<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, 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
15,126,284.
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30, February 28,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,346,701 $ 22,993,285
Trade accounts receivable 94,338,893 118,527,841
Income tax refund receivable 2,019,468 1,601,799
Other receivables - related parties 3,295,593 2,432,913
Cash in escrow 10,781,784 13,315,468
Inventory - natural gas 1,993,261 715,059
Deferred tax asset 6,836,000 6,836,000
Other current assets 5,206,056 2,106,303
Net assets of discontinued operations 3,864,870 3,266,864
------------- -------------
Total current assets 134,682,626 171,795,532
Property, plant and equipment, net 133,817,055 688,451
Long-term receivables - WCTP 5,581,186 6,657,052
Construction in progress 785,722 98,399,993
Cash in escrow - long-term -- 33,864,069
Long-term notes and interest receivable - WCTP 64,911,641 61,674,510
Intangible assets, net 18,511,783 19,821,691
Other assets (including advances to employees of $854,990
and $654,825, respectively) 5,746,460 8,190,937
------------- -------------
Total assets $ 364,036,473 $ 401,092,235
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Natural gas accounts payable $ 91,710,914 $ 112,789,241
Line of credit 27,505,563 18,150,727
Project payables 12,401,985 21,952,531
Accrued expenses and other payables 6,448,997 13,043,783
Current portion of deferred revenue -- 1,981,002
------------- -------------
Total current liabilities 138,067,459 167,917,284
Project notes payable 150,000,000 150,000,000
Other long-term liabilities 772,915 1,434,789
Deferred revenue and other credits 2,984,250 3,114,000
Deferred tax liability 7,968,084 11,503,100
------------- -------------
Total liabilities 299,792,708 333,969,173
Minority interest in partnership 2,654,387 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 15,249,408 and 15,018,526 shares, respectively 152,494 150,185
Additional paid-in capital 66,876,432 65,866,629
Accumulated earnings (deficit) (3,454,286) 1,147,719
------------- -------------
63,574,640 67,164,533
Less:
Treasury stock, at cost (123,124 shares) (1,409,401) (1,409,401)
Notes receivable - sale of common stock (575,861) (818,981)
Deferred compensation - ESOP -- (59,451)
------------- -------------
Total stockholders' equity 61,589,378 64,876,700
------------- -------------
Total liabilities and stockholders' equity $ 364,036,473 $ 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
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
For the Nine Months Ended For the Three Months Ended
November 30, November 30,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Natural gas sales $ 800,033,882 $ 584,581,204 $ 279,688,623 $ 231,479,102
Power project services 13,797,731 4,713,101 7,195,044 1,609,753
------------- ------------- ------------- -------------
Total revenues 813,831,613 589,294,305 286,883,667 233,088,855
------------- ------------- ------------- -------------
Costs of revenues:
Cost of natural gas 801,028,812 576,765,911 280,757,348 229,761,978
Cost of power project services 5,843,566 4,689,538 2,661,319 1,616,442
------------- ------------- ------------- -------------
Total costs of revenues 806,872,378 581,455,449 283,418,667 231,378,420
------------- ------------- ------------- -------------
Selling, general and administrative:
Natural gas 1,997,365 2,550,306 683,822 884,848
Power project services 1,951,210 1,063,786 735,348 531,397
General corporate expenses 6,401,178 4,551,295 2,337,496 1,879,352
------------- ------------- ------------- -------------
Total selling, general and administrative 10,349,753 8,165,387 3,756,666 3,295,597
------------- ------------- ------------- -------------
Other income (expense):
Interest income - WCTP 3,239,548 3,325,418 1,148,438 1,070,902
Interest income 1,127,849 1,555,724 284,339 970,320
Interest expense (4,782,822) (3,942,142) (2,228,182) (2,757,720)
Other income 4,515,432 4,617,963 1,645,281 1,463,729
Minority interest in partnership (408,024) (374,874) (144,551) (91,102)
------------- ------------- ------------- -------------
3,691,983 5,182,089 705,325 656,129
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes:
Natural gas (2,999,833) 5,253,969 (1,755,097) 822,703
Power project services 9,702,476 4,152,884 4,506,252 127,616
General corporate expenses (6,401,178) (4,551,295) (2,337,496) (1,879,352)
------------- ------------- ------------- -------------
301,465 4,855,558 413,659 (929,033)
Provision (benefit) for income taxes: (1,288,588) 1,960,345 (350,000) (642,700)
------------- ------------- ------------- -------------
Income (loss) from continuing operations 1,590,053 2,895,213 763,659 (286,333)
Discontinued operations
Loss from discontinued operations -- (7,904,600) -- --
