SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2001
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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 0-72
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York Research Corporation
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(Exact name of registrant as specified in its charter)
Delaware 06-0608633
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
280 Park Avenue, Suite 2700 West, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 557-6200
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of May 21, 2001 was as follows:
Common Stock, $.01 par value - $48,091,058
(Based on the closing price of $3.75 for the common stock on such date.)
The number of shares outstanding of the Registrant's classes of common
stock, as of May 21, 2001 was as follows:
Common Stock, $.01 par value - 16,262,697 shares
Documents incorporated by reference: Part III of this Form 10-K is incorporated
by reference from the Company's Proxy Statement for its 2001 Annual Meeting.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Report, including certain statements in the "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections, contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
this Report, the words "believe", "anticipate", "intend", "plan", "seek", "will
be", "expects", "estimates", "projects" and similar expressions identify such
forward-looking statements. Such statements regarding future events and/or the
future financial performance of the Company are subject to certain risks and
uncertainties which could cause actual events or the actual future results of
the Company to differ materially from any forward-looking statements. Certain of
these risks include changes in the markets in which the Company operates, price
volatility, interest rate volatility, construction risks, currency risks (in the
case of offshore projects and procurement), disturbances in the capital markets
which interfere with the Company's ability to finance its projects, changes in
applicable regulations, or change in supply or demand for energy and energy
projects, as well as possible adverse consequences resulting from the Chapter 11
filing of NAEC, claims by creditors of NAEC against the Company and the possible
sale or refinancing of certain of the Company's assets. See Item 1A. In light of
the significant risks and uncertainties inherent in the forward-looking
statements included herein, the inclusion of such statements should not be
regarded as a representation by the Company or any other person that the
objective and plans of the Company will be achieved.
2
PART I
ITEM 1 BUSINESS
A. General
York Research Corporation (together with its subsidiaries, "York", the
"Company" or "we") is a developer, owner and marketer of environmentally
friendly ("Greenenergy") projects and products. Through our subsidiaries,
partnerships, joint ventures and affiliates, we are in the business of
developing, constructing and operating energy production facilities, including
those that utilize natural gas as fuel to produce thermal and electric power
("cogeneration"), and renewable energy projects that convert wind energy into
transmittable electric power (collectively, "Greenpower").
Within our Greenpower business, there are five facilities currently in
commercial operation: in New York City, a 38 Megawatt ("MW") Warbasse
cogeneration facility (the "Warbasse facility") and a 286 MW Brooklyn Navy Yard
cogeneration facility (the "BNY facility"), in Big Spring, Texas a 34 MW wind
energy facility (the "Big Spring facility") and a 6.6 MW wind energy project
(the "West Texas project") and a 225 MW natural gas fueled power project in the
Republic of Trinidad and Tobago (the "Trinidad project"). Other power projects,
both domestic and international, are in earlier stages of development.
York's Greenpower project development strategy is to increase
development activities selectively around the world, giving priority to
negotiated rather than publicly bid opportunities. We believe that the market
for wind energy projects will grow as wind power becomes increasingly
competitive as a source of energy, as a function of its price and environmental
benefits.
On August 4, 1998, a $150,000,000, 12% portfolio bond financing due
October 30, 2007 was completed. This financing provided funding for construction
and completion of the Big Spring facility and the Trinidad project, and other
bond related costs, and future development activities. This financing was
underwritten by Credit Suisse First Boston ("CSFB") and is non-recourse to York
but is secured by certain assets and cash flow related to the BNY and Warbasse
facilities, as well as all of the cash flow and assets of the Big Spring
facility and Trinidad project.
On March 2, 2000, North American Energy Conservation, Inc. ("NAEC"), an
85% owned subsidiary of the Company, filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with The United States Bankruptcy Court for
the Southern District of New York. Reference is made to the Company's Current
Report on Form 8-K dated March 2, 2000 for a description of the background and
circumstances surrounding the NAEC filing. As of February 28, 2000, the Company
accounted for the NAEC wholesale and retail natural gas marketing business as a
discontinued operation, as well as the electric marketing business, which was
discontinued previously. On April 20, 2000 NAEC sold its retail natural gas
marketing business to Amerada Hess Corporation (see Note 17).
