<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 March 31, 1994
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
of incorporation or organization) Identification No.)
225 South Eighth Street, 19106
Philadelphia, PA
------------------------- --------------------
(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 (X) No ( )
As of May 12, 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.
<Page 2>
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1994 and
June 30, 1993 (unaudited).
Consolidated Statements of Operations for the nine
months ended March 31, 1994 and 1993 (unaudited).
Consolidated Statements of Operations for the three
months ended March 31, 1994 and 1993 (unaudited).
Consolidated Statements of Cash Flows for the nine
months ended March 31, 1994 and 1993 (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
March 31, 1994 and June 30, 1993
(Dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1994 1993
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,127 $ 5,213
Restricted cash and cash equivalents 8,182 5,064
Accounts receivable, net 17,743 12,394
Receivable from related parties 882 1,175
Notes receivable, current 759 2,564
Inventories 3,618 4,196
Insurance claims receivable -- 5,255
Other current assets 3,040 1,631
Assets held under contractual
arrangement 98 --
-------- -------
Total current assets 38,449 37,492
Property, plant and equipment, net 193,396 194,217
Coalbed methane gas properties,
held for sale -- 4,464
Project development costs 5,672 5,136
Notes receivable, noncurrent 5,309 9,315
Notes receivable from officers 237 246
Investments in equity affiliates 2,732 2,515
Excess of cost of investment in
subsidiaries over net assets
at date of acquisition, net 2,011 2,085
Deferred financing costs, net 5,384 5,728
Other assets 492 1,331
------- -------
Total assets $253,682 $262,529
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 4>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1994 and June 30, 1993
(Dollars in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1994 1993
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 20,274 $ 19,175
Convertible senior subordinated
debentures (Note 2) 49,174 -
Current maturities of recourse
long-term debt (Note 3) 26,906 10,419
Current maturities of nonrecourse
project financing 10,890 10,758
Short-term borrowings 2,721 2,199
Other current liabilities 7,549 6,060
Deferred credits 4,675 -
-------- -------
Total current liabilities 122,189 48,611
Recourse long-term debt,
net of current maturities 13,397 28,012
Convertible senior subordinated
debentures - 49,174
Nonrecourse project financing,
net of current maturities 90,820 97,140
Construction costs payable 5,100 5,100
Deferred income taxes 12,484 10,904
Other liabilities 1,626 7,913
-------- --------
245,616 246,854
------- -------
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 13,055,597 at
March 31, 1994 and June 30, 1993 130 130
Class B common stock, par value $.01,
ten votes per share; 10,000,000 shares
authorized; issued 4,070,770 at
March 31, 1994 and June 30, 1993 39 39
Additional paid-in capital 41,353 40,053
Accumulated deficit (32,789) (23,932)
Other (667) (615)
------- -------
Total stockholders' equity 8,066 15,675
------- -------
Total liabilities and stockholders'
equity $253,682 $262,529
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 5>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended March 31, 1994 and 1993
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Energy revenues $ 47,496 $ 52,055
Equipment sales and services 18,680 13,129
Rental revenues 4,414 2,668
Development and other fees 8,427 8,307
Revenues from related parties -- 346
--------- -------
79,017 76,505
--------- -------
Cost of energy revenues 36,694 34,893
Cost of equipment sales and services 17,046 11,261
Cost of rental revenues 1,854 1,452
Cost of development and other fees 8,452 6,469
Cost of revenues from related parties -- 322
--------- -------
64,046 54,397
--------- -------
Gross profit 14,971 22,108
Selling, general and administrative
expenses 13,799 10,999
--------- -------
Income from operations 1,172 11,109
Interest and other income 4,677 5,413
Interest and debt expense (13,100) (11,556)
--------- -------
Income (loss) before income taxes (7,251) 4,966
Provision for income taxes 1,606 2,310
--------- -------
Net income (loss) $ (8,857) $ 2,656
========= =======
Net income (loss) per share $ (.53) $ .16
========= =======
Weighted average shares
outstanding 16,871 16,813
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 6>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 1994 and 1993
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Energy revenues $ 17,718 $ 14,076
Equipment sales and services 6,875 3,887
