
"BNY facility"), and in Big Spring, Texas, a 34MW wind energy facility (the "Big
Spring facility"). A 215MW natural gas fueled power project in the Republic of
Trinidad and Tobago (the "Trinidad project") began commercial operation in
September 1999. In addition, we are a 1% general partner in a 6.6MW wind energy
project (the "West Texas project"), which began commercial operation at the end
of June 1999.
York's Energy Marketing business has been developed to take advantage
of the evolving deregulation in the energy industries. We participate in the
natural gas market through our 85% owned subsidiary, North American Energy
Conservation, Inc. ("NAEC"). NAEC's natural gas marketing operation is comprised
of wholesale and retail marketing.
Liquidity and Capital Resources
- -------------------------------
Overview
- --------
The Company finances initial development of its projects' cash needs
from its own funds. When a project is determined to be feasible, the Company
will generally seek to finance construction through some form of non-recourse
project financing. Once a project is operational, any additional capital
requirements are expected to be met by the operations of the facility. In
addition, the Company may finance future projects through the sale of partial
interests or other financing techniques. For example, construction of the West
Texas project, as well as a fee to York, have been financed by a capital
contribution of the 99% limited partner in this project.
General corporate and pre-financing project development needs have been
and will be met by the cash flow derived from the power projects, from future
profits of the energy marketing segment, and in the future if deemed appropriate
from existing and new debt or equity sources. In addition, these sources will be
used to fund the negative working capital existing at August 31, 1999.
In order to support NAEC's natural gas marketing business, and all of
NAEC's working capital needs, NAEC has 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. This line of credit
expires December, 1999. It is our intention to renew or replace this line of
credit upon expiration. The Company has used this credit line principally to
support the electric operations to date, and believes this line of credit and
possible future expansions thereof will be sufficient to support the capital and
credit needs of NAEC.
12
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Although still subject to price, availability and other market
fluctuations, as well as credit constraints, the natural gas marketing business
has been deregulated for many years. The Company uses put and call options, and
futures contracts (AInstruments@) in various combinations, to hedge physical
positions in the natural gas business. 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 at the time of settlement.
Portfolio Bond Financing
- ------------------------
On August 4, 1998, a $150,000,000, 12% portfolio bond financing due
October 30, 2007 was completed. Through the issuance of project notes to a
funding company, this financing provided approximately $102 million toward
construction and completion of the Big Spring and Trinidad projects, funded a
debt service reserve of approximately $15 million, interest during construction
and other costs of approximately $12.25 million, as well as provided
approximately $20.75 million 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 BNY and Warbasse facilities, as well as all of the cash flow and assets
of the Big Spring and Trinidad projects.
General
- -------
During the six months ended August 31, 1999, cash and cash equivalents
decreased approximately $12.9 million. Cash used in operating activities of
continuing operations was approximately $12.4 million.
Approximately $5.9 million was used in discontinued operations.
During the six months ended August 31, 1999, investing activities
generated approximately $1 million including approximately $20.2 million spent
on construction in progress primarily funded from receipts of approximately
$27.6 million from the escrow accounts.
During the six months ended August 31, 1999, financing activities
generated approximately $4.4 million, primarily due to an increase in the net
borrowings from the line of credit.
See Note 7 for disclosure of the impact of significant new accounting
pronouncements.
Year 2000 Compliance
- --------------------
In analyzing its Year 2000 ("Y2K") exposure, York has considered the
operations of both it and its subsidiaries, as well the operations of the
parties with whom they deal. Based on its review to date, and a recently
completed review of all significant operations by an independent party, York
does not believe that the issue of computer programs and imbedded computer chips
being unable to distinguish between the year 1900 and the year 2000 will be
material to the Company.
13
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
York has evaluated the nature of its contracts, and the contracts of
its subsidiaries. As noted below, the contracts for electricity provide for the
counterparty to make capacity payments representing the bulk of the payments
under the contract, whether or not electricity is delivered. In the case of gas,
there should be alternative methods of delivering gas even if a particular
pipeline system is shut down. As a result, York does not believe that a
contingency plan is necessary, and it does not currently intend to adopt a
formal contingency plan.
