<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________
Commission file number 1-9208
O'BRIEN ENVIRONMENTAL ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2076187
-------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation No.)
or organization)
225 South Eight Street
Philadelphia, PA 19106
----------------------------- --------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (215) 627-5500
-----------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
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 ( ) No (X)
As of March 23, 1994, there were 13,055,597 shares of Class A Common
Stock, and 4,070,770 shares of Class B Common Stock, par value of each
class $.01, outstanding.
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TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1993 and
June 30, 1993 (unaudited).
Consolidated Statements of Operations for the three
months ended September 30, 1993 and 1992 (unaudited).
Consolidated Statements of Cash Flows for the three
months ended September 30, 1993 and 1992 (unaudited).
Notes to Consolidated Financial Statements (unaudited).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
<Page 3>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1993 and June 30, 1993
(Dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1993 1993
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,407 $ 5,213
Restricted cash and cash equivalents 5,289 5,064
Accounts receivable, net 17,378 12,394
Receivable from related parties 997 1,175
Notes receivable, current 2,403 2,564
Inventories 4,776 4,196
Insurance claims receivable 5,007 5,255
Other current assets 2,501 1,631
-------- --------
Total current assets 41,758 37,492
Property, plant and equipment, net 192,539 194,217
Coalbed methane gas properties
held for sale -- 4,464
Project development costs 5,402 5,136
Notes receivable, noncurrent 12,028 9,315
Notes receivable from officers 237 246
Investments in equity affiliates 2,694 2,515
Excess of cost of investment in
subsidiaries over net assets
at date of acquisition, net 2,061 2,085
Deferred financing costs, net 5,608 5,728
Other assets 1,194 1,331
------- -------
Total assets $263,521 $262,529
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 4>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1993 and June 30, 1993
(Dollars in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, June 30,
1993 1993
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 20,999 $ 19,175
Current maturities of recourse
long-term debt 11,071 10,419
Current maturities of nonrecourse
project financing 10,758 10,758
Short-term borrowings 2,811 2,199
Other current liabilities 6,146 6,060
------- -------
Total current liabilities 51,785 48,611
Recourse long-term debt, net of
current maturities 27,293 28,012
Convertible senior subordinated
debentures 49,174 49,174
Nonrecourse project financing,
net of current maturities 97,140 97,140
Construction costs payable 5,100 5,100
Deferred income taxes 11,654 10,904
Other liabilities 7,908 7,913
------- -------
250,054 246,854
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01;
shares authorized 10,000,000; none
issued
Class A common stock, par value $.01,
one vote per share; 40,000,000 shares
authorized; issued 12,711,232 at
September 30, 1992 and June 30, 1992 130 130
Class B common stock, par value $.01,
ten votes per share; 10,000,000 shares
authorized; issued 4,320,770 at
September 30, 1992 and June 30, 1992 39 39
Additional paid-in capital 40,053 40,053
Accumulated deficit (26,122) (23,932)
Other (633) (615)
Total stockholders' equity 13,467 15,675
-------- -------
Total liabilities and stockholders' equity $263,521 $262,529
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 5>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended September 30, 1993 and 1992
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Energy revenues $ 16,346 $ 21,736
Equipment sales and services 5,161 3,802
Rental revenues 1,717 1,025
Revenues from related parties -- --
Development fees and other 6,426 621
------- -------
29,650 27,184
------- -------
Cost of energy revenues 10,761 12,675
Cost of equipment sales and services 4,710 3,125
Cost of rental revenues 534 470
Cost of revenues from related parties -- --
Cost of development fees and other 6,422 282
------- -------
22,427 16,552
------- -------
Gross profit 7,223 10,632
Selling, general and administrative
expenses 4,887 3,546
------- -------
Income from operations 2,336 7,086
Interest and other income 253 573
Interest and debt expense (4,227) (3,945)
------- -------
Income before income taxes (1,638) 3,714