York has guaranteed approximately $46 million of the total pre-petition
debt of NAEC. York and NAEC have conducted extensive discussions with both the
guaranteed and non-guaranteed creditor groups and had arrived at a settlement
agreement, which was approved by the bankruptcy court on January 8, 2001. The
Company expects to settle these obligations with the formation and funding of a
trust. For details see Notes 2 and 19.
York with the help of CSFB and other consultants, is pursuing several
alternative means, including the potential sale of all or part of York's
interest in various projects, of raising the funds necessary to fund the trust
and meet its other ongoing obligations.
3
There can be no assurance that the efforts of the Company to raise
sufficient funds will be successful and therefore there can also be no assurance
that the trust will be formed. See Item 3 below as to litigation involving the
NAEC creditors, and Item 7.
All note references are to the Notes to the Consolidated Financial
Statements.
B. Greenpower
1. Big Spring Renewable Energy Facility
On October 21, 1997, York acquired 100% of the partnership interest in
New World Power Texas Renewable Energy Limited Partnership, whose significant
asset was a power purchase agreement ("PPA") with Texas Utilities Electric
Company ("TU Electric").
York began commercial operation of this wind power project in May 1999
in accordance with the PPA. The facility has a capacity of 34 MW and includes 46
turbines, including four 1,650 Kilowatt ("kW") wind turbines ("V-66 turbines").
2. Trinidad Project
On February 12, 1998, InnCOGEN Limited ("InnCOGEN"), a wholly owned
indirect Trinidadian subsidiary of York, signed a 30 year PPA with Trinidad and
Tobago Electricity Commission ("T&TEC"), the government owned transmission and
distribution company, under which T&TEC will purchase the bulk of the project
output. The Company constructed a 225 MW natural gas fueled combustion turbine
project which achieved commercial operation in September 1999 in accordance with
the PPA. Fixed capacity payments, primarily tied to U.S. inflation rates,
constitute the majority of project revenues. T&TEC has the obligation to supply
and pay for fuel for the project, thereby eliminating InnCOGEN's fuel risk on
the project. T&TEC's obligations under the PPA are supported by a guarantee of
the Trinidad government. The Trinidad project may also supply energy to several
proposed new industrial developments. The Trinidad facility utilizes three
General Electric turbines.
3. West Texas Renewable Energy Project
On February 26, 1999 a second PPA was signed with TU Electric for 6.6
MW of capacity from a wind energy facility to be located on property adjacent to
the Big Spring facility.
The Company has developed and is operating this second facility, which
is owned by a partnership of York and Primesouth, Inc. The new contract requires
TU Electric to buy all of the power generated by the four V-66 turbines, the
largest commercially operating in North America, for 15 years plus options for
two additional five-year periods, in a similar manner to the Big Spring
facility. Power from this facility will be dedicated for use in Waco, Texas, as
part of a renewable energy program called "TU Renew" being offered to customers
of TU Electric/Lone Star Gas.
4. The Warbasse Cogeneration Facility
The 38MW combined cycle Warbasse facility, which is owned by
Warbasse-Cogeneration Technologies Partnership L.P. ("WCTP"), supplies all of
the thermal and electric needs of Amalgamated Warbasse Houses, Inc. ("AWH") and
the full capacity requirements of WCTP's 21MW electric power contract with
Consolidated Edison Company of New York, Inc. ("Con Edison"), as dispatched.
York constructed the Warbasse facility and continues to operate it under a
long-term operations and maintenance agreement. See Note 5 for information
regarding transactions between the Company and WCTP.
