<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
X Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
---
of 1934
For the quarterly period ended June 30, 1996 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 0-15472
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Environmental Power Corporation
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2782065
- - ------------------------------- --------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (603) 431-1780
--------------
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
----- -----
Number of shares of Common Stock outstanding
at August 13, 1996 - 11,076,783
---------------------------------
The Exhibit Index appears on Page 16.
Total number of pages is 17.
-1-
<PAGE>
ENVIRONMENTAL POWER CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE> Page No.
<CAPTION> -------
Item 1. Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets as of
June 30, 1996 (unaudited) and December 31, 1995............ 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three and Six Months Ended
June 30, 1996 and June 30, 1995............................ 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended
June 30, 1996 and June 30, 1995............................ 5
Notes to Condensed Consolidated Financial
Statements................................................. 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................. 8-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 14-15
Item 4. Submission of Matters to a Vote of
Security Holders.................................. 15
Item 5. Other Information................................. 16
Item 6. Exhibits and reports on Form 8-K.................. 16
Signatures................................................. 17
</TABLE>
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<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
------------- -------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,187,400 $ 1,011,822
Restricted cash 1,626,540 1,250,338
Receivable from utility 5,388,679 6,536,506
Notes receivable 1,222,217 1,673,091
Receivable from sale of affiliate 276,444 276,444
Other current assets 932,736 1,112,152
---------------- ----------------
TOTAL CURRENT ASSETS $ 10,634,016 $ 11,860,353
PROPERTY, PLANT AND EQUIPMENT, NET 7,092,050 7,075,907
DEFERRED INCOME TAX ASSET 4,741,929 5,543,229
LEASE RIGHTS, NET 2,981,025 3,055,526
NOTES RECEIVABLE 1,853,615 1,868,409
ACCRUED POWER GENERATION REVENUE 19,713,262 15,161,689
OTHER ASSETS 604,651 661,311
---------------- ----------------
$ 47,620,548 $ 45,226,424
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,372,708 $ 6,338,160
Other current liabilities 2,316,989 2,298,686
---------------- ----------------
TOTAL CURRENT LIABILITIES 7,689,697 8,636,846
DEFERRED GAIN, NET 6,168,214 6,322,419
SECURED PROMISSORY NOTES PAYABLE
AND OTHER BORROWINGS 8,596,580 8,543,767
ACCRUED LEASE EXPENSE 19,713,262 15,161,689
DEFERRED REVENUE 1,460,695 3,064,965
MAINTENANCE RESERVE 891,395 699,429
SHAREHOLDERS' EQUITY
Common Stock ($.01 par value; 20,000,000 shares authorized;
12,195,423 shares and 12,145,423 shares issued at
June 30, 1996 and December 31, 1995, respectively;
11,076,783 shares and 11,547,323 shares outstanding at
June 30, 1996 and December 31, 1995, respectively.) 121,954 121,454
Additional paid-in capital 11,943,637 12,592,808
Unearned compensation (26,771) (66,941)
Accumulated deficit (7,720,688) (8,847,585)
---------------- ----------------
4,318,132 3,799,736
Less: 1,118,640 and 598,100 common shares held in Treasury, at
cost, at June 30, 1996 and December 31, 1995, respectively (456,272) (168,395)
Notes receivable from officers (761,155) (834,032)
---------------- ----------------
3,100,705 2,797,309
---------------- ----------------
$ 47,620,548 $ 45,226,424
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
POWER GENERATION REVENUES $ 13,078,617 $ 9,126,623 $ 23,844,132 $ 17,070,582
---------------- ---------------- ---------------- ----------------
Costs and expenses:
Operating expenses 4,621,050 4,715,783 8,900,643 10,336,425
Lease expense 7,325,667 5,123,830 12,495,095 10,499,003
General and administrative expenses 674,699 945,658 1,657,676 1,756,971
Depreciation and amortization 60,407 41,752 102,277 83,432
---------------- ---------------- ---------------- ----------------
12,681,823 10,827,023 23,155,691 22,675,831
---------------- ---------------- ---------------- ----------------
OPERATING INCOME (LOSS) 396,794 (1,700,400) 688,441 (5,605,249)
Other Income (Expense):
Interest income 125,281 119,724 219,179 228,422
Interest expense (37,611) (23,295) (75,122) (50,792)
Warranty income --- --- 900,000 ---
