<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MAY 31, 1999
------------------------------------------------
OR
|X| 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
14,914,045.
- -----------
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, February 28,
1999 1999
------------------ ------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $14,975,007 $22,993,285
Trade accounts receivable 86,422,045 118,527,841
Income tax refund receivable 1,557,134 1,601,799
Other receivables - related parties 4,619,495 2,432,913
Cash in escrow 3,797,329 13,315,468
Inventory - natural gas -- 715,059
Deferred tax asset 6,836,000 6,836,000
Other current assets 1,262,957 2,106,303
Net assets of discontinued operations 2,087,147 3,266,864
------------------ ------------------
Total current assets 121,557,114 171,795,532
Property, plant and equipment, net 41,793,118 688,451
Long-term receivables - WCTP 9,501,027 11,001,027
Construction in progress 77,280,833 98,399,993
Cash in escrow - long-term 23,435,080 33,864,069
Long-term notes receivable - WCTP 57,330,535 57,330,535
Other intangible assets, net 19,397,877 19,821,691
Other assets (including advances to employees
of $654,825) 5,714,116 8,190,937
------------------ ------------------
Total assets $356,009,700 $401,092,235
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Natural gas accounts payable $84,572,369 $112,789,241
Line of credit 10,619,671 18,150,727
Project payables 9,784,467 21,952,531
Accrued expenses and other payables 10,890,786 13,043,783
Current portion of deferred revenue 5,962,276 1,981,002
------------------ ------------------
Total current liabilities 121,829,569 167,917,284
Project notes payable 150,000,000 150,000,000
Other long-term liabilities 1,467,979 1,434,789
Deferred revenue and other credits 3,070,750 3,114,000
Deferred tax liability 11,303,100 11,503,100
------------------ ------------------
Total liabilities 287,671,398 333,969,173
Minority interest in partnership 2,376,195 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 15,037,169 and 15,018,526 shares respectively 150,372 150,185
Additional paid-in capital 65,983,399 65,866,629
Accumulated earnings 2,008,225 1,147,719
------------------ ------------------
68,141,996 67,164,533
Less:
Treasury stock, at cost (123,124 shares) (1,409,401) (1,409,401)
Notes receivable - sale of common stock (721,996) (818,981)
Deferred compensation - ESOP (48,492) (59,451)
------------------ ------------------
Total stockholders' equity 65,962,107 64,876,700
------------------ ------------------
Total liabilities and stockholders' equity $356,009,700 $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 THREE MONTHS ENDED MAY 31,
<TABLE>
<CAPTION>
(Unaudited)
1999 1998
----------------- -----------------
<S> <C> <C>
REVENUES:
Natural gas sales $268,282,064 $168,337,561
Power project services 2,269,706 1,393,804
----------------- -----------------
Total revenues 270,551,770 169,731,365
----------------- -----------------
COSTS AND EXPENSES:
Cost of natural gas 268,362,704 166,161,676
Cost of power project services 1,683,858 1,364,338
Selling, general and administrative 3,252,594 2,798,635
----------------- -----------------
Total costs and expenses 273,299,156 170,324,649
----------------- -----------------
OTHER INCOME (EXPENSES):
Interest income - WCTP 1,026,937 1,126,667
Interest income 536,490 57,816
Interest expense (1,392,349) (6,010)
Other income 2,509,805 1,563,280
Minority interest in partnership (129,832) (141,811)
----------------- -----------------
Total other income 2,551,051 2,599,942
----------------- -----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (196,335) 2,006,658
Provision (benefit) for income taxes (493,588) 856,902
----------------- -----------------
INCOME FROM CONTINUING OPERATIONS 297,253 1,149,756
DISCONTINUED OPERATIONS
Loss from discontinued operations -- (401,993)
Estimated income (loss) on disposal (including actual operating
income during the phase out period) 563,253 --
----------------- -----------------
Total income (loss) from discontinued operations 563,253 (401,993)
----------------- -----------------
NET INCOME $860,506 $747,763
----------------- -----------------
----------------- -----------------
EARNINGS (LOSS) PER SHARE - BASIC:
Continuing operations $0.02 $0.08
Discontinued operations $0.04 ($0.03)
----------------- -----------------
Total $0.06 $0.05
----------------- -----------------
----------------- -----------------
Weighted average number of common shares used in
computing basic earnings (loss) per share 14,410,050 14,220,837
----------------- -----------------
----------------- -----------------
EARNINGS (LOSS) PER SHARE - DILUTED:
Continuing operations $0.02 $0.07
Discontinued operations $0.04 ($0.02)
----------------- -----------------
Total $0.06 $0.05
----------------- -----------------
