<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 December 31, 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
of incorporation or organization) Identification No.)
225 South Eight 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 April 8, 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 December 31, 1993 and
June 30, 1993 (unaudited).
Consolidated Statements of Operations for the six
months ended December 31, 1993 and 1992 (unaudited).
Consolidated Statements of Operations for the three
months ended December 31, 1993 and 1992 (unaudited).
Consolidated Statements of Cash Flows for the six
months ended December 31, 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
December 31, 1993 and June 30, 1993
(Dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1993 1993
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,548 $ 5,213
Restricted cash and cash equivalents 2,115 5,064
Accounts receivable, net 16,004 12,394
Receivable from related parties 612 1,175
Notes receivable, current 2,361 2,564
Inventories 6,010 4,196
Insurance claims receivable 2,769 5,255
Other current assets 2,242 1,631
Assets held under contractual
arrangement 98 --
-------- -------
Total current assets 34,759 37,492
Property, plant and equipment, net 191,992 194,217
Coalbed methane gas properties,
held for sale -- 4,464
Project development costs 5,674 5,136
Notes receivable, noncurrent 11,533 9,315
Notes receivable from officers 237 246
Investments in equity affiliates 2,734 2,515
Excess of cost of investment in
subsidiaries over net assets
at date of acquisition, net 2,036 2,085
Deferred financing costs, net 5,489 5,728
Other assets 902 1,331
------- -------
Total assets $255,356 $262,529
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 4>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and June 30, 1993
(Dollars in thousands)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, June 30,
1993 1993
---- ----
<S> <C> <C>
Current liabilities:
Accounts payable $ 18,842 $ 19,175
Current maturities of recourse
long-term debt 15,387 10,419
Current maturities of nonrecourse
project financing 10,890 10,758
Short-term borrowings 2,992 2,199
Other current liabilities 6,246 6,060
Deferred credits 4,025 -
-------- -------
Total current liabilities 58,382 48,611
Recourse long-term debt,
net of current maturities 21,991 28,012
Convertible senior subordinated
debentures 49,174 49,174
Nonrecourse project financing,
net of current maturities 91,820 97,140
Construction costs payable 5,100 5,100
Deferred income taxes 12,008 10,904
Other liabilities 7,892 7,913
-------- --------
246,367 246,854
------- -------
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
December 31, 1993 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
December 31, 1993 and June 30, 1993 39 39
Additional paid-in capital 41,353 40,053
Accumulated deficit (31,887) (23,932)
Other (646) (615)
------- -------
Total stockholders' equity 8,989 15,675
------- -------
Total liabilities and stockholders'
equity $255,356 $262,529
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 5>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended December 31, 1993 and 1992
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Energy revenues $ 29,778 $ 37,979
Equipment sales and services 11,805 9,242
Rental revenues 3,189 2,020
Development and other fees 7,369 7,228
--------- -------
52,141 56,469
--------- -------
Cost of energy revenues 22,923 25,225
Cost of equipment sales and services 10,223 7,918
Cost of rental revenues 1,227 1,110
Cost of development and other fees 7,399 5,492
--------- -------
41,772 39,745
--------- -------
Gross profit 10,369 16,724
Selling, general and administrative
expenses 8,872 7,026
--------- -------
Income from operations 1,497 9,698
Interest and other income 330 808
Interest and debt expense (8,703) (7,781)
--------- -------
Income (loss) before income taxes (6,876) 2,725
Provision for income taxes 1,079 1,540
--------- -------
Net loss $ (7,955) $ 1,185
========= =======
Net loss per share $ (.47) $ .08
========= =======
Weighted average shares
outstanding 16,871 16,847
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 6>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended December 31, 1993 and 1992
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Energy revenues $ 13,469 $ 16,243
Equipment sales and services 6,644 5,440
Rental revenues 1,472 995
Development and other fees 906 6,607
------- -------
22,491 29,285
------- -------
Cost of energy revenues 12,162 12,550
Cost of equipment sales and services 5,513 4,855
Cost of rental revenues 693 578
Cost of development and other fees 977 5,210
------- -------
19,345 23,193
Gross profit 3,146 6,092
Selling, general and administrative
expenses 3,985 3,480
------- -------
Income (loss) from operations (839) 2,612
Interest and other income 77 235
Interest and debt expense (4,476) (3,836)
------- -------
Loss before income taxes (5,238) (989)
Provision for income taxes 527 770
------- -------
Net loss $ (5,765) $ (1,759)
======= =======
Net loss per share $ (.34) $ (.10)
======= =======
Weighted average shares
outstanding 16,871 16,862
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 7>
O'BRIEN ENVIRONMENTAL ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended December 31, 1993 and 1992
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,955) $ 1,185
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 5,133 4,230
Deferred income taxes 1,104 1,490
Equity interest in unconsolidated
entities (219) 4
Changes in assets and liabilities:
Accounts receivable (3,610) 2,569
Inventories (1,814) (415)
Receivables from related parties 563 (430)
Notes receivable -- (4,573)
Accounts payable (333) 2,008
Other (251) (1,157)
------- -------
Net cash provided by (used for)
operating activities (7,382) 7,225
-------- -------
Cash flows from investing activities:
Capital expenditures, net (1,862) (2,163)
Capital expenditures to repair
damaged plants (17,548) --
Insurance proceeds for damaged plants 20,034 --