Other income 77,216 685,028 196,399 762,131
---------------- ---------------- ---------------- ----------------
164,886 781,457 1,240,456 939,761
---------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 561,680 (918,943) 1,928,897 (4,665,488)
INCOME TAX (EXPENSE) BENEFIT -- Note B (227,000) 135,000 (802,000) 1,633,000
---------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ 334,680 $ (783,943) $ 1,126,897 $ (3,032,488)
================ ================ ================ ================
PRIMARY AND FULLY DILUTIVE EARNINGS (LOSS)
PER COMMON SHARE -- Note C $ 0.03 $ (0.07) $ 0.10 $ (0.28)
================ ================ ================ ================
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
[CAPTION]
<TABLE>
Six Months Ended
June 30
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,126,897 $ (3,032,488)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 102,277 83,432
Deferred income taxes 801,300 (1,633,000)
Amortization of deferred gain (154,205) (154,206)
Amortization of unearned compensation 40,170 40,170
Accrued power generation revenue (4,551,573) (2,106,466)
Accrued lease expense 4,551,573 2,106,466
Changes in operating assets and liabilities:
Increase in restricted cash (376,202) ---
Decrease (increase) in receivable from utility 1,147,827 (326,679)
Decrease in receivable from sale of affiliate --- 3,499,313
Decrease in other current assets 179,416 391,251
(Decrease) increase in accounts payable and
accrued expenses (965,452) 3,587,240
(Decrease) increase in deferred revenue (1,604,270) 116,679
Decrease in other current liabilities (9,197) (1,345,823)
Increase in maintenance reserve 191,966 250,002
--------- ---------
Cash provided by operating activities 480,527 1,475,891
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the collection of notes receivable 465,668 ---
Decrease in other assets 38,810 ---
Property, plant and equipment expenditures (15,157) 2,960
Capitalized facility under development expenditures (10,912) (34,922)
Proceeds from the sale of office equipment --- 1,000
--------- ---------
Cash provided by (used in) investing activities 478,409 (31,962)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments (663,108) ---
Purchase of treasury stock (160,000) ---
Proceeds from other borrowings 52,813 ---
Repayment of other borrowings (27,500) (75,000)
Proceeds from the issuance of common stock 14,437 10,000
--------- ---------
Cash used in financing activities (783,358) (65,000)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 175,578 1,378,929
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,011,822 356,527
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,187,400 $ 1,735,456
========= =========
See Note D for supplemental disclosure of noncash investing and financing activities.
See notes to condensed consolidated financial statements.
</TABLE>
-5-
<PAGE>
ENVIRONMENTAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
- - -----------------------------
The accompanying unaudited condensed consolidated financial statements of
Environmental Power Corporation ("EPC") and its subsidiaries (the "Company")
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for annual financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of operations
for the six months ended June 30, 1996 are not necessarily indicative of results
to be expected for the year ending December 31, 1996. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
NOTE B--PROVISION FOR INCOME TAXES
- - ----------------------------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This standard
requires, among other things, recognition of future tax benefits, measured by
enacted tax rates, attributable to deductible temporary differences between
financial bases of assets and liabilities, and net operating loss carryforwards
to the extent that realization of such benefits are more likely than not.
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and net operating loss
carryforwards for which the Company expects income tax benefits will be realized
in future years.
NOTE C-- NET EARNINGS (LOSS) PER SHARE
- - --------------------------------------
The Company computes its earnings (loss) per common share using the treasury
stock method in accordance with Accounting Principles Board Opinion No. 15.
Under this method, all options, warrants and their equivalents are assumed
exercised (whether dilutive or antidilutive) with aggregate proceeds used to
purchase up to 20% of the Company's outstanding common stock. If the combined
effect of the assumed exercise is dilutive, all options, warrants and their
equivalents are included in the computation.