----------------- -----------------
Weighted average number of common shares and common share equivalents used in
computing diluted earnings (loss)
per share 15,466,971 15,463,157
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 31,
<TABLE>
<CAPTION>
(Unaudited)
1999 1998
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income from continuing operations $297,253 $1,149,756
Adjustments to reconcile net income from continuing operations to
net cash generated by (used in) operating activities:
Depreciation and amortization 317,442 74,247
Deferred tax benefit (200,000) --
Amortization of deferred credits (43,250) (760,488)
Amortization of deferred charges 288,138 --
ESOP contribution 190,449 175,507
Minority interest in partnership 129,833 144,754
Changes in operating assets and liabilities:
Increase in receivables 29,919,214 (12,092,391)
Net (increase) decrease in notes receivable, inventory, other current
assets, and other assets 5,800,388 (1,113,121)
Net increase (decrease) in accounts payable, accrued expenses, deferred
revenue and long-term liabilities (33,309,328) 12,398,100
Increase (decrease) in accrued taxes (144,665) 393,838
---------------- ---------------
NET CASH GENERATED BY OPERATING ACTIVITIES OF
CONTINUING OPERATIONS 3,245,474 370,202
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS 1,742,970 (851,762)
---------------- ---------------
INVESTING ACTIVITIES:
Construction in progress (25,410,268) (2,737,708)
Receipts from cash in escrow 19,947,128 --
Purchase of machinery and equipment (32,838) (159,811)
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (5,495,978) (2,897,519)
---------------- ---------------
FINANCING ACTIVITIES:
Payments on capital leases (14,140) (32,536)
Repayment of notes receivable -- 275,000
Net borrowings (repayments) from line of credit (7,531,056) 1,357,892
Proceeds from exercise of stock options and warrants 34,452 136,027
---------------- ---------------
NET CASH GENERATED BY (USED IN) FINANCING ACTIVITIES (7,510,744) 1,736,383
---------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS (8,018,278) (1,642,696)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,993,285 10,254,366
---------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14,975,007 $8,611,670
---------------- ---------------
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
In the opinion of management, the accompanying consolidated, unaudited
financial statements contain all adjustments necessary to present fairly York
Research Corporation and Subsidiaries' ("York" or the "Company") consolidated
financial position as at May 31, 1999, results of operations for the three
months ended May 31, 1999, and 1998, and cash flows for the three months ended
May 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 three
months ended May 31, 1999 and 1998:
<TABLE>
<CAPTION>
------------------------------------------------- ------------------------------------
THREE MONTHS ENDED
MAY 31,
------------------------------------------------- ---------------- -------------------
1999 1998
------------------------------------------------- ---------------- -------------------
<S> <C> <C>
Weighted average number of common shares 14,907,102 14,862,062
outstanding
------------------------------------------------- ---------------- -------------------
Average of unreleased ESOP shares (497,052) (641,225)
------------------------------------------------- ---------------- -------------------
Weighted average number of common shares 14,410,050 14,220,837
outstanding - basic
------------------------------------------------- ---------------- -------------------
Dilution (warrants and options) 1,056,921 1,242,320
------------------------------------------------- ---------------- -------------------
Weighted average number of common shares and 15,466,971 15,463,157
common share equivalents outstanding - diluted
------------------------------------------------- ---------------- -------------------
</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 1,860,000 shares of
common stock were outstanding at May 31, 1999, ranging from $5.88 to $11.00, but
were not included in the computation of diluted earnings per share for the 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 quarter ended May 31, 1998, 389,300 options and warrants ranging
from $8.00 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 with Texas Utilities Electric Company. York
has completed construction of this wind power project and achieved full
commercial operation in May 1999. The facility has a capacity of 34 MW and
includes 46 turbines, including four 1,650 Kilowatt ("kW") wind turbines. At May
31, 1999, the total costs capitalized related to the development and
construction of this project were approximately $41,329,000, which were
transferred to fixed assets from construction in progress at May 31, 1999.