Estimated loss on disposal (consisting of actual
operating losses during the phase out period) (6,192,058) (1,248,860) (1,284,264) (1,248,860)
------------- ------------- ------------- -------------
Total loss from discontinued operations (6,192,058) (9,153,460) (1,284,264) (1,248,860)
------------- ------------- ------------- -------------
Net loss $ (4,602,005) $ (6,258,247) $ (520,605) $ (1,535,193)
============= ============= ============= =============
Earnings (loss) per share - Basic:
Continuing operations $ 0.11 $ 0.20 $ 0.05 $ (0.02)
Discontinued operations $ (0.43) $ (0.64) $ (0.08) $ (0.09)
------------- ------------- ------------- -------------
Total $ (0.32) $ (0.44) $ (0.03) $ (0.11)
============= ============= ============= =============
Weighted average number of common shares used
in computing basic earnings (loss) per share 14,591,397 14,266,747 14,881,353 14,295,106
============= ============= ============= =============
Earnings (loss) per share - Diluted:
Continuing operations $ 0.10 $ 0.19 $ 0.05 $ (0.02)
Discontinued operations $ (0.40) $ (0.61) $ (0.08) $ (0.09)
------------- ------------- ------------- -------------
Total $ (0.30) $ (0.42) $ (0.03) $ (0.11)
============= ============= ============= =============
Weighted average number of common shares and
common share equivalents used in computing diluted
earnings (loss) per share 15,381,461 14,929,087 15,170,440 14,295,106
============= ============= ============= =============
</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>
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income from continuing operations $ 1,590,053 $ 2,895,213
Adjustments to reconcile net income from continuing operations
to net cash used in operating activities:
Depreciation and amortization 745,903 246,192
Deferred taxes (3,535,016) (6,921,524)
Loss on write-off of fixed assets -- 30,788
Amortization of deferred credits (129,750) (129,750)
Amortization of deferred charges 1,542,578 625,577
ESOP contribution 539,260 513,725
Minority interest in partnership 408,025 (1,836,240)
Changes in operating assets and liabilities:
(Increase) decrease in receivables 23,326,268 (73,413,326)
Net increase in notes receivable, inventory,
other current assets, and other assets (4,356,941) (13,082,978)
Net increase (decrease) in accounts payable, accrued
expenses, deferred revenue and long-term liabilities (36,880,853) 86,645,668
Increase (decrease) in accrued taxes (417,669) 11,822
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES
OF CONTINUING OPERATIONS (17,168,142) (4,414,833)
------------- -------------
NET CASH USED IN OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS (6,790,064) (13,634,447)
------------- -------------
INVESTING ACTIVITIES:
Construction in progress (38,519,929) (61,698,410)
Deposits into cash in escrow (8,153,137) (124,612,000)
Receipts from cash in escrow 44,550,890 46,300,492
Payment of note receivable -- 275,000
Purchase of machinery and equipment (571,606) (347,272)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (2,693,782) (140,082,190)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from Bond Financing -- 150,000,000
Payment of financing costs -- (4,495,642)
Payments on capital leases (22,246) (52,609)
Net borrowings from line of credit 9,354,836 17,239,425
Amounts received from ESOP 630,000 --
Proceeds from exercise of stock options and warrants 42,814 186,626
------------- -------------
NET CASH GENERATED BY FINANCING ACTIVITIES 10,005,404 162,877,800
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,646,584) 4,746,330
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,993,285 10,254,366
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,346,701 $ 15,000,696
============= =============
</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, 1999, results of operations for the nine
and three months ended November 30, 1999, and 1998, and cash flows for the nine
months ended November 30, 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 nine and
three months ended November 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
November 30, November 30,
---------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 14,982,680 14,882,486 15,126,284 14,886.385
---------- ---------- ----------- -----------
Average of unreleased ESOP shares (391,283) (615,739) (244,931) (591,279)
---------- ---------- ----------- -----------
Weighted average number of common
shares outstanding - basic 14,591,397 14,266,747 14,881,353 14,295,106
---------- ---------- ----------- -----------
Dilution (warrants and options) 790,064 662,340 289,087 -0-
---------- ---------- ----------- -----------
Weighted average number of common
shares and common share equivalents
outstanding - diluted 15,381,461 14,929,087 15,170,440 14,295,106
</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.