Provision for income taxes 552 750
------- -------
Net income (loss) $ (2,190) $ 2,964
======= =======
Net income (loss) per share $ (.13) $ .18
======= =======
Weighted average shares outstanding $ 16,871 $ 16,786
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 6>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three month periods ended September 30, 1993 and 1992
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,190) $ 2,964
Adjustment to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 2,407 2,361
Deferred income taxes 745 750
Equity interest in unconsolidated entities (179) (57)
Changes in assets and liabilities:
Accounts receivable (4,984) (2,168)
Inventories (580) (826)
Receivables from related parties 178 85
Notes receivable (79) (228)
Accounts payable 1,824 1,344
Other (932) (2,034)
------ -----
Net cash provided by (used for)
operating activities (3,790) 2,191
------ -----
Cash flows from investing activities:
Capital expenditures, net (317) (779)
Capital expenditures to repair Newark plant (4,494) --
Insurance proceeds for Newark plant 4,879 --
Project development costs (296) (790)
Proceeds from sale of project net of note
receivable 2,000 --
Deposits into restricted cash accounts (225) (1,617)
Other (108) (566)
------ -----
Net cash provided by (used for) investing
activities 1,439 (3,752)
Cash flows from financing activities:
Proceeds from long-term debt 8,372 425
Repayments of long-term debt (8,439) (1,416)
Net proceeds (repayments) of
short-term borrowings 612 919
------ -----
Net cash provided by (used for) financing
activities 545 (72)
------ -----
Net decrease in cash and
cash equivalents (1,806) (1,633)
Cash and cash equivalents at beginning
of period 5,213 8,824
------ -----
Cash and cash equivalents at end
of period 3,407 7,191
====== =====
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
1. Basis of Presentation:
In the opinion of management, all adjustments (which consist only of normal
recurring adjustments necessary for the fair presentation of the results of
operations for the interim periods) have been included in the accompanying
financial statements.
The interim financial statements should be read in conjunction with the
financial statements for the year ended June 30, 1993 as presented in the
annual report on Form 10-K of the Company.
2. Newark Project:
On December 25, 1992, a fire disabled the Company's Newark Boxboard
cogeneration plant. The fire has been classified by the local fire
commissioner as accidental. The plant returned to partial operation in
August 1993 and full operation in October 1993.
During the three month period ended September 30, 1993 and 1992, revenues
associated with the project were $2,157 and $7,346, respectively. Revenues
for the three months ended September 30, 1993 consisted of business
interruption insurance proceeds and revenues from partial operations in
August and September. See "Results of Operations for the Three Months
ended September 30, 1993 and 1992" and "Liquidity and Capital Resources"
for further discussion and analysis of the impact of the fire.
At September 30, 1993, nonrecourse debt associated with this project was
$35,088. The floating rate on debt as of that date was approximately 4.5%.
3. Parlin Project:
During the three months ended September 30, 1993 and 1992, revenues
associated with the project were $13,330 and $13,829, respectively.
At September 30, 1993, nonrecourse debt associated with this project was
$72,810. The floating rate on approximately $21,000 of debt as of that
date was approximately 4.4%, with the remainder of the loan as of that date
having a fixed rate of approximately 11.1%.
4. Sale of Project Under Development:
On August 27, 1993, the Company entered into an agreement with an
unrelated third party to sell substantially all proved and unproved coalbed
methane gas properties for $6,500. The $6,500 consists of a $2,000 cash
payment and a production payment note with a face value of $4,500. The
$4,500 production payment note has been discounted in order to reflect a
lower anticipated net realizable value in consideration of the Company's
plan to monetize certain assets and accelerate cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources - Working Capital Requirements". Costs and
other commitments associated with this transaction amounted to approxi-
mately $5,100, which resulted in no gain being recognized. The production
payment note will be paid from a percentage of net revenues from the
coalbed methane gas properties until the earlier of (1) the note being paid
in full or (2) 10 years.