4
5. Brooklyn Navy Yard Cogeneration Facility
Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), is owned
equally by a subsidiary of Edison Mission Energy ("Mission"), which is an
indirect wholly owned subsidiary of Edison International, and B-41 Associates
L.P. ("B-41LP") an entity in which York holds an indirect 74.7% equity interest
(see Item 1C). BNYLP was formed to develop, construct, finance, own and operate
the 286 MW natural gas fired combined cycle BNY Facility.
The facility has been operational since 1996 and supplies Con Ed with
both electricity and steam under a 40-year contract. Steam is delivered to Con
Ed's New York City district steam system, the world's largest, through a tunnel
under the East River. The BNY facility currently provides more than 15% of Con
Ed's total steam in New York City. Electric energy delivered represents about 3%
of peak power demand in the service territory. The facility also supplies energy
to the host industrial park and to an adjacent waste water facility.
6. Other Greenpower and Renewable Energy Projects Under
Development
We have been funding development work on a variety of large and small
potential projects in the United States and internationally. There can be no
assurances that any of these projects will be completed or successful.
C. Subsidiaries, Partnerships and Joint Ventures
The Company conducts a substantial portion of its business through
subsidiaries, partnerships and joint ventures, in some of which affiliates of
York have an interest.
York owns 100% of the outstanding shares of B-41 Management Corp.
("B-41MC"), Cogeneration Technologies, Inc. ("Cogen"), and York Internet Power
Services, Inc.
York and its subsidiaries own 74.7% of B-41LP, the 50% partner in
BNYLP, as a result of the following:
B-41MC holds a 5% general partnership interest in B-41LP.
Cogen holds a 22% limited partnership in B-41LP.
York holds a 90% limited partnership interest in York Cogen Partners
L.P. ("YCP"), which in turn holds a 53% limited partnership interest in
B-41LP.
RV Associates L.P. ("RVA"), an entity in which the Chairman is an
indirect minority partner, holds a 5% general partnership interest and
a 15% limited partnership interest in B-41LP.
A portion of B-41LP's partnership interest in BNYLP has been pledged as
collateral to unaffiliated third parties to secure certain obligations
of B-41LP.
York, through wholly owned subsidiaries, some of which are offshore,
owns 100% of the Big Spring facility and the Trinidad project. For revenues and
assets of the Big Spring Facility and Trinidad project, see Note 8.
WCTP is a limited partnership whose 25% general partner is RRR'S
Ventures Ltd. ("RRR'S"). York's Chairman is a shareholder in RRR'S. Entities
unaffiliated with York or RRR'S own an aggregate of 75% limited partnership
interest in WCTP. RRR'S also holds a 10% general partnership interest in YCP.
The West Texas Renewables Limited Partnership is a partnership whose 1%
general partner is a subsidiary of York, and whose 99% limited partner is
Primesouth, Inc.
5
York continues to own 85% of NAEC, which is in Chapter 11. York's
chairman controls the remaining 15%. See Items 1A and 3.
D. Backlog
We do not currently calculate backlog because the revenue streams are
dependent upon a number of variable factors such as inflation, fuel prices and
electric utility rates and utilizations.
E. Patents and Trademarks
We have no patents or trademarks that have been considered material to
our businesses.
F. Research and Development
Since research and development costs are not significant, we do not
account separately for these costs.
G. Raw Materials and Suppliers
We are not dependent on any single source of supplies or services for
our activities. Certain of the facilities enter into long-term contracts with
suppliers, however, alternative sources are typically available.
H. Marketing
We market our projects and products through a dedicated project
development staff, supplemented by our technical support personnel and
management personnel, and by consultants internationally.
I. Employees
As of June 1, 2001, we employed 31 people on a full-time basis. Most of
our executives are technically trained and actively engaged in the project
development area.
J. Competition
There are many companies with access to greater financial resources
that are active in various aspects of our energy business. These companies will
continue to compete in the energy marketplace. We cannot assess the effect of
competition in the future.