As the year 2000 approaches, York and its subsidiaries will be
continuing to monitor their operations, and the operations of their suppliers
and customers, to ascertain whether any unexpected Y2K problems arise. York has
not incurred material Y2K costs to date; and at this point there do not appear
to be any material Y2K costs to be incurred on behalf of York or any of its
subsidiaries.
Projects
--------
The bulk of the revenues from York's power projects are derived from
power purchase agreements with utilities. With the exception of the TU Wind
Power contract, these contracts provide that even if electricity is not
delivered, the project is entitled to receive substantial capacity payments. As
a result, even if the utilities to which York delivers power are unable to
accept the power, the bulk of the payments under these contracts will continue
to be made.
With respect to the Wind Power Project, although there are no capacity
payments, that contract specifies minimum payments each year, with overpayments
to be made up by subsequent production. Accordingly, even if there is an
interruption in delivering power in the Wind Project, York does not believe it
will have a material effect on its revenues or operations.
The computers used in the Big Spring facility are new, and therefore
Y2K compliant. Based on a review of TU Electric's public filings, York does not
believe that there will be a material problem arising out of the failure of TU
Electric's systems to be Y2K compliant.
The Trinidad Project was completed in September 1999, and its
operations are expected to be Y2K compliant. Based on a review of public
filings, Palmark, Inc., who will be providing operating and maintenance services
to the Trinidad Project does not appear to have material Y2K problems. York has
been unable to ascertain the extent to which the Government of Trinidad will
have a Y2K problem. However, York does not anticipate that any Y2K problem on
the part of the Government of Trinidad, or T&TEC, will have a material effect on
the operations of the Trinidad Project.
The BNY facility and the Warbasse facility have both previously been in
commercial operation. However, based upon a review of their systems, it does not
appear that there will be any material Y2K compliance issues. Based on a review
of public filings of Con Edison, the main customer of each of these Projects,
and Palmark, which provides the BNY facility with operating and maintenance
services, York does not anticipate there will be a material Y2K compliance issue
resulting from Con Edison or Palmark.
York engages in development activities for new projects, and provides
administrative and other services to certain of its subsidiaries. Based on a
review of its systems, it does not appear that there will be any material Y2K
compliance issues.
14
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NAEC
----
The two principal external computer systems with which NAEC is required
to deal are the gas commodity exchanges, which set prices, and the pipeline
systems. In the event the gas commodity exchanges are inoperable, this will
result in a potential delay in determining the price at which NAEC is buying
and/or selling gas, but should not result in the loss of any material net
revenues. With respect to the pipeline system, a shutdown of the pipeline system
could interrupt gas deliveries. However, NAEC has experience in rerouting gas
over alternative pipeline systems. Accordingly, even if a particular pipeline
system shuts down, NAEC believes that this will result in no more than a
possible delay in delivery of gas by or to NAEC.
Based on a review of NAEC's internal computer systems, York does not
believe that there will be any material Y2K compliance issues. In addition, NAEC
has made inquiries of its material customers and suppliers as to their Y2K
compliance. Based on responses received, NAEC does not believe that its material
customers and suppliers will have any material Y2K compliance issues which could
affect NAEC.
Results of Operations
- ---------------------
1999 Compared to 1998
- ---------------------
Natural gas sales increased approximately $167 million and $68 million,
respectively, when comparing the six and three months ended August 31, 1999 to
the six and three months ended August 31, 1998 and cost of natural gas increased
approximately $173 million and $72 million, respectively, when comparing the
same periods. These increments were due to an increase in the volume of natural
gas moved this year versus last year as part of the overall growth strategy and
increased per unit transportation costs incurred. Gross margins on the gas
business are impacted by changes in unit prices, supply and seasonal factors. In
the six months ended August 31, 1999, gross margins have been negatively
impacted by a reduced number of suppliers and customers caused by increased
credit constraints.