Rental revenues 1,225 648
Development and other fees 1,058 1,079
Revenues from related parties -- 346
------- -------
26,876 20,036
------- -------
Cost of energy revenues 13,771 9,668
Cost of equipment sales and services 6,823 3,343
Cost of rental revenues 627 342
Cost of development and other fees 1,053 977
Cost of revenues from related parties -- 322
------- -------
22,274 14,652
------- -------
Gross profit 4,602 5,384
Selling, general and administrative
expenses 4,927 3,973
------- -------
Income (loss) from operations (325) 1,411
Interest and other income 4,347 4,605
Interest and debt expense (4,397) (3,775)
------- -------
Loss before income taxes (375) 2,241
Provision for income taxes 527 770
------- -------
Net income (loss) $ (902) $ 1,471
======= =======
Net income (loss) per share $ (.05) $ .09
======= =======
Weighted average shares
outstanding 16,871 16,848
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 7>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended March 31, 1994 and 1993
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,857) $ 2,656
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 7,693 6,725
Deferred income taxes 1,580 1,706
Equity interest in unconsolidated
entities (217) 80
Gain from settlement of insurance
claims (4,499) --
Changes in assets and liabilities:
Accounts receivable (5,349) 5,156
Inventories 578 (303)
Receivables from related parties 293 (319)
Notes receivable 1,814 (10,833)
Accounts payable 1,099 (265)
Other 1,115 1,518
------- -------
Net cash provided by (used for)
operating activities (4,750) 6,121
-------- -------
Cash flows from investing activities:
Capital expenditures, net (2,792) (6,355)
Capital expenditures to repair
damaged plants (21,663) -
Insurance proceeds for damaged plants 28,000 -
Proceeds from sale of project net of
note receivable 2,000 -
Project development costs (619) (1,920)
Payments on notes receivable 1,077 645
Deposits into restricted cash
accounts (3,118) (4,191)
Other (427) (2,253)
------- -------
Net cash provided by (used for)
investing activities 2,458 (14,074)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 14,514 20,329
Repayments of long-term debt (18,830) (15,680)
Net proceeds of short-term
borrowings 5,522 537
Proceeds from stock issuances - 274
Other - (200)
------- -------
Net cash provided by
financing activities 1,206 5,260
------- -------
Net decrease in cash and
cash equivalents (1,086) (2,693)
Cash and cash equivalents at the
beginning of the period 5,213 8,824
------- -------
Cash and cash equivalents at the end
of the period $ 4,127 $ 6,131
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 8>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation:
In the opinion of management, all adjustments (which consist
primarily 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. Convertible Senior Subordinated Debentures:
The Company did not make the March 15, 1994 interest payment
on its three series of Convertible Senior Subordinated
Debentures ("Debentures") within the grace period which
expired on April 14, 1994. As a result of this default, the
$49,174,000 balance of all outstanding Debentures has been
classified as a current liability. The Company filed a
registration statement with the Securities and Exchange
Commission on May 13, 1994 relating to a proposed exchange
offer for the Debentures. For further information see
"Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Capital Resources".
3. Current Maturities of Recourse Long-Term Debt:
As a result of defaults the Company has classified an
additional $8,064,000 for a total of $26,906,000 of its
recourse debt as a current liability. The Company is having
discussions with its various lenders regarding the defaults,
and is developing a program to restructure this debt. This
program will provide, among other things, an extended
amortization of the debt and the sale of equipment which is
not currently being utilized in an operating project or which
has not been designated for a project under development. To
date no lender has accelerated the payment of its loans with
the Company. There can be no assurance that the program will
be approved by the Company's lenders and be implemented. In the
event that the Company is unable to effect this program, the
Company's financial position and operations would be
materially adversely affected.
4. 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. 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. As a result of the insurance
settlement and the subsequent repairs made to the project,
the Company recognized an involuntary conversion gain of
$4,499,000 in March 1994, which was included in other income
on the Consolidated Statement of Operations.