K. Customers
During fiscal 2001, substantially all of the revenues were derived from
operating power projects. Each of the power projects is dependent on one
customer, typically a utility, for substantially all of its revenues. See Notes
5 and 8 for revenues from major customers.
L. Environmental Matters
We believe that the various technologies we employ, which provide for
increased efficiency, compared to conventional power generation facilities, are
not environmentally sensitive. The construction of power generation facilities
requires typical environmental impact statements and permitting procedures which
may result in delays. We believe that we are in compliance with federal, state
and local laws involving the protection of the environment. We do not believe
that continued compliance will require any material capital expenditures. Our
facilities are designed to comply with all applicable environmental laws.
6
M. Regulation
A subsidiary of the Company has been retained through an operations and
maintenance agreement to operate the Warbasse cogeneration facility in New York,
a qualifying cogeneration facility ("QF") pursuant to the Public Utility
Regulatory Policies Act of 1978. The BNY facility in New York has also obtained
QF status.
Cogeneration projects that meet the QF criteria stated in the federal
rules generally are exempt from most of the federal, state and local regulations
that apply to generating facilities which are not QFs.
The BNY facility is operating as a QF but also has the right to
operate as an exempt wholesale generator ("EWG"). An EWG must be engaged
exclusively in the business of owning or operating an eligible facility and
selling electricity at wholesale.
The Big Spring facility has been self-certified as a QF. The Federal
Energy Regulatory Commission granted EWG status to the Trinidad project and the
West Texas Renewable Energy project.
ITEM 2 PROPERTIES
We lease our facilities. We consider our facilities to be suitable and
adequate for the purposes for which they are used.
Square
Footage Use
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Entity/Location
York Research Corporation
280 Park Avenue (1) Office
New York, New York
Subsidiaries
Cogeneration Technologies, Inc. (1) Office
280 Park Avenue
New York, New York
(1) Total square footage shared by York and Cogen at this location is
16,700.
Each of the power facilities and projects located in Big Spring, Texas
and Trinidad, leases the land on which it is located from a third party.
7
ITEM 3 LEGAL PROCEEDINGS
On March 2, 2000, NAEC filed a voluntary petition for Chapter 11
Bankruptcy in the United States Bankruptcy Court for the Southern District of
New York. That action is still pending. Reference is made to the Company's
current report on Form 8-K dated March 2, 2000 for a description of the
background and circumstances surrounding the NAEC filing. As a result of the
bankruptcy filing, all actions against NAEC are stayed.
Certain liabilities of NAEC have been guaranteed by the Company and in
consequence, NAEC creditors holding Company guarantees have formed an ad hoc
committee (the "Ad Hoc Committee") which in turn has retained counsel and a
financial advisor. In July of 2000 the Ad Hoc Committee and the Company agreed
upon a term sheet ("Term Sheet") which provides a framework for settlement of
all of the guarantee claims. Subsequently, the Company and the Ad Hoc Committee
negotiated with the Official Creditors' Committee of NAEC with a view toward
bringing NAEC into the settlement and thereby achieving a global settlement.
That goal was reached in November, 2000 when the Company, each of the members of
the Ad Hoc Committee and the Official Creditor's Committee of NAEC entered into
a settlement agreement dated November 30, 2000 (the "Settlement Agreement")
which comprised all claims of NAEC against York and formally approved the Term
Sheet. An application was made to the Bankruptcy Court for approval of the
Settlement Agreement. On January 8, 2001 the Bankruptcy Court approved the
Settlement Agreement and, in order to assure that the Company would be in a
position to complete the transactions contained in the Settlement Agreement,
issued an injunction against any party asserting claims against the Company
until the closing of the transactions contemplated in the Settlement Agreement.
That injunction is currently in force, and in consequence the remaining actions
against the Company (PG & E Energy Trading - Gas Corporation, El Paso Merchant
Energy - Gas, LP, and Congress Financial Corp.) are stayed. The Company was
unable to meet certain of its obligations under the Settlement Agreement within
its time limitations and therefore approached both the Ad Hoc Committee and the
NAEC Official Committee with a request for an extension of time and a modified
proposal. The time for the Company to perform has been extended while the
committees consider the modified proposal which if approved will be submitted to
the Bankruptcy Court for approval. (See Item 1 and Note 2).