<Page 8>
5. Earnings Per Share:
The weighted average number of shares used to compute primary earnings per
share were 16,871,000 and 16,786,000 for the three months ended September
30, 1993 and 1992, respectively. Fully diluted earnings per share for the
three months ended September 30, 1993 and 1992 are not presented because
conversion of the convertible senior subordinated debentures would be
antidilutive.
6. Income Taxes:
Income tax expense for the three month periods ended September 30, 1993 and
1992 consists primarily of deferred income taxes associated with certain of
the Company's wholly-owned subsidiaries, charges associated with net
operating losses that cannot be utilized, and taxable temporary
differences. The Company has established a full valuation allowance for
temporary deductible amounts, including net operating loss carryforwards.
<Page 9>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The Company develops cogeneration, waste heat recovery and biogas projects
("Energy business"). In addition, the Company sells and rents power generation
equipment ("Equipment sales, rental and services business"). Included in the
Equipment sales, rental and services business is the Company's demand-side
management business, through which the Company provides standby power equipment
to a customer for a fee.
At present, the Company has eight projects in operation totalling
approximately 217 megawatts of electric generating capacity, including seven
wholly-owned projects developed by the Company totalling approximately 185
megawatts and one 32 megawatt project developed by the Company but presently
owned substantially by a subsidiary of Chrysler Capital Corporation.
The Company's energy revenues and gross profits are subject to seasonal
variations as a result of power sales agreements which contain peak and
off-peak energy pricing provisions and fuel costs which fluctuate based upon
seasonal demand and other factors.
In December 1992, a fire disabled the Company's Newark Boxboard
cogeneration plant. The plant returned to partial operation in August 1993 and
full operation in October 1993. In February 1994, the Company reached an
agreement with its insurance carrier concerning the property damage and business
interruption insurance claims submitted. See "Results of Operations for the
three months ended September 30, 1993 and 1992" and "Liquidity and Capital
Resources" for further discussion and analysis of the impact of the fire.
During May 1993, operations commenced at the Company's initial demand side
management project (the "Philadelphia Water Department project"). The
Philadelphia Water Department project consists of two ten megawatt standby power
generating plants. In November 1993, the Company entered into a transaction
under which it sold its interest in the Philadelphia Water Department project
to entities controlled by an unrelated private investor. See "Liquidity and
Capital Resources".
In September 1993, the Company reached an agreement to settle the Hartford
Steam project litigation with the project's turnkey contractor, Hawker Siddeley
Power Engineering, Inc. Under the terms of the settlement, the Company
relinquished its interest in the project and its general partner
responsibilities. As the Company's interest in the project was only 5%,
management does not believe the settlement will have a significant impact on the
Company's future results of operations.
During the year ended June 30, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" through
restatement of prior years. See "Results of Operations for the three months
ended September 30, 1993 and 1992".
<Page 10>
Results of Operations for the Three Months ended September 30, 1993 and 1992
Revenues
Energy revenues for the three months ended September 30, 1993 and 1992 were
$16,346,000 and $21,736,000, respectively. Energy revenues primarily reflect
billings associated with the Company's Newark Boxboard, du Pont Parlin and
biogas projects. The decrease in energy revenues from 1992 to 1993 was
primarily attributable to reduced revenues as a result of the fire at the
Company's Newark Boxboard project. Revenues recognized at the Newark Boxboard
project in 1993 were $2,157,000 and consisted of business interruption
insurance proceeds and revenues from partial operations in August and September.
In comparison, the Newark Boxboard project had revenues of $7,346,000 in 1992.
In February 1994, the Company and its insurance carrier for the Newark
Boxboard project reached an agreement concerning the property damage and
business interruption insurance claims submitted in connection with the fire.
Under the terms of the agreement, the insurance carrier agreed to a minimum
settlement of $36 million. In addition, the Company has the right to receive
up to an additional $1.4 million upon the recovery by the insurance carrier of
its claims against third parties.