The following chart summarizes the number of options and warrants not
included in the computation of diluted earnings per share for the nine and three
months ended November 30, 1999 and 1998, as the results would have been
antidilutive. The options and warrants expire between April, 2000 and April,
2009.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
November 30, November 30,
------------------------------------- ------------------------------------
1999 1998 1999 1998
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Options and Warrants 1,588,266 3,571,958 3,493,956 5,527,181
--------------- --------------- -------------- ---------------
Price Range $5.88 to $11.00 $4.50 to $11.00 $4.50 to 11.00 $3.13 to $11.00
</TABLE>
(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 ("kW") wind turbines. At
November 30, 1999, of the total costs incurred,the total costs capitalized
related to the development and construction of this project were approximately
$43.5 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 ("InnCOGEN"), a wholly owned
indirect Trinidadian subsidiary of York, signed a PPA 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 constructed a 215 MW natural gas fueled combustion turbine
project, which achieved commercial operation in September 1999 in accordance
with the PPA. At November 30, 1999, of the total costs incurred, the total costs
capitalized related to the development and construction of this project were
approximately $89.9 million, which is reflected in fixed assets. Duke/Fluor
Daniel constructed the Trinidad facility under a turnkey construction contract.
The Trinidad facility utilizes three General Electric turbines.
-6-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
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, as well as to pay York for supervising construction and to
reimburse York for certain expenses incurred in developing the project. The
total amount earned during the nine months ended November 30, 1999 was
approximately $1,946,000. 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 "Bond 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 was used as follows: (a) $15 million was used to fund a debt service
reserve fund, (b) $4.5 million was used to fund a contingency reserve subfund,
(c) approximately $3.25 million was 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 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 $190 million at November 30, 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
-7-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
November 30, 1999 was approximately $1,081,000.
(b) Line of Credit
In November 1999, North American Energy Conservation, Inc. ("NAEC")
amended its loan and security agreement with Congress Financial Corporation. The
revolving line of credit was increased from $25 million to $30 million, which is
collateralized by NAEC's assets, and further guaranteed by the Company. The line
of credit, which expires in November 2001, bears interest at one half percent
per annum over the prime rate. At November 30, 1999 and February 28, 1999, the
loan payable was approximately $27.5 million and $18.2 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 may have on the Company's consolidated financial statements and
disclosures.
Recently, 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
NAEC Electric Marketing Business
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. Operations have ceased as of
December 31, 1999, when all remaining commitments had been fullfilled.
The operations of the electric marketing business are reflected as
discontinued operations for all periods presented. The operating results of the
discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended For the Quarter Ended
November 30, November 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 55,973,668 $215,044,841 $ 14,898,341 $ 53,153,448
------------ ------------ ------------ -------------
Loss before tax benefit (9,192,058) (16,642,655) (2,919,280) (2,270,654)
------------ ------------ ------------ -------------
Tax benefit (3,000,000) (7,489,195) (1,635,016) (1,021,794)
------------ ------------ ------------ -------------
Net loss ($ 6,192,058) ($ 9,153,460) ($ 1,284,264) ($ 1,248,860)
------------ ------------ ------------ -------------
</TABLE>
Net assets and liabilities of the electric marketing business 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 principally finance losses incurred by the discontinued
operations. Accordingly, interest expense of approximately $907,000 and $447,000
has been allocated to discontinued operations in the nine and three months ended
November 30, 1999, respectively, and $655,000 and $362,000 was allocated in the
nine and three months ended November 30, 1998, respectively.
-9-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At November 30, 1999 and February 28, 1999, included in net assets and
net liabilities 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 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 December 1998
and a natural gas fueled power project in the Republic of Trinidad and Tobago
which started generating revenues in September 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 November 30, 1999 were approximately
$89.3 million, and are located in the Republic of Trinidad and Tobago. Revenues
from foreign operations in Trinidad were approximately $4.6 million for the nine
and three months ended November 30, 1999.