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
PART II
MARKET FOR THE REGISTRANTS COMMON STOCK
ITEM 5 AND RELATED SECURITY HOLDER MATTERS
Our common stock is traded on the Nasdaq National Market System under
the symbol "YORK". The following table shows the range of high and low closing
sales prices for the common stock.
High Low
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Fiscal Year 2001
First Quarter 3 7/8
Second Quarter 1-15/16 1-3/32
Third Quarter 1-5/32 11/16
Fourth Quarter 2-7/16 25/32
Fiscal Year 2000
First Quarter 7-5/16 4-1/2
Second Quarter 6-9/16 4-1/2
Third Quarter 4-31/32 3-5/8
Fourth Quarter 4-7/8 3-5/32
On May 29, 2001, we had 462 holders of record of our common stock. We
have not declared any common stock or cash dividends during the last five years
and have no present intention to declare cash dividends. Pursuant to a covenant
under the portfolio bond financing, York agreed to limit annual cash dividends
to $.01 per share.
9
ITEM 6 SELECTED FINANCIAL DATA
(in thousands of dollars, except per share data)
As of and for the Year Ended
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2/28/01 2/28/00 2/28/99 2/28/98 2/28/97
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Total Revenues $ 37,298 $ 22,533 $ 6,238 $ 13,787 $ 19,756
========= ========== ======== ======== ========
Income (loss) from continuing operations $ 3,760 $ 3,585 ($1,217) $ 4,134 $ 6,861
========= ========== ======== ======== ========
Net income (loss) $ 3,760 ($31,142) ($5,990) $ 12,044 $ 7,518
========= ========== ======== ======== ========
Earnings (loss) per share - Basic:
From continuing operations $ 0. 25 $ 0. 24 ($0.09) $ 0.29 $ 0.54
========= ========== ======== ======== ========
Total $ 0. 25 ($2.12) ($0.42) $ 0.86 $ 0.59
========= ========== ======== ======== ========
Earnings (loss) per share - Diluted:
From continuing operations $ 0. 24 $ 0.23 ($0.09) $ 0.27 $ 0.46
========= ========== ======== ======== ========
Total $ 0. 24 ($2.03) ($0.42) $ 0.77 $ 0.49
========= ========== ======== ======== ========
Total assets $ 263,451 $ 269,886 $266,101 $134,139 $ 92,669
========= ========== ======== ======== ========
Limited recourse liabilities
including current portion $ 147,312 $ 150,000 $150,000 $ 0 $ 29,283
========= ========== ======== ======== ========
Stockholders' equity $ 40,734 $ 36,003 $ 64,877 $ 63,747 $ 46,167
========= ========== ======== ======== ========
Cash dividends declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0
========= ========== ======== ======== ========
Note: All years presented reflect the natural gas and electric marketing
businesses as discontinued operations.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7 OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company's business is Greenpower, which includes developing,
constructing and operating Greenenergy production facilities, including those
that utilize natural gas as fuel to produce thermal and electric power
("cogeneration") or renewable energy projects primarily converting wind energy
into transmittable electric power.
Within our Greenpower business, there are five currently operating
facilities: in New York City, a 38 megawatt ("MW") Warbasse cogeneration
facility (the "Warbasse facility") and a 286MW Brooklyn Navy Yard cogeneration
facility (the "BNY facility"), in Big Spring, Texas, a 34MW wind energy facility
(the "Big Spring facility") and a 6.6MW wind energy facility (the "West Texas
project") and a 225 MW natural gas fueled power project in the Republic of
Trinidad and Tobago (the "Trinidad project"). Other power projects are in
earlier stages of development.