-6-
<PAGE>
ENVIRONMENTAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C-- NET EARNINGS (LOSS) PER SHARE (CONTINUED)
- - --------------------------------------------------
The Company computed its primary and fully dilutive earnings (loss) per common
share using the weighted average number of shares of common stock and dilutive
common stock equivalents outstanding which amounted to 11,193,415 and 11,344,632
for the three and six months ended June 30, 1996, respectively, and 10,648,846
for each of the three and six months ended June 30, 1995, respectively.
NOTE D-- CHANGES IN STOCKHOLDERS' EQUITY
- - ----------------------------------------
During the six months ended June 30, 1996, other than net income of $1,126,897,
the Company reported the following changes to its stockholders' equity:
Dividends - The Company declared and paid dividends of $330,805 and $332,303
---------
during the three months ended March 31, 1996 and June 30, 1996, respectively.
Unearned Compensation - The Company amortized unearned compensation of
---------------------
$20,085 during each of the quarters ended March 31, 1996 and June 30, 1996,
respectively. The unearned compensation is associated with 594,356 shares of
restricted stock issued in 1993 to executive officers whereby the ownership
is subject to a vesting period.
Issuance of Common Stock - The Company received proceeds of $14,437 from the
------------------------
issuance of 50,000 shares of its common stock during the three months ended
June 30, 1996. The shares were issued from the exercise of stock options at
prices ranging from $.14 to $.4375 per share.
Treasury Stock - In March 1996, the Company purchased 520,540 shares of its
--------------
common stock from a resigning executive officer for $287,876. The Company's
note receivable of $72,876 from the officer was deducted from the purchase
price. The $215,000 balance of the purchase price was paid by the delivery
of $160,000 in cash and the Company's $55,000 installment note maturing in
September 1996.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- - -------------------
On June 30, 1996, the Company had cash and cash equivalents of $1,187,400
as compared to $1,011,822 at December 31, 1995. The increase is primarily due
to the cash generated from the operations of the Scrubgrass project and the
collection of notes receivable related to the Scrubgrass project. The increase
was offset in part by cash used for the purchase of treasury stock and the
payment of a $.03 per share dividend to stockholders in each of March 1996 and
June 1996.
On June 30, 1996 the Company had working capital of $2,944,319 as compared
to working capital of $3,223,507 at December 31, 1995. The decrease is primarily
attributable to the expiration of certain prepaid expenses of the Scrubgrass
project, the increase in the working capital loan for the Scrubgrass project to
cover certain non-recurring expenses during the first quarter in 1996, the
payment of dividends and an increase in the balance of accounts payable in
relation to the balance of receivable from utility. Generally, accounts payable
balances are paid as the proceeds from the receivable from utility are
collected. As such, changes to the accounts payable are generally expected to
show a direct correlation to changes in the receivable from utility. However,
due to expenses associated with the planned annual outage of the Scrubgrass
plant in May 1996, the accounts payable was slightly higher as a percentage of
the receivable from utility than usual as of June 30, 1996. The decrease in
working capital from December 31, 1995 to June 30, 1996 was offset in part by
cash generated from the favorable operating performance of the Scrubgrass
project.
Receivable from utility relates to the Scrubgrass project and was
$5,388,679 at June 30, 1996 as compared to $6,536,506 at December 31, 1995. The
decrease is attributable to a nonrecurring receivable amounting to $545,000 at
December 31, 1995 and lower than average May revenues, due to the scheduled
shutdown of the Scrubgrass plant. The nonrecurring receivable at December 31,
1995 primarily pertained to the utility's payment of contracted rates for energy
produced by the Scrubgrass plant in excess of 80MW in any hour.
The current portion of notes receivable was $1,222,217 as of June 30, 1996
as compared to $1,673,091 as of December 31, 1995. The decrease is primarily due
to the collection of current maturities of notes receivable related to the
Scrubgrass project. Certain of such notes, with a current portion of $1,187,500
at June 30, 1996, are the subject of a legal proceeding. See "Part II - Item 1.
Legal Proceedings".