During the nine month periods ended March 31, 1994 and 1993,
revenues associated with the project were $15,943,000 and
$16,598,000, respectively. Revenues for the nine months
ended March 31, 1994 consisted of business interruption
insurance proceeds and revenues from partial operations in
August and September and full operations for the period of
October 1993 through March 1994. Revenues for the nine
months ended March 31, 1993 consisted of business
interruption insurance proceeds and revenues from operations
for the period of July through December 1992. During the
three month periods ended March 31, 1994 and 1993, revenues
associated with the project were $6,425,000 and $2,976,000,
Page <9>
respectively. Revenues for the three months ended March 31,
1994 reflect full operations whereas the three months ended
March 31, 1993 consisted entirely of business interruption
insurance proceeds. See "Results of Operations for the Nine
Months ended March 31, 1994 and 1993" and "Liquidity and
Capital Resources" for further discussion and analysis of
the impact of the fire.
At March 31, 1994, nonrecourse debt associated with this
project was $31,900,000, with a floating rate of
approximately 4.7%.
5. Parlin Project:
During the nine month periods ended March 31, 1994 and 1993,
revenues associated with this project were $30,246,000 and
$34,211,000 respectively. During the three months ended
March 31, 1994 and 1993, revenues associated with the
project were $11,050,000 and $10,776,000 respectively. See
"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations for the
Nine Months ended March 31, 1994 and 1993."
At March 31, 1994, nonrecourse debt associated with this
project was $69,810,000. The floating rate on approximately
$20,442,000 of this debt as of that date was approximately
4.9%, with the remainder of the debt as of that date having
a fixed rate of approximately 11.1%.
6. Sale of Equity Interest:
Effective March 31, 1993, the Company sold a 12.5% interest
in all proceeds received by the Company in its capacity as a
stockholder of O'Brien (Newark) Cogeneration, Inc., a
wholly-owned subsidiary, to a third party for a promissory
note in the amount of $6,250,000. The costs associated with
the sale amounted to $1,667,000 which resulted in a net gain
of $4,583,000 recognized in the third quarter of 1993. On
January 18, 1994, the Company repurchased the 12.5% interest
from the third party for the $6,250,000 and the forgiveness
of accrued interest. As a result of repurchasing the 12.5%
interest in O'Brien (Newark) Cogeneration, Inc., the Company
recorded a charge in the fourth quarter of 1993 of
$4,583,000 to defer the net gain recognized in the third
quarter. The minority interest of $1,667,000 established in
the third quarter and the deferred gain of $4,583,000
recorded in the fourth quarter are in other liabilities in
the accompanying consolidated balance sheet at June 30,
1993. The Company offset the $6,250,000 note receivable,
$1,667,000 minority interest and $4,583,000 deferred gain in
January 1994, the effective date of the repurchase agreement
for the 12.5% interest in O'Brien (Newark) Cogeneration,
Inc.
7. Sale of Projects Under Development:
On August 27, 1993, the Company entered into an agreement
with an unrelated third party to sell substantially all its
proved and unproved coalbed methane gas properties for
$6,500,000. The $6,500,000 consists of a $2,000,000 cash
payment and a production payment note with a face value of
$4,500,000. The $4,500,000 production payment note has been
discounted on the books of the Company 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
approximately $5,100,000, 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) 10 years whether paid in
full or not or (2) the note being paid in full.
Page <10>
During the nine months ended March 31, 1993, the Company
recognized $4,600,000 of revenues upon the sale of certain
contractual rights associated with projects under
development. Costs associated with these sales aggregated
approximately $3,000,000.
8. Philadelphia Water Department Transaction:
On November 12, 1993, the Company sold, subject to the
repurchase option discussed below, the capital stock of
O'Brien (Philadelphia) Cogeneration, Inc. ("OPC") and
Philadelphia BioGas Supply, Inc. ("Biogas"), wholly-owned
subsidiaries, and issued 5.5 million warrants for Class A
Common Stock to entities controlled by an unrelated private
investor for $5,000,000 in cash, of which $525,000 was set
aside for the purpose of funding capital improvements to the
equipment in accordance with the sales agreement. The
warrants are exercisable at prices ranging from $4.00 to
$6.00 per share, and have been assigned a value of
$1,300,000 which has been reflected in additional paid-in
capital. The primary assets of OPC and Biogas are a 20-year
Energy Service Agreement and a 10-year Digester Gas Supply
Agreement with the Philadelphia Municipal Authority
("Authority"). The project commenced operations in May
1993. The proceeds of $5,000,000 net of the assigned value
of the warrants, are considered to be discounted borrowings
and have been classified as Deferred credits on the
Company's balance sheet since the Company has the right to
repurchase OPC and Biogas in May 1994 for $5,000,000 plus a
17% minority interest in the project. The $1,300,000 value
assigned to the warrants is being amortized through May 1994
using the effective interest method. The Company has the
right to extend the repurchase option through August 1994
upon the payment of $350,000 for each one month extension.