-10-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information for continuing operations for the nine and three
months ended November 30, 1999 and 1998 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
November 30, November 30,
---------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from external customers:
Energy Marketing $800,034 $584,581 $279,689 $231,479
Greenpower 13,798 4,713 7,195 1,610
-------- -------- -------- --------
Total Revenues $813,872 $589,294 $286,884 $233,089
-------- -------- -------- --------
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 $ (3,000) $ 5,254 $ (1,755) $ 823
Greenpower 9,702 4,153 4,506 127
General corporate expenses (6,401) (4,551) (2,337) (1,879)
-------- -------- -------- --------
Consolidated income (loss) from continuing
operations before income taxes: $ 301 $ 4,856 $ 414 $ (929)
-------- -------- -------- --------
</TABLE>
(10) Income Taxes
In the nine and three months ended November 30, 1999 the Company
recognized a tax benefit of approximately $1,389,000 and $450,000,respectively,
primarily related to federal wind tax credits generated by the Big Spring
Facility.
The Internal Revenue Service is in the process of examining the York
Research Corporation consolidated federal income tax return for the fiscal year
ended February 28, 1997.
(11) Potential Refinancing
The Company has been in serious discussions relating to refinancing its
existing bonds which would include the sale of certain assets or portions
thereof. Although certain aspects of the potential transactions have been
reduced to written contracts there is a significant amount of due diligence and
negotiation remaining to be accomplished and significant open conditions
precedent. There can be no assurance that any transaction will be completed and
no assessment of the impact on the Company's financial statements can yet be
made. Management of the Company believes that if the Company is able to complete
a transaction which restructures the Company's bonds, it would improve the
Company's access to available cash flow and its ability to support new project
development.
-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. The Company participates
in the natural gas market through its 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 a 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, 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 November 30, 1999.
-12-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In order to support NAEC's energy business, and NAEC's working capital
needs, NAEC has a revolving line of credit, currently up to $30 million, with
Congress Financial Corp., collateralized by NAEC's receivables and other assets,
and guaranteed by York. This line of credit expires November 2001. The company
has used this credit line principally to support the electric operations to
date.
The natural gas marketing business has been deregulated for many years.
The industry has seen a consolidation recently in the number of companies
participating, especially in the regions in which NAEC is active. This
consolidation and the recent experiences in electric marketing have caused
significant increases in credit constraints throughout the industry which are
making greater demands on NAEC's capital resources and are making it more
difficult to obtain supplies of natural gas at reasonable prices. NAEC has met
all of its commitments to date and believes it can continue to do so. There can
be no assurance, however, that the issues discussed will not negatively impact
NAEC in a significant manner in the future.
The Company uses put and call options, and futures contracts
("Instruments"), where possible, 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 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. (see note 11)
General
During the nine months ended November 30, 1999, cash and cash
equivalents decreased approximately $16.6 million. Cash used in operating
activities of continuing operations was approximately $17.2 million. The cash
used was primarily due to a decrease of accounts payable which was partially
offset by a decrease in accounts receivable. Approximately $6.8 million was used
in discontinued operations.
During the nine months ended November 30, 1999, cash used in investing
activities was approximately $2.7 million including approximately $38.5 million
spent on construction in progress primarily funded from the net increase of
approximately $36.4 million from the escrow accounts.
-13-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the nine months ended November 30, 1999, financing activities
generated approximately $10 million primarily due to an increase in 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, nothing
has come to our attention that would indicate 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.
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.
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. Nothing has come to
our attention of any interruptions to date.
The computers used in the Big Spring facility are new, and therefore
Y2K compliant. There were no material problems 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 did not experience any Y2K problem on the part
of the Government of Trinidad, or T&TEC, that had a material effect on the
operations of the Trinidad Project and presently there have not been any
reported Y2K problems.
-14-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The BNY facility and the Warbasse facility have both previously been in
commercial operation. There were no 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. There were no
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 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.
There have not been any material Y2K compliance issues with NAEC's
internal computer systems. 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 $215 million and $48 million,
respectively, when comparing the nine and three months ended November 30, 1999
to the nine and three months ended November 30, 1998 and cost of natural gas
increased approximately $224 million and $51 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 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 nine and three
months ended November 30, 1999, gross margins have been negatively impacted by a
reduced number of suppliers and customers and increased credit constraints.