Revenues at the du Pont Parlin project were $13,330,000 and $13,829,000 for
the three months ended September 30, 1993 and 1992, respectively. The decrease
in revenues from 1992 to 1993 was primarily attributable to $367,000 of business
interruption insurance proceeds relating to an earlier period being recognized
in 1992. In addition, in late September 1993, a gas turbine generator was shut
down for repairs. The shutdown continued until the middle of December 1993 and
is expected to have a negative effect on the three month period ended December
31, 1993 as well.
Revenues of the du Pont Parlin project will be lower for the three months
ended December 31, 1993 as compared to the three months ended September 30, 1993
as a result of both the shut down associated with the gas turbine repair and
provisions in the project's power purchase agreement. Under the terms of the
agreement, peak energy prices are in effect during the months of December
through February and June through September. With October and November being
non-peak months, an equivalent amount of production will result in a
substantially lower amount of revenues.
Energy revenues from the Company's biogas projects for the three months
ended September 30, 1993 and 1992 were $859,000 and $561,000, respectively. The
increase from 1992 to 1993 was primarily due to enhanced operating performance
at existing biogas projects as well as energy revenues from the Philadelphia
Water Department project.
Equipment sales and services for the three months ended September 30, 1993
and 1992 were $5,161,000 and $3,802,000, respectively. Equipment sales of Puma
for the three months ended September 30, 1993 and 1992 were $3,755,000 and
$3,245,000, respectively. The increase in sales from 1992 to 1993 was primarily
due to increased production resulting from a strong backlog. Domestic equipment
sales and services for the three months ended September 30, 1993 and 1992 were
$1,406,000 and $557,000, respectively. The increase in domestic equipment sales
and services in 1993 was primarily due to the Company's expanding its business
in the design and assembly of generator sets and switchgear.
<Page 11>
Rental revenues were $1,717,000 and $1,025,000 for the three months ended
September 30, 1993 and 1992, respectively. The increase in rental revenues in
1993 as compared to 1992 was attributable to the completion in May 1993 of the
Philadelphia Water Department project.
Development fees and other revenues were $6,426,000 and $621,000 for the
three months ended September 30, 1993 and 1992, respectively. Development fees
and other revenues for 1993 include $5,121,000 of revenues recognized in
connection with the sale of the Company's contractual rights to develop certain
coalbed methane reserves. The selling price consisted of $2,000,000 of cash
and a production note receivable of $4,500,000. The Company has applied a
discount factor to the production note in order to reflect a lower anticipated
net realizable value in consideration of the Company's plan to monetize certain
assets and accelerate cash flow. Development fees for 1993 also include
$1,281,000 of revenue recognized in connection with an ongoing fuel management
agreement between the Company and the California Milk Producers project. In
1992, development fees included $325,999 of revenues recognized in connection
with the sale of a biogas project under development. Development fees and other
for 1992 also include $226,000 of revenues recognized in connection with
equipment supply agreements associated with the Hartford Steam project. The
balance of development fees and other for 1993 and 1992 consists of revenues
recognized in connection with management fees agreements associated with the
California Milk Producers and Hartford Steam projects.
Costs and Expenses
Cost of sales for the three months ended September 30, 1993 and 1992
include direct costs associated with the operation of projects of $10,761,000
and $12,675,000, respectively as well as costs associated with equipment sales
and services for the three months ended September 30, and 1992 of $4,710,000
and $3,125,000, respectively. Cost of energy revenues increased as percentage
of energy revenues in 1993 versus 1992 primarily as a result of higher fuel
costs. Approximately seventy percent of the operating costs of the Newark
Boxboard and du Pont Parlin projects consists of natural gas fuel costs which
fluctuate in response to Management believes the Company's long-term exposure
to fuel prices is partially reduced through the price provisions of its power
purchase agreements, which are generally linked to the utility's cost
of generating electricity or broader economic indices. In addition, fuel risk
can be significantly reduced by entering into a long-term gas supply arrangement
or hedge. In the short-term, the unfavorable effects of higher gas prices can
be mitigated through enhanced operation performance and the volatility of gas
prices can be mitigated through hedging strategies. During the year ended June
30, 1993, the Company entered into a gas swap agreement whereby the Company
agreed to levelize its gas costs for the three months ended December 31, 1992
and the three months ended September 30, 1993. As a result of the gas swap,
natural gas costs were approximately $1,000,000 lower during the year ended
June 30, 1993 than they would have been otherwise. Conversely, natural gas
costs were approximately $1,000,000 higher than they would have been otherwise
for the three months ended September 30, 1993. However, there is no assurance
that any of the foregoing will prevent a reduction in gross profit percentage
for the year ending June 30, 1994 or for the interim periods within such year.