-8-
<PAGE>
FINANCIAL CONDITION (CONTINUED)
- - -------------------------------
Deferred income tax asset at June 30, 1996 was $4,741,929 as compared to
$5,543,229 as of December 31, 1995. The decrease is largely attributable to the
utilization of net operating loss carryforwards recorded for the six months
ended June 30, 1996.
Accrued power generation revenue increased to $19,713,262 at June 30, 1996
as compared to $15,161,689 at December 31, 1995. This asset relates to the
Scrubgrass project and represents a receivable recorded as a result of the
straight-line accounting treatment of certain revenues under the Scrubgrass
power purchase agreement.
Accounts payable and accrued expenses decreased to $5,372,708 at June 30,
1996 from $6,338,160 at December 31, 1995. The decrease is primarily due to the
timing of incurring and paying expenses related to the Scrubgrass project.
Other current liabilities were $2,316,989 at June 30, 1996 as compared to
$2,298,686 at December 31, 1995. The increase is primarily due to additional
borrowings from the working capital loan to pay certain nonrecurring Scrubgrass
lease expenses. The increase was offset in part by the repayment of a $300,000
demand obligation.
Deferred gain, net decreased to $6,168,214 at June 30, 1996 from $6,322,419
at December 31, 1995. The decline is due to the amortization of the deferred
gain related to the Scrubgrass project, which is being amortized on a straight-
line basis over 22 years.
Secured promissory notes payable and other borrowings increased to
$8,596,580 at June 30, 1996 from $8,543,767 at December 31, 1995 as a result of
additional borrowings from the lessor of the Scrubgrass project who paid certain
Scrubgrass project expenses on behalf of the Company.
Accrued lease expense was $19,713,262 at June 30, 1996 as compared to
$15,161,689 at December 31, 1995. This liability relates to the Scrubgrass
project and represents an accrued expense recorded as a result of the straight-
line accounting treatment of the lease expense over the initial 22 year lease
term.
Deferred revenue, which represents power generation revenues of the
Scrubgrass project which were deferred pursuant to conditions set forth in the
power purchase agreement, amounted to $1,460,695 at June 30, 1996 as compared to
$3,064,965 at December 31, 1995. The decrease is attributable to power
generation revenues which were earned during the six months ended June 30, 1996.
The balance of the deferred revenue continues to be deferred until earned, which
is expected to occur primarily during 1996.
-9-
<PAGE>
FINANCIAL CONDITION (CONTINUED)
- - -------------------------------
Maintenance reserve is related to the Scrubgrass project and increased to
$891,395 at June 30, 1996 from $699,429 at December 31, 1995 due to scheduled
reserves provided for the ongoing maintenance of the plant.
RESULTS OF OPERATIONS
- - ---------------------
REVENUES AND EXPENSES
Power generation revenues for the three and six months ended June 30, 1996
amounted to $13,078,617 and $23,844,132, respectively, as compared to power
generation revenues for the three and six months ended June 30, 1995 of
$9,126,623 and $17,070,582, respectively. The overall increase in power
generation revenues during 1996 is primarily attributable to the recognition of
certain revenues which were previously deferred under the power purchase
agreement, an increase in the capacity and contracted rates billed to the
utility, and an increase in the revenue recorded as a result of the straight-
line accounting treatment of certain revenues under the power purchase
agreement. All power generation revenues earned in 1996 and 1995 related to the
Scrubgrass project.
Operating expenses for the three and six months ended June 30, 1996
amounted to $4,621,050 and $8,900,643, respectively, as compared to operating
expenses for the three and six months ended June 30, 1995 of $4,715,783 and
$10,336,425, respectively. All operating expenses in 1996 and 1995 related to
the Scrubgrass project. The overall decrease in 1996 operating expenses is
primarily attributable to three factors. First, Scrubgrass incurred maintenance
expenses during its 1995 annual plant outage which were significantly greater by
comparison to expenses incurred during the 1996 annual plant outage. Secondly,
due to maintenance modifications and additional operating experience, the
Scrubgrass project has been less costly and more efficient to operate during
1996. Finally, as a result of a refinancing transaction which occurred in
December 1995, certain operating expenses were reclassified as lease expenses.