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.
(4) 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 is constructing a 215 MW natural gas
fueled combustion turbine project for commercial operation by Fall 1999. At May
31, 1999, the total costs incurred that relate to the development and
construction of this project were approximately $74,354,000 which are included
in construction in progress. Duke/Fluor Daniel is constructing the Trinidad
facility under a turnkey construction contract.
The Trinidad facility will utilize three General Electric turbines.
(5) WEST TEXAS PROJECT
On February 26, 1999, West Texas Renewables Limited Partnership ("West
Texas L.P.") signed a power purchase agreement ("PPA") with Texas Utilities
Electric Company ("TU Electric") for 6.6MW of capacity from a wind energy
facility to be 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. Primesouth, Inc. purchased its limited partnership interest for
a capital contribution which is being used to fund construction of the wind
turbine facility as well as to pay York a fee for supervising construction and
to reimburse York for certain expenses incurred in developing and constructing
the project. The fee is estimated to be $1,594,000 in total of which $1,195,000
was recognized in the quarter ended May 31, 1999, and included in other income.
(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 "Bond Financing") 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 the two new 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 34MW
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 $173 million at May 31, 1999. The Trinidad project is
expected to achieve full commercial operation in September 1999, and the Big
Spring Project began full commercial operation in May 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.
Amortization through May 31, 1999 was approximately $658,000.
(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
May 31, 1999 and February 28, 1999, the loan payable was approximately $10.6
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 ("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. 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", ("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, 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 QUARTER ENDED MAY 31,
1999 1998
---- ----
<S> <C> <C>
Revenues $16,040,600 $53,442,300
-------------------- --------------------
Income (loss) before tax benefit $898,300 ($649,900)
-------------------- --------------------
Tax provision (benefit) $335,000 ($247,900)
-------------------- --------------------
Net income (loss) $563,300 ($402,000)
-------------------- --------------------
</TABLE>
Net assets and net liabilities of discontinued operations consist
mainly of trade accounts receivable and trade accounts payable.
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 $194,000 and $ 0 has been
allocated to discontinued operations in the quarters ended May 31, 1999 and
1998.
At May 31, 1999 and February 28, 1999, included in net assets from
discontinued operations is a net amount receivable of approximately $3.6
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
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 May 31, 1999 were approximately $74.4
million, and are located in the Republic of Trinidad and Tobago.
Segment information for continuing operations for the quarter ended May
31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MAY 31,
(IN THOUSANDS OF DOLLARS)
1999 1998
---- ----
<S> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
Energy Marketing $ 268,282 $ 168,337
Greenpower 2,270 1,394
----------------- -----------------
TOTAL REVENUES $ 270,552 $ 169,731
----------------- -----------------
INTERSEGMENT REVENUES:
Energy Marketing $ 284 $ 292
----------------- -----------------
TOTAL INTERSEGMENT REVENUES $ 284 $ 292
----------------- -----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES:
Energy Marketing ($ 1,052) $ 1,222
Greenpower 1,510 2,128
General corporate expenses (654) (1,343)
----------------- -----------------
CONSOLIDATED INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES: ($ 196) $ 2,007
----------------- -----------------
</TABLE>
(10) INCOME TAXES
In the quarter ended May 31, 1999 the Company recognized a tax benefit
of approximately $494,000 primarily related to federal wind tax credits
generated by the Big Spring Facility.
10
<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"). We are constructing a 215MW natural gas fueled power project
in the Republic of Trinidad and Tobago (the "Trinidad project") scheduled for
completion by the fall of 1999. In addition, we have the 6.6MW wind energy
project (the "West Texas project"), which began commercial operations 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 has been financed by a capital contribution of the limited partner
in this project.
General corporate and pre-financing project development needs are and
will be met by the cash flow derived from the power projects, from profits of
the energy marketing segment, and in the future if deemed appropriate from new
debt or equity sources.
NAEC's natural gas marketing business continues to grow. In order to
support that growth, 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.