Cost of equipment sales and services increased primarily as a result of the
start-up costs associated with the Company's domestic design and assembly of
generator sets and switchgear business as well as competitive pressures in
Puma's and American Hydrotherm's traditional markets.
<Page 12>
Cost of rental revenues for the three months ended September 30, 1993 and
1992 was $534,000 and $470,000, respectively. Costs of rental revenues
decreased as a percentage of revenue from 1992 to 1993 primarily as a result of
the substantial margins associated with the Philadelphia Water Department
project.
Cost of development fees and other revenue was $6,422,000 and $282,000 for
the three months ended September 30, 1993 and 1992, respectively. In 1993,
these costs consist principally of costs associated with the sale of the
Company's rights to develop certain coalbed methane reserves and costs
associated with a fuel management agreement with the California Milk Producers
project. In 1992, these costs consist principally of costs associated with an
equipment supply agreement for the Hartford Steam project and costs associated
with the sale of a biogas project under development. The balance of costs in
1993 and 1992 consist of costs of management fees charged to project
partnerships in which the Company has or had a minority interest.
Selling, general and administrative expenses for the three months ended
September 30, 1993 and 1992 were $4,887,000 and $3,546,000, respectively. This
increase was primarily attributable to increased legal fees as a result of
litigation with a project contractor and other activities, and was partially
offset by the Company's ongoing overhead reduction activities.
Interest and Other Income
Fluctuations in interest and other income are primarily attributable to
interest income on escrow accounts established in connection with the Newark
Boxboard and du Pont Parlin projects, as well as exchange rate fluctuations on
certain intercompany receivables denominated in sterling.
Interest and Debt Expense
Interest and debt expense for the three months ended September 30, 1993 and
1992 was $4,227,000 and $3,945,000, respectively. The increase in interest
expense in 1993 as compared to 1992 was primarily the result of debt incurred in
connection with the construction of the Philadelphia Water Department project
and was partially offset by debt amortization on the Newark Boxboard and du Pont
Parlin projects.
Income Taxes
Income tax expense for the three month periods ended September 30, 1993 and
1992 consists primarily of deferred income taxes associated with certain of the
Company's wholly-owned subsidiaries, charges associated with net operating
losses that cannot be utilized, and taxable temporary differences. The Company
has established a full valuation allowance for temporary deductible amounts,
including net operating loss carryforwards.
Liquidity and Capital Resources
Cash and cash equivalents at September 30, 1993 totalled approximately
$3,407,000 as compared to approximately $5,213,000 at June 30, 1993. Cash
equivalents consist primarily of short-term money market instruments. The
decrease in cash was primarily due to recurring debt amortization and
semi-annual interest payments on the Company's convertible senior subordinated
debentures. The decrease was partially offset by operating cash flow from the
<Page 13>
du Pont Parlin project. However, such cash flow was not available to the
Company due to restrictions in the project's financing agreement.
Restricted cash at September 30, 1993 totalled approximately $5,289,000 as
compared to approximately $5,064,000 at June 30, 1993. The increase was
primarily due to the transfer of approximately $2,300,000 into a debt service
reserve fund required by the du Pont Parlin project financing agreement. The
increase in restricted cash at the du Pont Parlin project was partially offset
by a release to the Company of $2,000,000 of restricted cash at the Newark
Boxboard project in accordance with project agreements. In the future, the
Company expects restricted cash to increase because of the debt service reserve
funds required by the Newark Boxboard and du Pont Parlin projects.