The Company has extended its right to repurchase OPC and
Biogas through June 1994. The net assets of OPC and Biogas
have been presented as Assets held under contractual
arrangement in the accompanying Balance Sheet. The Company
continues to guarantee the performance of OPC and Biogas to
the Authority. In addition, the Company continues to rent
to OPC and Biogas the facilities and all related power
generation and associated equipment for the project. The
annual rent is approximately $2,350,000. Also, the Company
continues to operate and maintain the project for an annual
fee of approximately $250,000 subject to adjustment. If the
Company does not exercise its repurchase option, OPC and
Biogas have the right to (1) purchase the facilities and all
related equipment and (2) terminate the operation and
maintenance contract upon payment of certain consideration.
The Company would recognize a gain associated with the sale
if the repurchase option is allowed to expire.
9. Litigation Settlement:
On May 3, 1994, the Company settled all remaining actions
between it and Hawker Siddeley Power Engineering, Inc.
("Hawker Siddeley"). As a result of this settlement the
Company gave Hawker Siddeley a promissory note in the amount
of $1,500,000. The note has scheduled principal payments of
$250,000 on June 15, 1994, $375,000 on April 1, 1995 and
1996 and $500,000 on April 1, 1998. The final payment of
$500,000 would become payable at an earlier date if the
Company were to enter into certain transactions involving
the sale or disposition of certain assets.
10. Earnings Per Share:
The weighted average number of shares used to compute
primary earnings per share were 16,871,000 and 16,848,000
for the three month periods ended March 31, 1994 and 1993,
respectively and 16,871,000 and 16,813,000 for the
nine month periods ended March 31, 1994 and 1993,
respectively. Fully diluted earnings per share for the
three month and nine month periods ended March 31, 1994 and
1993 are not presented because conversion of the convertible
senior subordinated debentures would be antidilutive.
Page <11>
11. Income Taxes:
Income tax expense for the three month and nine month
periods ended March 31, 1994 and 1993 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 <12>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company develops and manages cogeneration, waste heat
recovery and biogas projects ("Energy business"). In addition,
the Company sells, rents and services power generation equipment
("Equipment sales, rental and services business"). Included in
the Equipment sales, rental and services business is the
Company's standby/peak shaving business, through which the
Company provides standby power equipment to customers 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 Nine Months ended March 31, 1994 and 1993" 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 standby/peak shaving 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" and Note 8 to the Consolidated
Financial Statements.
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 three months ended March 31, 1994 the Company
ceased operating a United Kingdom subsidiary, which was in the
business of manufacturing low voltage switchgear. Pretax losses
associated with this United Kingdom subsidiary were $1,010,000
and $411,000 for the nine month and three month periods ended
March 31, 1994, respectively. Included in these losses were
costs of $244,000 associated with the closure of the business.
On May 12, 1994 the Company reduced its workforce at its
corporate headquarters by 20% as part of its ongoing effort to
reduce costs.
Page <13>
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 Nine Months ended March 31, 1994
and 1993".
Results of Operations for the Nine Months ended March 31, 1994
and 1993
Revenues
Energy revenues for the nine months ended March 31, 1994 and
1993 were $47,496,000 and $52,055,000, 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 1993 to 1994 was primarily
attributable to reduced revenues at the Company's du Pont Parlin
project (as discussed below). Revenues recognized at the Newark
Boxboard project in 1994 were $15,943,000 and consisted of
business interruption insurance proceeds and revenues from
partial operations in August and September and full operations
for the period of October 1993 through March 1994. In
comparison, the Newark Boxboard project had revenues of
$16,598,000 during the same period in 1993 consisting of revenues
from operations for the period of July through December 1992 and
business interruption proceeds for the period of January through March
1993.