Accordingly, the operating expenses for 1996 were lower by comparison to 1995.
In comparing operating expenses by quarter between 1996 and 1995 and by quarter
within each year, it is important to note that the 1996 annual plant outage
occurred in May and the 1995 annual plant outage occurred in March. Due to
additional maintenance expenses, operating expenses tend to be higher during a
period of a plant outage by comparison to a period which does not have a plant
outage.
Lease expense for the three and six months ended June 30, 1996 amounted to
$7,325,667 and $12,495,095, respectively, as compared to lease expense for the
-10-
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
- - ---------------------------------
three and six months ended June 30, 1995 of $5,123,830 and $10,499,003,
respectively. The overall increase in lease expense during 1996 is primarily due
to an increase in equity rents paid to the lessor based on the favorable
performance of the Scrubgrass plant in 1996 and an increase in the lease expense
recorded as a result of the straight-line accounting treatment of such expenses.
The increase is partially offset by the lowering of interest rates incurred in
1996 which reduced the lessor's loan costs that were passed through to the
Company in its facility lease expenses.
General and administrative expenses for the three and six months ended June
30, 1996 amounted to $674,699 and $1,657,676, respectively, as compared to
general and administrative expenses for the three and six months ended June 30,
1995 of $945,658 and $1,756,971, respectively. The overall decrease in general
and administrative expenses during 1996 is primarily due to the Company's
efforts to reduce its corporate overhead expenses. However, during the six
months ended June 30, 1996, the Company continued to incur substantial
management and professional fees to negotiate certain contract matters and
proceed with certain legal proceedings, and made reclassifications of certain
1996 operating expenses to general and administrative expenses which stem from
the December 1995 refinancing of Scrubgrass. Accordingly, the full effect of
the Company's efforts to reduce corporate overhead expenses has not yet been
shown in its recent operating results.
Interest income for the three and six months ended June 30, 1996 amounted
to $125,281 and $219,179, respectively, as compared to interest income for the
three and six months ended June 30, 1995 of $119,724 and $228,422, respectively.
The overall decrease during 1996 is primarily attributable to lower aggregate
principal balances resulting from the maturity of the current portion of notes
receivable related to the Sunnyside project and the maturity of a note
receivable related to the Scrubgrass project.
Warranty income for the six months ended June 30, 1996 amounted to $900,000
and resulted from a legal settlement with an engineering and construction
contractor for the Scrubgrass plant which occurred during the three months ended
March 31, 1996.
Other income for the three and six months ended June 30, 1996 amounted to
$77,216 and $196,399, respectively, as compared to other income for the three
and six months ended June 30, 1995 of $685,028 and $762,131, respectively. For
the six months ended June 30, 1996 and June 30, 1995, other income included the
current period amortization of the deferred gain resulting from the original
sale of the Scrubgrass project in 1990. For the six months ended June 30, 1996
-11-
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
- - ---------------------------------
and June 30, 1995, the remainder of other income primarily consisted of two
sales tax refunds associated with the Sunnyside project one of which was
incurred during the three months ended March 31, 1996 and the other incurred
during three months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company's principal sources of cash to continue its general corporate
activities in 1996 will consist of current cash balances, principal and interest
proceeds received pursuant to the 1994 sale of the Sunnyside project, interest
income on cash equivalents and cash flows which may become available from the
Scrubgrass project.
The obligors on the notes received by the Company in connection with the sale of
the Sunnyside project are among the plaintiffs who have commenced a legal
proceeding against the Company and seek remedies which include an unspecified
amount of damages and rescission of the Sunnyside purchase and sale contract.
Furthermore, beginning in June 1996, the obligors on the aforementioned notes
began withholding payments currently due under the terms of such notes. An
unfavorable outcome of this litigation or the continued withholding of payments
currently due under the notes would have an adverse effect on the Company's
liquidity and capital resources. See "Part II - Item 1. Legal Proceedings".