Proceeds from sale of project net of
note receivable 2,000 --
Project development costs (593) (1,596)
Payments on notes receivable 246 142
(Deposits) withdrawals into restricted
cash accounts 2,949 (3,524)
Other (61) (1,274)
------- -------
Net cash provided by (used for)
investing activities 5,165 (8,415)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 14,013 10,362
Repayments of long-term debt (20,254) (9,399)
Net proceeds of short-term
borrowings 5,793 509
Proceeds from stock issuances -- 270
Other -- (200)
------- -------
Net cash provided by (used for)
financing activities (448) (1,542)
------- -------
Net increase (decrease) in cash and
cash equivalents (2,665) 352
Cash and cash equivalents at the
beginning of the period 5,213 8,824
Cash and cash equivalents at the end ------- -------
of the period $ 2,548 $ 9,176
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<Page 8>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
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. 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 six month periods ended December 31, 1993 and
1992, revenues associated with the project were $9,518 and
$13,622, respectively. During the three month periods ended
December 31, 1993 and 1992, revenues associated with the
project were $7,361 and $6,276, respectively. Revenues for
the six months ended December 31, 1993 consisted of business
interruption insurance proceeds and revenues from partial
operations in August and September and full operations for
the period of October through December 1993. See "Results of
Operations for the Six Months ended December 31, 1993 and 1992"
and "Liquidity and Capital Resources" for further discussion and
analysis of the impact of the fire.
At December 31, 1993, nonrecourse debt associated with this
project was $32,900 with a floating rate of approximately 4.5%.
3. Parlin Project:
During the six month periods ended December 31, 1993 and
1992, revenues associated with this project were $19,196 and
$23,435, respectively. During the three months ended
December 31, 1993 and 1992, revenues associated with the
project were $5,866 and $9,606, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations for the Six Months ended
December 31, 1993 and 1992."
At December 31, 1993, nonrecourse debt associated with this
project was $69,810. The floating rate on approximately
$20,442 of debt as of that date was approximately 4.4%, with
the remainder of the debt as of that date having a fixed
rate of approximately 11.1%.
4. 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. 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 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, which
resulted in no gain being recognized. The production
payment note will be paid from a percentage of net revenues
<Page 9>
from the coalbed methane gas properties until the earlier of
(1) the note being paid in full or (2) 10 years.
During the six months ended December 31, 1992, the Company
recognized $4,600 of revenues upon the sale of certain
contractual rights associated with projects under
development. Costs associated with these sales aggregated
approximately $3,000.
5. 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 in cash, of which $525 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 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,
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 plus a 17%
minority interest in the project. The $1,300 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 for each one month extension. 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.
Also, the Company will continue to operate and maintain the project
for an annual fee of approximately $250, 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.
6. Earnings Per Share:
The weighted average number of shares used to compute
primary earnings per share were 16,871,000 and 16,862,000
for the three month periods ended December 31, 1993 and
1992, respectively and 16,871,000 and 16,847,000 for the six
month periods ended December 31, 1993 and 1992 respectively.
Fully diluted earnings per share for the three month and six
month periods ended December 31, 1993 and 1992 are not
presented because conversion of the convertible senior
subordinated debentures would be antidilutive.
7. Income Taxes:
Income tax expense for the three month and six month periods
ended December 31, 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 10>
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 six months ended December 31, 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" and Note 5 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 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 six months ended December 31, 1993
and 1992".
<Page 11>
Results of Operations for the Six Months ended December 31, 1993
and 1992
Revenues
Energy revenues for the six months ended December 31,
1993 and 1992 were $29,778,000 and $37,979,000, 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
attributable to reduced revenues as a result of the fire at the
Company's Newark Boxboard project and to reduced revenues at the
Company's du Pont Parlin project (as discussed below). Revenues
recognized at the Newark Boxboard project in 1993 were $9,518,000
and consisted of business interruption insurance proceeds and
revenues from partial operations in August and September and full
operations for the period of October through December 1993. In
comparison, the Newark Boxboard project had revenues of
$13,622,000 during the same period 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 $19,196,000
and $23,435,000 for the six months ended December 31, 1993 and
1992, respectively. The decrease in revenues from 1992 to 1993
was primarily attributable to a gas turbine generator being shut
down for repairs from late September 1993 until the middle of
December 1993. In addition, $367,000 of business interruption
proceeds relating to an earlier period were recognized in the six
month period ended December 31, 1992.