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 $36,000,000. In addition, the Company has the right to
receive up to an additional $1,400,000 upon the recovery by the
insurance carrier of its claims against third parties. As a
result of the insurance settlement and the subsequent repairs
made to the project, the Company recognized an involuntary
conversion gain of $4,499,000 in March 1994, which was included
in other income on the Company's Consolidated Statement of
Operations.
Revenues at the du Pont Parlin project were $30,246,000 and
$34,211,000 for the nine months ended March 31, 1994 and 1993,
respectively. The decrease in revenues from 1993 to 1994 was
primarily attributable to a gas turbine generator being shut down
for repairs from late September 1993 until the middle of December
1993. Business interruption proceeds of $367,000 which relate to
an earlier period were recognized in the nine month period ended
March 31, 1993.
Energy revenues from the Company's biogas projects for the
nine months ended March 31, 1994 and 1993 were $1,307,000 and
$1,246,000, respectively. The increase from 1993 to 1994 was
primarily due to energy revenues from the Philadelphia Water
Department project through November 12, 1993, the date the
project was sold.
Equipment sales and services for the nine months ended March
31, 1994 and 1993 were $18,680,000 and $13,129,000, respectively.
Equipment sales from United Kingdom operations for the nine
months ended March 31, 1994 and 1993 were $10,939,000 and
$10,331,000, respectively. The increase in sales from 1993 to
1994 was primarily due to backlog fluctuations and the timing of
order completions. Domestic equipment sales and services for the
nine months ended March 31, 1994 and 1993 were $7,741,000 and
$2,798,000, respectively. The increase in domestic equipment
Page <14>
sales and services in 1994 was primarily due to the Company's
expanding its business in the design and assembly of generator
sets and switchgear.
Rental revenues were $4,414,000 and $2,668,000 for the nine
months ended March 31, 1994 and 1993, respectively. The increase
in rental revenues in 1994 as compared to 1993 was attributable
to the startup in May 1993 of the Philadelphia Water Department
project.
Development fees and other revenues were $8,427,000 and
$8,307,000 for the nine months ended March 31, 1994 and 1993,
respectively. Development fees and other revenues for 1994
include $5,171,000 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 1994 also include $3,168,000 of revenue recognized in
connection with an ongoing fuel management agreement between the
Company and the California Milk Producers project as compared to
$3,162,000 for the nine months ended March 31, 1993. In 1993,
development fees included $4,611,000 of revenues recognized in
connection with the sale of various projects under development.
Development fees and other for 1993 also include $456,000 of
revenues recognized in connection with equipment supply
agreements associated with the Hartford Steam project. The
balance of development fees and other for 1994 and 1993 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 nine months ended March 31, 1994 and
1993 include direct costs associated with the operation of
projects of $36,694,000 and $34,893,000, respectively, as well as
costs associated with equipment sales and services for the nine
months ended March 31, 1994 and 1993 of $17,046,000 and
$11,261,000, respectively. Cost of energy revenues increased as
a percentage of energy revenues in 1994 as compared to 1993
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 market conditions. 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 operational performance, and the volatility of gas
prices can be mitigated through hedging strategies. 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. 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 $1,020,000 lower during the nine months ended
March 31, 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 nine months ended March 31,
1994.
Page <15>
Cost of equipment sales and services increased primarily as
a result of the increased business associated with the Company's
domestic activity in the design and assembly of generator sets
and switchgear business. Cost of equipment sales and services as
a percentage of revenues increased from 1993 to 1994 because of
the deferral of profit margins associated with a domestic
equipment sale involving installation and start up. This profit
margin will be recognized upon the completion of equipment
performance tests.
Cost of rental revenues for the nine months ended March 31,
1994 and 1993 was $1,854,000 and $1,452,000, respectively. Costs
of rental revenues decreased as a percentage of revenue from 1993
to 1994 primarily as a result of the margins associated with the
Philadelphia Water Department project.