During the six months ended June 30, 1996, the Company received $1,303,531 in
cash which became available from the Scrubgrass project. However, various
Scrubgrass contractual obligations may require that any future cash flows from
the Scrubgrass project be used to increase certain reserve accounts and/or be
used to fund contractual obligations of the project and, therefore, there is no
assurance that future cash flows from the Scrubgrass project will be available
to the Company. As of June 30, 1996, there were no deficiencies in funding
reserve accounts or contractual obligations which would impact the future
availability of cash from the Scrubgrass project.
In August 1996, the Company received proceeds from the favorable settlement of a
legal proceeding. The receipt in August 1996 of the net settlement proceeds of
approximately $418,000 have had a favorable impact on the Company's current
liquidity position and will contribute to the Company's results of operations
during the third quarter in 1996.
-12-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- - -------------------------------------------
Presently, other than the potential development of the Milesburg project, the
Company's management sees no investment opportunities for its available
resources. Accordingly, until it is determined whether the Milesburg project
will be developed, the Company plans to maintain its present focus on seeking to
control costs and to enhance the return which can be offered to its
shareholders. In this regard, during the six months ended June 30, 1996, the
Company declared and paid quarterly dividends aggregating $663,108. While the
Company's Board of Directors intends to evaluate the payment of any future
dividends based on the Company's then current and projected operating
performance and capital requirements, the Company currently seeks to continue
regular dividends to shareholders which are supported by the Company's operating
performance. When the Company determines whether the Milesburg project will be
developed, the Company's Board of Directors will evaluate the continuation of
any dividend payments then being made in light of the cash requirements, if any,
needed to support the development of that project.
-13-
<PAGE>
PART II
-------
ITEM 1. LEGAL PROCEEDINGS
On May 3, 1996, B&W Sunnyside L.P., NRG Sunnyside Inc., NRG Energy Inc., and
Sunnyside Cogeneration Associates (collectively the "plaintiffs") filed a
complaint, which was amended on June 27, 1996, against the Company and three of
its wholly-owned subsidiaries (collectively hereafter "the Company") in Seventh
District Court for Carbon County, State of Utah. The amended complaint alleges
that the Company breached the purchase and sale agreement by which the Company
transferred all of its interest in Sunnyside Cogeneration Associates, a joint
venture which owned and operated a nominal 51 megawatt waste coal fired facility
located in Carbon County, Utah. The amended complaint also alleges that the
Company made certain misrepresentations in connection with the purchase and sale
agreement. As a result of the alleged breaches of contract and
misrepresentations, the plaintiffs allege that they suffered damages in an
unspecified amount that exceed the aggregate outstanding principal and interest
balances due to the Company by B&W Sunnyside L.P. and NRG Sunnyside, Inc. under
certain notes receivable, which amounted to $2,937,500 and $73,236, respectively
at June 30, 1996 (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources"). In
addition to alleging unspecified damages, the plaintiffs also request rescission
of the purchase and sale agreement.
On July 26, 1996, in response to the plaintiffs' amended complaint, the Company
filed an answer and counterclaim. In the answer to the amended complaint, the
Company denied all material allegations of the amended complaint and asserted
numerous affirmative defenses. In the counterclaim, the Company alleges numerous
causes of action against the plaintiffs which include breach of contract, breach
of the promissory notes, intentional, malicious and willful breach of contract,
intentional tort, interference and misrepresentation. Through the counterclaim,
the Company seeks remedies which include: (1) compensatory, consequential and
punitive damages; (2) acceleration and immediate payment in full of the
promissory notes; and (3) injunctions which require the plaintiffs to continue
making payments under the promissory notes during the pendency of this action
and until the promissory notes are paid in full and which enjoin the plaintiffs
from continuing certain malicious and intentional actions that are alleged in
the counterclaim, together with interest, reasonable attorney's fees, costs and
other such relief as the court deems proper.