Power project service revenues and cost of power project services
include fuel and other operations and maintenance costs. Revenues increased
approximately $3,499,000 and $1,428,000, respectively, and cost of power project
services increased approximately $105,000 and decreased approximately $14,000,
respectively, when comparing the six and three months ended August 31, 1999 to
the six and three months ended August 31, 1998, mainly due to increases of
approximately $1,689,000 and $785,000, and $211,000 and $93,000, respectively,
as a result of the commencement of operations of the Big Spring project. The
amount earned on construction of the West Texas facility (see Note 5) also
accounted for an increase in revenues of approximately $1,946,000 and $751,000,
respectively, when comparing the above periods.
15
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative expenses increased approximately
$1,727,000 and $1,073,000, respectively, when comparing the six and three months
ended August 31, 1999 to the same periods in the prior year. Of this increase,
approximately $839,000 and $348,000 relates to non-cash amortization of the
following: (a) an increase of approximately $347,000 and $144,000 as a result of
amortization of deferred financing costs due to the Portfolio Bond Financing in
August 1998, and (b) an increase of approximately $492,000 and $204,000 due to
amortization of the deferred charge resulting from the transfer of a note to
minority interests in August 1998. In addition to these non-cash expenses,
approximately $888,000 and $725,000 related to new project development, which
accounts for the balance of the increase.
Interest income increased approximately $258,000 and decreased
approximately $221,000 when comparing the six and three months ended August 31,
1999 to the six and three months ended August 31, 1998 due to respective levels
of cash available for investment. Since the Portfolio Bond Financing closed on
August 4, 1998, the impact on the six month comparison is greater than the
impact on the three month comparison.
Interest expense increased approximately $1,370,000 and decreased
approximately $16,000 when comparing the six and three months ended August 31,
1999 to the six and three months ended August 31, 1998. The increase for the six
months was caused by the same reason as the changes in interest income as noted
above. The decrease for the three months was caused by capitalization of
interest expense on substantially higher construction costs incurred as of
August 31, 1999.
Other income decreased approximately $284,000 and $35,000,
respectively, mainly due to a decrease in royalty fees from BNYLP of
approximately $229,000 during the six month period.
16
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
PART II
-------
ITEM 1. Legal Proceedings
None
ITEM 4. Submission of Matters To A Vote Of Security Holders
The annual meeting of Stockholders of York Research Corporation was
held on July 21, 1999.
At the meeting the following items were voted upon:
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
ITEM FOR AGAINST WITHHELD NON-VOTES
---- --- ------- -------- ---------
<S> <C> <C> <C> <C>
Election of Directors:
Howard F. Sommer 13,429,079 648,487
Harvey W. Schultz 13,428,579 648,987
Ratification of Adoption of
1999 Incentive Stock Option
Plan 5,901,116 2,524,256 140,217
Ratification of the
appointment of Auditors 13,537,437 356,463 163,666
</TABLE>
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 August 31, 1999.
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 12, 1999 /s/ Robert M. Beningson
------------------------
Robert M. Beningson
Chairman of the Board and
President
Dated: October 12, 1999 /s/ Michael Trachtenberg
------------------------
Michael Trachtenberg
Executive Vice President
and Chief Financial and
Accounting Officer
18
<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 AUGUST 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> AUG-31-1999
<CASH> 10,123,265
<SECURITIES> 0
<RECEIVABLES> 94,584,657
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 131,358,455
<PP&E> 44,805,612
<DEPRECIATION> (1,496,096)
<TOTAL-ASSETS> 364,584,552
<CURRENT-LIABILITIES> 136,843,685
<BONDS> 0
0
0
<COMMON> 150,392
<OTHER-SE> 61,671,676
<TOTAL-LIABILITY-AND-EQUITY> 364,584,552
<SALES> 520,345,259
<TOTAL-REVENUES> 526,947,946
<CGS> 520,271,464
<TOTAL-COSTS> 523,450,046
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (112,195)
<INCOME-TAX> (938,588)
<INCOME-CONTINUING> 826,393
<DISCONTINUED> (4,907,794)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,081,401)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.26)
</TABLE>