Cost of development fees and other revenue was $8,452,000
and $6,469,000 for the nine months ended March 31, 1994 and 1993,
respectively. In 1994, 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 1993, these costs consist principally of costs associated with
the fuel management agreement with the California Milk Producers
project, with an equipment supply agreement for the Hartford
Steam project and costs associated with the sale of various
projects under development. The balance of costs in 1994 and
1993 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 nine
months ended March 31, 1994 and 1993 were $13,799,000 and
$10,999,000, respectively. This increase was primarily
attributable to increased legal fees as a result of litigation
with a project contractor and increased costs associated with the
Company's expansion of its business in the design and assembly of
generator sets and switchgear, 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 other income
for the nine months ended March 31, 1994 includes an involuntary
conversion gain of $4,499,000 resulting from the insurance
settlement for the Newark Boxboard project fire. Interest and
other income for the nine months ended March 31, 1993 includes
$4,583,000 of income recognized in connection with the sale of a
twelve and one half percent equity interest in the Newark
Boxboard project. (See Note 6 to the Consolidated Financial
Statements).
Interest and Debt Expense
Interest and debt expense for the nine months ended
March 31, 1994 and 1993 was $13,100,000 and $11,556,000,
respectively. The increase in interest expense in 1994 as
compared to 1993 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.
Page <16>
Income Taxes
Income tax expense for the nine month periods ended
March 31, 1994 and 1993 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.
Results of Operations for the Three Months ended March 31, 1994
and 1993
Revenues
Energy revenues for the three months ended March 31, 1994
and 1993 were $17,718,000 and $14,076,000, respectively. Energy
revenues primarily reflect billings associated with the Company's
Newark Boxboard, du Pont Parlin and biogas projects.
Revenues at the Newark Boxboard project were $6,425,000 and
$2,976,000 for the three months ended March 31, 1994 and 1993,
respectively. The increase in revenues for the three months
ended March 31, 1994 as compared to the same period in 1993 is
attributable to the lost production in the 1993 quarter resulting
from the fire at the plant. Revenues at the du Pont Parlin
project were $11,050,000 and $10,776,000 for the three months
ended March 31, 1994 and 1993, respectively. Energy revenues
from the Company's biogas projects for the three months ended
March 31, 1994 and 1993 were $243,000 and $324,000, respectively.
Equipment sales and services for the three months ended
March 31, 1994 and 1993 were $6,875,000 and $3,887,000,
respectively. Equipment sales of United Kingdom operations for
the three months ended March 31, 1994 and 1993 were $3,669,000
and $2,905,000, respectively. The increase in sales from 1993 to
1994 was primarily due to backlog fluctuations and the timing of
order completions. Domestic equipment sales and services for the
three months ended March 31, 1994 and 1993 were $3,206,000 and
$982,000, respectively. The increase in domestic equipment sales
and services in 1994 was primarily due to the Company's expansion
of its business in the design and assembly of generator sets and
switchgear.
Rental revenues were $1,225,000 and $648,000 for the three
months ended March 31, 1994 and 1993, respectively. The increase
in rental revenues in 1994 as compared to 1993 was attributable
to the start-up in May 1993 of the Philadelphia Water Department
project.
Development fees and other revenues were $1,058,000 and
$1,079,000 for the three months ended March 31, 1994 and 1993,
respectively. Development fees for 1994 include $1,025,000 of
revenue recognized in connection with an ongoing fuel management
agreement between the Company and the California Milk Producers
project, as compared to $1,039,000 for the three month period
ended March 31, 1993. The balance of development fees and other
for 1994 and 1993 consists of revenues recognized in connection
with management fees agreements associated with the California
Milk Producers and Hartford Steam projects.
Page <17>
Costs and Expenses
Cost of sales for the three months ended March 31, 1994 and
1993 include direct costs associated with the operation of
projects of $13,771,000 and $9,668,000, respectively as well as
costs associated with equipment sales and services for the three
months ended March 31, 1994 and 1993 of $6,823,000 and
$3,343,000, respectively. Cost of energy revenues increased as a
percentage of energy revenues in 1994 versus 1993 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 market conditions. 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
operational performance, and the volatility of gas prices can be
mitigated through hedging strategies. 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.