The Company's working capital deficiency at September 30, 1993 was
approximately $10,027,000 as compared to a working capital deficiency of
approximately $11,119,000 at June 30, 1993. Changes in working capital are
primarily due to, in addition to the items discussed above, balloon payments
aggregating $3,301,000 that will be due on equipment financing prior to
September 30, 1994. Management intends to refinance or restructure certain of
these balloon payments. There can be no assurance as to the success of these
intended refinancings. In addition, accounts receivable increased primarily as
a result of the seasonal aspects of the du Pont Parlin power sale agreement.
Capital Resources - Working Capital Requirements
During the year ended June 30, 1993 and the period from June 30, 1993 to
the present, the Company has suffered certain setbacks. Among these were the
Newark Boxboard project fire, the expenses and significant diversion of
management focus required to repair the Newark Boxboard plant and the
intensification of the Hawker litigation. All of these have made it difficult
for the Company to refinance or sell equity in its Newark Boxboard project and
thus deprived the Company of access to significant capital which would otherwise
have been available for project development.
In response to these developments, the Board of Directors of the Company
initiated a plan to address the short, intermediate and long-term working
capital needs of the Company. Management expects the short-term (fiscal 1994)
needs of the Company to be met through the monetization of assets or other
means of accelerating cash flow. An example of this is the Philadelphia Water
Department project transaction. Under its terms, the Company will give up
approximately $115,000 a month of project income in exchange for an up front
payment of $5,000,000. The Company may repurchase approximately eighty-three
percent of this project for $5,000,000 in May 1994. The Company has the option
upon the payment of extension fees, to extend the repurchase period.
In order to further enhance short-term cash flow, management has also
offered discounts to certain debtors of the Company for early payment. In the
aggregate, during the period July 1, 1993 through February 1994, the Company has
received $1,500,000 in satisfaction of notes receivable of $1,768,000 . Under
the terms of the notes, cash would not have been received until periods ranging
from three months to over two years from the date of actual funding.
<Page 14>
In November 1993, the Company entered into a letter of intent with Stewart
& Stevenson, a major equipment supplier and operation and maintenance company
for a $7 million credit facility to be disbursed upon the completion of certain
milestones. The first disbursement of $1 million was funded on January 13, 1994
based on the agreement of the parties to the terms and conditions of operation
and maintenance contracts for the Company's Newark Boxboard and du Pont Parlin
projects. The second disbursement of $3.5 million was funded on March 16, 1994.
Of this amount, $2.3 million was disbursed to the Company and $1.2 million
remained in the Newark Boxboard project to prepay project debt, pay certain
expenses of the project and create a capital improvement fund. The third
disbursement of $2.5 million is expected to be funded in the near future based
upon approval of loan documentation and the obtaining of necessary consents.
This disbursement is intended to be utilized for prepayment of debt at the
Newark Boxboard project level. It is expected that the proceeds of the Stewart
& Stevenson credit facility will be repaid upon the refinancing of the Newark
Boxboard term loan.
The Company has retained NatWest Markets to evaluate and market a partial
sale of equity and/or a refinancing of the Newark Boxboard project term loan for
approximately $50 million. The current debt outstanding on this project is
approximately $32 million. Management's objective is to complete these
transactions in the near future. If management deems it prudent, management may
choose to sell a partial equity interest in the Newark Boxboard project first in
order to generate additional cash flow or enhance its ability to enter into a
strategic alliance with a larger entity. In order to facilitate these financing
arrangements, or other financing alternatives, the Company reacquired in January
1994 a twelve and one-half percent equity interest in the Newark Boxboard
project which it has previously sold in March 1993. There can be no assurance
that the above mentioned transactions will occur.