Energy revenues from the Company's biogas projects for
the six months ended December 31, 1993 and 1992 were $1,064,000
and $922,000, 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 through November 12, 1993, the date the
project was sold.
Equipment sales and services for the six months ended
December 31, 1993 and 1992 were $11,805,000 and $9,242,000,
respectively. Equipment sales from its United Kingdom operations
for the six months ended December 31, 1993 and 1992 were $7,270,000
and $7,426,000, respectively. The decrease in sales from 1992 to
1993 was primarily due to backlog fluctuations and the timing of
order completions. Domestic equipment sales and services for the
six months ended December 31, 1993 and 1992 were $4,535,000 and
$1,816,000, 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.
Rental revenues were $3,189,000 and $2,020,000 for the
six months ended December 31, 1993 and 1992, respectively. The
increase in rental revenues in 1993 as compared to 1992 was
attributable to the startup in May 1993 of the Philadelphia Water
Department project.
<Page 12>
Development fees and other revenues were $7,369,000 and
$7,228,000 for the six months ended December 31, 1993 and 1992,
respectively. Development fees and other revenues for 1993
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 1993 also include $2,143,000 of revenue recognized in
connection with an ongoing fuel management agreement between the
Company and the California Milk Producers project as compared to
$2,123,000 for the six months ended December 31, 1992. In 1992,
development fees included $4,601,000 of revenues recognized in
connection with the sale of various projects under development.
Development fees and other for 1992 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 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 six months ended December 31, 1993
and 1992 include direct costs associated with the operation of
projects of $22,923,000 and $25,225,000, respectively, as well as
costs associated with equipment sales and services for the six
months ended December 31, 1993 and 1992 of $10,223,000 and
$7,918,000, respectively. Cost of energy revenues increased as a
percentage of energy revenues in 1993 as compared to 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 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 or for the remaining
interim periods within such year. 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
six months ended December 31, 1992 than they would have been
otherwise. Conversely, natural gas costs were approximately
$1,000,000 higher than they would have been otherwise for the six
months ended December 31, 1993.
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 rental revenues for the six months ended
December 31, 1993 and 1992 was $1,227,000 and $1,110,000,
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.
<Page 13>
Cost of development fees and other revenue was
$7,399,000 and $5,492,000 for the six months ended December 31,
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
various projects 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 six
months ended December 31, 1993 and 1992 were $8,872,000 and
$7,026,000, 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 Debt Expense
Interest and debt expense for the six months ended
December 31, 1993 and 1992 was $8,703,000 and $7,781,000,
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 six month periods ended
December 31, 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.
Results of Operations for the Three Months ended December 31,
1993 and 1992
Revenues
Energy revenues for the three months ended December 31,
1993 and 1992 were $13,469,000 and $16,243,00, 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 $7,361,000
and $6,276,000 for the three months ended December 31, 1993 and
1992 respectively. The increase in revenues for the three months
ended December 31, 1993 as compared to the same period in 1992 is
attributable to a scheduled maintenance outage which occurred in
the 1992 quarter.
<Page 14>
Revenues at the du Pont Parlin project were $5,866,000
and $9,606,000 for the three months ended December 31, 1993 and
1992, respectively. The decrease in revenues from 1992 to 1993
was primarily attributable to a gas turbine generator being shut
down for repairs from late September 1993 until the middle of
December 1993.
Energy revenues from the Company's biogas projects for
the three months ended December 31, 1993 and 1992 were $242,000
and $361,000, respectively. The decrease in revenues in 1993 as
compared to 1992 was primarily attributable to seasonal and
weather factors.
Equipment sales and services for the three months ended
December 31, 1993 and 1992 were $6,644,000 and $5,440,000,
respectively. Equipment sales of Puma for the three months ended
December 31, 1993 and 1992 were $3,515,000 and $4,181,000,
respectively. The decrease in sales from 1992 to 1993 was
primarily due to decreased production during the period.
Domestic equipment sales and services for the three months ended
December 31, 1993 and 1992 were $3,129,000 and $1,259,000,
respectively. The increase in domestic equipment sales and
services in 1993 was primarily due to the Company's expansion of
its business in the design and assembly of generator sets and
switchgear.