Cost of equipment sales and services as a percentage of
revenues increased primarily as a result of the deferral of
profit margins associated with a domestic equipment sale
involving installation and start up. This profit margin will be
recognized upon the completion of equipment performance tests.
Cost of rental revenues for the three months ended March 31,
1994 and 1993 was $627,000 and $342,000, respectively. Costs of
rental revenues increased in the 1994 period as a result of the
start-up in May 1993 of the Philadelphia Water Department
project.
Cost of development fees and other revenue was $1,053,000
and $977,000 for the three months ended March 31, 1994 and 1993,
respectively. In 1994 and 1993, these costs consist principally
of costs associated with a fuel management agreement with the
California Milk Producers project and asset management agreements
for the Hartford Steam and California Milk Producers projects.
Selling, general and administrative expenses for the three
months ended March 31, 1994 and 1993 were $4,927,000 and
$3,973,000, respectively. This increase was primarily
attributable to increased legal fees as a result of litigation
with a project contractor and various other activities as well as
increased costs associated with the Company's expansion of its
business in the design and assembly of generator sets and
switchgear, and was partially offset by the Company's ongoing
overhead reduction activities.
Interest and Other Income
Interest and other income for the three months ended
March 31, 1994 includes an involuntary conversion gain of
$4,499,000 resulting from the insurance settlement for the Newark
Boxboard project fire. Interest and other income for the three
months ended March 31, 1993 includes $4,583,000 of income
recognized in connection with the sale of a twelve and one half
percent equity interest in the Newark Boxboard project (see Note
6 to the Consolidated Financial Statements). Other fluctuations
in Interest and other income are primarily attributable to
interest income on escrow accounts established in connection with
Page <18>
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
March 31, 1994 and 1993 was $4,397,000 and $3,775,000,
respectively. The increase in interest expense in 1994 as
compared to 1993 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
March 31, 1994 and 1993 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 March 31, 1994 totalled
approximately $4,127,000 as compared to approximately $5,213,000
at June 30, 1993. Cash equivalents consist primarily of short-
term money market instruments. However, not all such cash
balances were available to the Company due to provisions in the
Newark Boxboard and du Pont Parlin financing agreements. The
decrease in cash was primarily due to recurring debt amortization
and the September 1993 semi-annual interest payments on the
Company's Convertible Senior Subordinated Debentures
("Debentures"). The decrease was partially offset by operating
cash flow from the Newark Boxboard and du Pont Parlin projects.
Additional funds were also provided by a transaction with Stewart
& Stevenson Services, Inc. and by the discounting of notes
receivable in consideration of early payment, both of which are
discussed below.
Restricted cash at March 31, 1994 totalled approximately
$8,182,000 as compared to approximately $5,064,000 at June 30,
1993. The increase was primarily due to the receipt of
$5,200,000 of insurance proceeds pertaining to the Newark
Boxboard project fire which will fund costs incurred to date to
repair the project. Also, contributing to the increase was the
transfer of approximately $2,800,000 into a debt service reserve
fund required by the du Pont Parlin project financing agreement.
This was offset by the use of approximately $3,300,000 of
restricted cash to fund the December 1993 semi-annual principal
and interest payment. This funding from the restricted cash
account was required primarily as a result of a gas turbine
generator being shutdown for repairs during the three months
ended December 1993, as discussed in "Results of Operations for
the Nine Months ended March 31, 1994 and 1993". In addition,
restricted cash decreased as a result of a release to the Company
of $2,000,000 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.
Page <19>
The Company's working capital deficiency at March 31, 1994
was approximately $83,740,000 as compared to a working capital
deficiency of approximately $11,119,000 at June 30, 1993. The
substantial increase in the Company's working capital deficiency
is primarily due to the reclassification to current liabilities
of the $49,174,000 balance of all outstanding Debentures as a
result of the Company not making its March 15, 1994 interest
payment on its Debentures. A registration statement relating to
an offering to exchange (the "Exchange Offer") the Debentures for
preferred stock, Class A Common Stock and warrants to purchase
Class A Common Stock was filed with the Securities and Exchange
Commission on May 13, 1994. In addition, as a result of
defaults, the Company has classified an additional $8,064,000 for
a total of $26,906,000 of its recourse debt as a current
liability. The Company is having discussions with its lenders
regarding the defaults, and is developing a program to
restructure this debt. This program will provide for, among
other things, an extended amortization of the debt and the sale of
equipment which is not currently being utilized in an operating
project or has not been designated for a project under development.