With respect to satisfying the Company's long-term working capital needs,
management intends to proceed with a plan to (i) restructure or divest some of
its businesses, (ii) review the desirability of exchanging its three series of
convertible debentures for one preferred stock instrument or other alternative
which would have a more liquid market, and (iii) enter into a strategic alliance
with a third party interested in investing equity into existing projects or
projects as they are developed in the future. The restructuring of the
Company's businesses will involve selective domestic and international
cogeneration project development, an increased emphasis on the Company's niche
markets, such as its standby power generation and rental businesses, stack
recovery project development, and a change in emphasis on wholly-owned biogas
projects in order to concentrate on developing, acquiring and selling gas
producing Section 29 tax credits. In the United Kingdom, the Company will
continue to develop normal biogas projects as electric prices justify. If
terms and conditions are appropriate, the Company's restructuring plan may
involve the sale or shutdown of certain biogas facilities and equipment
manufacturing subsidiaries.
The Company's long-term strategic plan involving an alliance with a third
party may include a party who can enhance the Company's existing business,
development efforts, or both. Such enhancement may involve development capital,
project equity, fuel enhancement, construction or equipment services or any
combination of the above.
Despite the losses to date and the liquidity problems of the Company,
management believes that it can be successful in these various plans primarily
because the equity values in its portfolio of projects have not yet been fully
recognized or accounted for in the Company's market capitalization.
<Page 15>
There can be no assurance that the above plan will ultimately be
successful. If the Company is unable to effect any of these options, the
Company's operations would be materially adversely affected.
Cogeneration and Waste Heat Recovery Projects - Capital Resources
The Company has previously and expects to continue to arrange for the
construction and permanent funding of its projects through long-term nonrecourse
debt. Depending upon the specifics of the project and economic alternatives
available, the Company either retains all of the ownership of a project or
participates in project finance structures involving leases, corporate joint
ventures, and limited partnerships. In the latter instances, the Company sells
all or a portion of a project during its development or construction stage to
third parties, and then participates in the various profit centers of such
projects throughout the construction stage as well as the long-term (20+year)
life of the project.
Alternatively, the Company may use a debt/equity structure, whereby the
Company retains 100% ownership of the project. In such instances, the Company's
equity position in the project funded either internally, from borrowings or the
sale of securities, or from financial arrangements with other parties, will
enable it to retain all of the long-term (20+year) revenues of the project.
Capital Resources - Other Capital Requirements
In addition to the development and construction of projects, the Company's
principal nonoperating expenditures over the next twelve months are expected to
consist of the repayment of various short-term and long-term debt instruments
primarily associated with equipment activities. In such instances, management
anticipates that the sale of the underlying equipment or the refinancing of
such equipment will provide the funds for repayment.
Demand-Side Management and Biogas Fuel Projects - Capital Resources
Generally, because the capital requirements of demand side management and
biogas fuel projects are substantially less than those required by most
industrial cogeneration and waste heat recovery projects, the Company finances
the construction and permanent funding of these demand-side management and
biogas projects primarily through the use of recourse lines of credit or loans
with commercial banks and other lending institutions. Financing terms
generally extend from one to seven years. Project assets are also leased by
the Company on a medium to long-term basis. In most cases, wholly-owned
subsidiaries are established for each project. Projects may also be structured
in such a fashion as to allow the Company, or other participants, to take
advantage of various tax credits that continue to exist.
At September 30, 1993, the Company had nominal availability under existing
lines of credit. Although the Company has refinanced over $6 million of debt
subsequent to June 30, 1993, there can be no assurance that the Company will be
successful in extending its current lines of credit or obtaining new lines of
credit. Additionally, the Indenture governing one series of the Company's
Convertible Senior Subordinated Debentures restricts the ability of the Company
to incur new long-term indebtedness under certain circumstances.
<Page 16>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O'Brien Environmental Energy, Inc.
----------------------------------
(Registrant)
Dated: March 25, 1994 /s/Joel D. Cooperman
---------------------
Joel D. Cooperman
Vice President/Finance,
Secretary, Treasurer,
Chief Financial and
Accounting Officer
Dated: March 25, 1994 /s/Sanders D. Newman
--------------------
Sanders D. Newman
General Counsel