Rental revenues were $1,472,000 and $995,000 for the
three months ended December 31, 1993 and 1992, respectively. The
increase in rental revenues in 1993 as compared to 1992 was
attributable to the start-up in May 1933 of the Philadelphia
Water Department project.
Development fees and other revenues were $906,000 and
$6,607,000 for the three months ended December 31, 1993 and 1992,
respectively. Development fees for 1993 include $862,000 of
revenue recognized in connection with an ongoing fuel management
agreement between the Company and the California Milk Producers
project, as compared to $2,051,000 for the three month period
ended December 31, 1992. In 1992, development fees included
$4,276,000 of revenues recognized in connection with the sale of
various projects under development. Development fees and other
for 1992 also include $230,000 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 December 31,
1993 and 1992 include direct costs associated with the operation
of projects of $12,162,000 and $12,550,000, respectively as well
as costs associated with equipment sales and services for the
three months ended December 31, 1993 and 1992 of $5,513,000 and
$4,855,000, respectively. Cost of energy revenues increased as a
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 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
<Page 15>
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 or for the interim periods
within such year. The Company entered into a gas swap agreement whereby
the Company agreed to levelized 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 three months ended December 31, 1992 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.
Cost of equipment sales and services as a percentage of revenues
decreased primarily as a result of increased business associated with the
Company's domestic design and assembly of generator sets and switchgear
business.
Cost of rental revenues for the three months ended
December 31, 1993 and 1992 was $693,000 and $640,000,
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 $977,000
and $5,210,000 for the three months ended December 31, 1993 and
1992, respectively. In 1993, these costs consist principally of
costs associated with a fuel management agreement with the
California Milk Producers project as well as residual expenses
incurred in connection with the sale of the Company's contractual
rights to develop certain coal bed methane reserves. In 1992,
these costs consist principally of costs associated with a gas
supply agreement with the California Milk Producers project,
costs associated with the sale of various projects under
development and costs associated with an equipment supply
agreement for the Hartford Steam project. The balance of costs
in 1993 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
three months ended December 31, 1993 and 1992 were $4,185,000 and
$3,480,000, 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
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.
<Page 16>
Interest and Debt Expense
Interest and debt expense for the three months ended
December 31, 1993 and 1992 was $4,476,000 and $3,836,000,
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
December 31, 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 December 31, 1993 totalled
approximately $2,548,000 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 the September
1993 semi-annual interest payments on the Company's convertible
senior subordinated debentures. The decrease was partially
offset by operating cash flow from the Newark Boxboard and du
Pont Parlin projects. However, such cash flow was not available
to the Company due to restrictions in the project's financing
agreement.
Restricted cash at December 31, 1993 totalled
approximately $2,115,000 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. This
was offset by the use of approximately $3,300,000 of restricted
cash needed 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". 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.
The Company's working capital deficiency at December 31,
1993 was approximately $23,623,000 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 that will be due on
equipment financing prior to December 31, 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 fully operational status
of the Newark Boxboard project at December 31, 1993, as compared
to its non-operational status at June 30, 1993 as a result of the
fire.
<Page 17>
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.
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 expected to be available to the Company 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 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 du Pont Parlin project.
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.
<Page 18>
With respect to satisfying the Company's long-term
working capital requirements, management intends to proceed with a plan
to (i) restructure or divest some of its businesses, (ii) exchange
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.
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.
On March 14, 1994 the Company announced that it had elected
to take advantage of the 30-day grace period allowable with respect to
the payment of interest on its three bond indentures relating to its
convertible senior subordinated debentures. The amount of the
interest due at the end of the grace period, April 14, 1994, is $2,519,000.
The Company also announced that it had engaged Jefferies & Company, Inc. as
advisor to develop a proposal for the exchange of the Company's
three series of convertible senior subordinated debentures and to provide
other advisory services. The Board of Directors determined that a modification
of the Company's capital structure was advisable in order to strengthen the
Company's working capital position and to provide a stronger foundation for
growth. Accordingly, the Board of Directors elected not to make the March 15,
1994 interest payment, with respect to each of the Company's three series of
convertible senior subordinated debentures. Further, they instructed the
officers of the Company and the Company's financial advisor, Jeffries &
Company, Inc. to implement a program under which the Company will offer to all
holders of its debentures an opportunity to exchange their existing debentures
for a new issuance of securities of the Company.
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 long-term
(20+year) life of the project.
<Page 19>
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 December 31, 1993, 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. 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 20>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<Page 21>
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: April 11, 1994 /s/Joel D. Cooperman
---------------------------
Joel D. Cooperman
Financial and
Accounting Officer
Dated: April 11, 1994 /s/Sanders D. Newman
----------------------------
Sanders D. Newman
General Counsel