-14-
<PAGE>
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
The Company plans to vigorously defend against the amended complaint and
vigorously pursue the causes of action stated in the counterclaim. The Company
is currently awaiting an answer to its counterclaim from the plaintiff.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders, held on Monday June 3, 1996,
the following actions were submitted to a vote of security holders:
1. The Company elected a Board of Directors to serve for the ensuing year until
their respective successors have been duly elected and qualified. The results
of the voting were as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------
<S> <C> <C>
WITHHELD
ELECTED DIRECTOR FOR AUTHORITY
--------------------------- --------- ---------
Joseph E. Cresci 9,959,229 9,400
Donald A. Livingston 9,958,729 9,900
Peter J. Blampied 9,959,229 9,400
Edward B. Koehler 9,959,229 9,400
Robert I. Weisberg 9,955,729 12,900
</TABLE>
2. The Company ratified the selection of the firm Deloitte and Touche LLP as
auditors for the Company for the fiscal year ending December 31, 1996. The
results of the voting were as follows:
<TABLE>
<CAPTION>
RESULT NUMBER OF SHARES
-------------- ------------------
<S> <C>
For 9,921,803
Against 35,901
Abstain 10,925
</TABLE>
3. The Company ratified and approved the grant of non-qualified stock options
to Peter J. Blampied, Edward B. Koehler and Robert I. Weisberg. The results of
the voting were as follows:
<TABLE>
<CAPTION>
RESULT NUMBER OF SHARES
------------- ------------------
<S> <C>
For 9,852,903
Against 103,501
Abstain 11,225
Del-N-Vote 1,000
</TABLE>
-15-
<PAGE>
ITEM 5. OTHER INFORMATION
On July 30, 1996, the Company entered into a joint development agreement with
U.S. Generating Company concerning the Milesburg project. U.S. Generating
Company brings to the Milesburg project the resources of its parent companies,
Pacific Gas and Electric and Bechtel Corporation, and its considerable
experience as one of America's largest independent power companies. In
addition, the Company and U.S. Generating Company have a history of working
together in the co-development and ongoing operation of the Scrubgrass plant
which has now been operating profitably for the last three successive quarters.
The Company believes the execution of this agreement is an important step in its
efforts to realize value from the Milesburg project. The development agreement
increases the likelihood that the Company will have available the financial and
technical resources necessary to pursue the development of the plant.
Alternatively, should the Company deem a "buyout" of the power purchase contract
to be a better alternative, the joint development agreement will enhance the
Company's ability to negotiate with West Penn Power Company. However, there can
be no assurance that the Milesburg project will be successfully developed or
that Company will realize value from such project.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of earnings per share
(b) Reports on Form 8-K - None
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL POWER CORPORATION
August 13, 1996 by: /s/ William D. Linehan
-------------------------------
William D. Linehan
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
-17-
<PAGE>
EXHIBIT 11
Environmental Power Corporation
Computation of Earnings Per Share
June 30, 1996
FOR THE THREE MONTHS ENDED JUNE 30, 1996:
- - -----------------------------------------
Weighted average number of shares outstanding 11,193,415
==========
Net Income $ 334,680
===========
Earnings per share - primary and fully diluted $ .03
===========
FOR THE SIX MONTHS ENDED JUNE 30, 1996:
- - ---------------------------------------
Weighted average number of shares outstanding 11,344,632
==========
Net Income $ 1,126,897
===========
Earnings per share - primary and fully diluted $ .10
===========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AT JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,813,940<F1>
<SECURITIES> 0
<RECEIVABLES> 8,740,955<F2>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,634,016
<PP&E> 7,092,050
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,620,548
<CURRENT-LIABILITIES> 7,689,697
<BONDS> 8,596,580
0
0
<COMMON> 121,954
<OTHER-SE> 2,978,751
<TOTAL-LIABILITY-AND-EQUITY> 47,620,548
<SALES> 23,844,132
<TOTAL-REVENUES> 23,844,132
<CGS> 8,900,643
<TOTAL-COSTS> 8,900,643
<OTHER-EXPENSES> 12,495,095
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,122
<INCOME-PRETAX> 1,928,897
<INCOME-TAX> 802,000
<INCOME-CONTINUING> 1,126,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126,897
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<FN>
<F1>Cash includes $1,626,540 which is restricted as to use.
<F2>Receivables includes notes receivable of $1,853,615 which are noncurrent.
</FN>
</TABLE>