To date, no lender has accelerated the payment of its loans with the
Company. There can be no assurance that the Exchange Offer or the
program to extend the maturities of the recourse debt will be successful.
In the event that these efforts are not successful, the Company's financial
position and operations would be materially adversely affected. Accounts
receivable increased primarily as a result of the fully
operational status of the Newark Boxboard project at March 31,
1994, as compared to its non-operational status at June 30, 1993
as a result of the fire.
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 Siddeley 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. Additionally, the Indenture governing
one series of the Company's Debentures restricts the ability of
the Company to incur new long-term indebtedness under certain
circumstances.
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 forego 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 June 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 March 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 <20>
In November 1993, the Company entered into a letter of
intent with Stewart & Stevenson Services, Inc., a major equipment
supplier and operation and maintenance company for a $7,000,000
credit facility to be disbursed upon the completion of certain
milestones. The first disbursement of $1,000,000 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 $3,500,000 was funded on March 16, 1994.
Of this amount, $2,300,000 was disbursed to the Company and
$1,200,000 remained in the Newark Boxboard project to prepay
project debt, pay certain expenses of the project and create a
capital improvement fund. A third disbursement of $2,500,000 is
available to the Company 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 an aggregate principal
amount of approximately $50,000,000. The current debt
outstanding on this project is approximately $32,000,000. In
addition, the Company is currently evaluating a partial sale of
equity in its Newark Boxboard and du Pont Parlin projects.
Management's objective is to complete these transactions in the
near future. Management may, prior to a refinancing of the
Newark Boxboard project, choose to sell a partial equity interest
in the Newark Boxboard and/or the du Pont Parlin project in order
to generate additional cash flow or enhance its ability to enter
into a strategic alliance with a larger entity. There can be no
assurance that the above mentioned transactions will occur. 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.
Within the last year, the Company has attempted to refinance
and/or sell equity in certain projects. Furthermore, the Company
retained an investment banking firm to develop plans to enhance
shareholder value including an evaluation of the merits of selling
or merging the Company or forming a strategic alliance. Subsequently,
the Company engaged Jeffries & Company, Inc. to complete the implementation
of the Company's plans to maximize shareholder value. Although the
Company has received numerous indications of interest, the Company's efforts
to implement a restructuring plan ("Restructuring Plan") have been hampered
by, among other things, the ongoing litigation with the Company's previous
principal project turnkey construction contractor (the "Hawker Siddeley
litigation"), the Newark fire, the constraints in the Debentures and the
Company's liquidity problems.
To reduce debt, increase equity, alleviate the Company's short-term
liquidity problems, and improve long-term liquidity, the Company is pursuing
a Restructuring Plan that includes the following steps: (1) the recent
settlement of the Hawker Siddeley litigation, (2) appointment of a new
President and Chief Operating Officer, and Vice President/Finance and Chief
Financial Officer, (3) implementation of a cost reduction program,
(4) refinancing and/or sale of all or part of its ownership in its Newark
and Parlin cogeneration plants, (5) a strategic review of its other assets
and business units and (6) completion of the Exchange Offer.
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 <21>
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 the 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 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 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.
Standby/Peak Shaving and Biogas Fuel Projects - Capital
Resources
Generally, because the capital requirements of standby/peak
shaving 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 standby/peak shaving 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 March 31, 1994, the Company had nominal availability
under existing lines of credit. Although the Company has
refinanced over $6,000,000 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.
Page <22>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page <23>
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: May 16, 1994 /s/Larry Zalkin
---------------------------
Larry Zalkin
President and Chief
Operating Officer
Dated: May 16, 1994 /s/Ronald R. Rominiecki
----------------------------
Ronald R. Rominiecki
Vice President/Finance and
Chief Financial Officer