Power project service revenues include the sale of electric energy to
utility customers in the case of the Big Spring and Trinidad projects. These
revenues also include power project services such as engineering services, fuel
procurement and other services. Cost of power project services revenues include
fuel, payroll, and other operations and maintenance costs. Revenues increased
approximately $9,085,000 and $5,585,000, respectively, and cost of power project
services increased approximately $1,154,000 and $1,045,000, respectively, when
comparing the nine and three months ended November 30, 1999 to the nine and
three months ended November 30, 1998, as a result of the commencement of
operations of Big Spring in December 1998, West Texas in June 1999 and Trinidad
in September 1999.
-15-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Big Spring project earned revenues of approximately $2,638,000 and
$949,000, respectively, and incurred costs of approximately $285,000 and
$74,000, respectively, for the nine and three months ended November 30, 1999.
The Trinidad project earned revenues of approximately $4,585,000 and incurred
costs of approximately $931,000 for both the nine and three months ended
November 30, 1999. The Trinidad project has no fuel risk because the government
provides all the fuel utilized by the 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 for the nine months ended November 30,
1999.
Selling, general and administrative expenses increased approximately
$2,184,000 and $461,000, respectively, when comparing the nine and three months
ended November 30, 1999 to the same periods in the prior year. This increase is
comprised of the following: (a) expenses incurred by the Energy Marketing
segment decreased approximately $553,000 and $201,000 due to lower professional,
consulting and other fees. (b) expenses incurred by the Greenpower segment
increased approximately $887,000 and $204,000. There was an increase of
approximately $395,000 for the nine months ended November 30, 1999 due to
amortization of deferred financing costs due to the Portfolio Bond Financing in
August 1998. The balance of these increases primarily related to new project
development. (c) general corporate expenses increased approximately $1,850,000
and $458,000. There was an increase of approximately $492,000 for the nine
months ended November 30, 1999 due to amortization of certain deferred charges
related to the Portfolio Bond Financing. The balance of these increases
primarily related to professional and consulting fees and additional amounts
spent on payroll and employee benefits as a result of additional personnel.
Interest income decreased approximately $428,000 and $686,000 when
comparing the nine and three months ended November 30, 1999 to the nine and
three months ended November 30, 1998 due to decreased levels of cash available
for investment resulting principally from construction of the Trinidad and Big
Spring projects.
Interest expense increased approximately $841,000 and decreased
approximately $530,000 when comparing the nine and three months ended November
30, 1999 to the nine and three months ended November 30, 1998. The increase for
the nine months was caused by the greater impact of the Portfolio Bond Financing
which closed on August 4, 1998, net of interest capitalized on construction
costs incurred. The decrease for the three months was caused by capitalization
of interest expense on substantially higher construction costs incurred as of
November 30, 1999.
Other income decreased approximately $103,000 and increased
approximately $182,000 when comparing the nine and three months ended November
30, 1999 to the same periods in the prior year. These changes were primarily due
to a decrease in royalty fees from BNYLP of approximately $72,000 during the
nine month period and an increase in these fees of approximately $157,000 for
the three month period.
-16-
<PAGE>
YORK RESEARCH CORPORATION AND SUBSIDIARIES
PART 11
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, 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: January 18, 2000 /s/Robert M. Beningson
----------------------
Robert M. Beningson
Chairman of the Board and
President
Dated: January 18, 2000 /s/ Michael Trachtenberg
------------------------
Michael Trachtenberg
Executive Vice President
and Chief Financial and
Accounting Officer
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The consolidated balance sheets and consolidated statements of income as of and
for the periods ended November 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 6,346,701
<SECURITIES> 0
<RECEIVABLES> 94,338,893
<ALLOWANCES> 0
<INVENTORY> 1,993,261
<CURRENT-ASSETS> 134,682,626
<PP&E> 135,894,490
<DEPRECIATION> 2,077,435
<TOTAL-ASSETS> 364,036,473
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0
<COMMON> 152,494
<OTHER-SE> 61,436,884
<TOTAL-LIABILITY-AND-EQUITY> 364,036,473
<SALES> 0
<TOTAL-REVENUES> 813,831,613
<CGS> 0
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<INCOME-CONTINUING> 1,590,053
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