11
<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, the natural gas marketing business has been deregulated for many
years. The Company uses put and call options, and futures contracts
("Instruments") 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 quarter ended May 31, 1999, cash and cash equivalents
decreased approximately $8 million. Cash generated by operating activities of
continuing operations was approximately $3.2 million.
Approximately $1.7 million was generated by discontinued operations.
During the quarter ended May 31, 1999, investing activities used
approximately $5.5 million including approximately $25.4 million spent on
construction in progress primarily funded from receipts from the escrow
accounts.
During the quarter ended May 31, 1999, financing activities used
approximately $7.5 million, due to the net repayment of 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, 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.
12
<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 Big Spring facility was completed in May 1999. As a result, the
computers used in its operations are Y2K compliant. Construction of the West
Texas Project was substantially completed by June 30, 1999. Accordingly, York
does not anticipate any Y2K problem from construction contractors. In
addition, 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 is currently being constructed, and its operations
are expected to be Y2K compliant. Based on a review of public filings, the
parties providing construction services to the Trinidad Project, and Palmark,
Inc., who will be providing operating and maintenance services to the
Trinidad Project after construction, do 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.
13
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 selling
gas, but should not result in the loss of any material 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 and cost of natural gas increased approximately $100
million and $102 million, respectively, when comparing the quarter ended May 31,
1999 to the quarter ended May 31, 1998. 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.
Power project service revenues and cost of power project services
include fuel and other operations and maintenance costs. Revenues increased
approximately $876,000 and cost of power project services increased
approximately $320,000 when comparing the quarter ended May 31, 1999 to the
quarter ended May 31, 1998, mainly due to increases of approximately $904,000
and $318,000, respectively, as a result of the commencement of preliminary
operations of the Big Spring project. Included in the $318,000 of cost of power
project services is $200,000 of depreciation.
Selling, general and administrative expenses increased approximately
$454,000 when comparing the quarter ended May 31, 1999 to the same quarter in
the prior year. Of this increase, approximately $395,000 relates to non-cash
amortization of the following: (a) an increase of approximately $107,000 as a
result of amortization of deferred financing costs due to the Portfolio Bond
Financing in August 1998, and (b) an increase of approximately $288,000 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,
payroll and employee benefits increased approximately $162,000 when comparing
quarter to quarter as a result of new personnel and salary increases.
14
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest income increased approximately $479,000 when comparing the
quarter ended May 31, 1999 to the quarter ended May 31, 1998 due to increased
levels of cash available for investment, mainly due to the Portfolio Bond
Financing.
Interest expense increased approximately $1,386,000 when comparing the
quarter ended May 31, 1999 to the quarter ended May 31, 1998 primarily due to
the Portfolio Bond Financing.
Other income increased approximately $947,000 mainly due to an increase
of approximately $1,195,000 as a result of the recognition of fee income from
Primesouth, Inc. (see Note 5), offset by a decrease in royalty fees from BNYLP
of approximately $243,000.
15
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) There were no reports on Form 8-K filed during the three months
ended May 31, 1999.
16
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 14, 1998 /S/ROBERT M. BENINGSON
------------------------
Robert M. Beningson
Chairman of the Board and
President
Dated: July 14, 1998 /S/ MICHAEL TRACHTENBERG
------------------------
Michael Trachtenberg
Executive Vice President
and Chief Financial and
Accounting Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS OF AND
FOR THE PERIODS ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
<CASH> 14,975,007
<SECURITIES> 0
<RECEIVABLES> 86,422,045
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 121,557,114
<PP&E> 2,049,512
<DEPRECIATION> (1,361,061)
<TOTAL-ASSETS> 356,009,700
<CURRENT-LIABILITIES> 121,829,569
<BONDS> 150,000,000
0
0
<COMMON> 150,372
<OTHER-SE> 65,811,735
<TOTAL-LIABILITY-AND-EQUITY> 356,009,700
<SALES> 268,282,064
<TOTAL-REVENUES> 270,551,770
<CGS> 268,362,704
<TOTAL-COSTS> 270,046,562
<OTHER-EXPENSES> 3,252,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,392,349
<INCOME-PRETAX> (196,335)
<INCOME-TAX> (493,588)
<INCOME-CONTINUING> 297,253
<DISCONTINUED> 563,253
<EXTRAORDINARY> 0
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<NET-INCOME> 860,506
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