On March 2, 2000 North American Energy Conservation, Inc. ("NAEC"), an
85% owned subsidiary of the Company, filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United States Bankruptcy Court for
the Southern District of New York. As of February 28, 2000, the Company
accounted for NAEC's wholesale and retail natural gas marketing business as a
discontinued operation, as well as the electric marketing business, which was
discontinued previously. On April 20, 2000 NAEC sold its retail natural gas
marketing business to Amerada Hess Corporation (see Note 17A).
Reference is made to the Company's Current Report on Form 8-K dated
March 2, 2000 for a complete description of the background and circumstances
surrounding the NAEC filing.
See Note 3 for disclosure of the impact of significant new accounting
pronouncements.
Liquidity and Capital Resources
Overview
The Company finances initial development of a projects' cash needs from
its own funds. When a project is determined to be feasible, the Company will
generally seek to finance construction through some form of non-recourse project
financing. Once a project is operational, any additional capital requirements
are expected to be met by the operations of the facility. In addition, the
Company may finance future projects through the sale of partial interests (or in
some cases significant interests) or other financing techniques. For example,
construction of the West Texas project was financed by a capital contribution of
the limited partner in this project.
General corporate, pre-financing project development and negative
working capital needs have historically been met by the cash flow derived from
the power projects. The Company believes that from cash flow sources described
above and from potential development fees received on future projects, there
will be sufficient cash flow for continuing operations for at least twelve
months. However, unless the Company is successful continuing in raising new
funds as described below, there can be no assurance that it will have sufficient
working capital to meet its obligations.
11
York has guaranteed approximately $46 million of the total pre-petition
debt of NAEC. York and NAEC have conducted extensive discussions with both the
guaranteed and non-guaranteed creditor groups and had arrived at a settlement
agreement, which was approved by the bankruptcy court on January 8, 2001.
Pursuant to the settlement agreement, among other requirements, the Company was
required to fund $13 million into a trust for the benefit of the creditors by
May 1, 2001. To date, both NAEC and the Company have been unable to fund the
initial cash payment into the trust. The time for the Company to perform has
been extended while it continues negotiations with the creditors. The trust is
expected to be funded, upon formation, with a minimum of $13 million, six
million shares of common stock which would be sold over time under controlled
conditions to liquidate the obligations, a warrant for one million shares at an
exercise price to be determined and a carried interest in the Company's net
available cash flow, as defined, which will be used to the extent the sale of
the common stock is insufficient to liquidate all obligations. To the extent the
trust has not previously been liquidated, the total amount to be liquidated via
the trust is expected to increase by $2 million on the third anniversary and
additional amounts up to a cap of $4 million on each anniversary thereafter.
Included in the total settlement is an expected debt obligation of $1 million,
collateralized by certain assets, due December 31, 2009 or earlier under certain
circumstances as defined.
York, with the help of Credit Suisse First Boston ("CSFB") and other
consultants, is pursuing several alternative means, including the potential sale
of all or part of York's interest in various projects, of raising the funds
necessary to fund the trust and meet its other ongoing obligations.
There can be no assurance that the trust referred to above being
negotiated with the creditor groups will ultimately resolve NAEC'S liabilities
or York's obligations with respect thereto. There also can be no assurance that
the efforts of the Company to raise sufficient funds will be successful.
The Company has met all required principal and interest payments on the
project notes payable to date, and expects to continue to do so. The project
notes payable are non-recourse to York. However, as a result of the bond
trustee's inability to set up certain foreign escrow accounts pursuant to
provisions included in the bond indenture, the project notes payable have been
classified as a current liability as of February 28, 2001 (see Note 11).
General
During fiscal 2001, cash and cash equivalents decreased approximately
$5.1 million. Cash used in operating activities of continuing operations was
approximately $3.4 million. This principally consisted of net income of
approximately $3.8 million adjusted for non cash items of approximately $7
million less the increase in receivables and other assets of approximately $13.9
million.
During fiscal 2001, investing activities provided approximately $4.8
million. Net cash flow from the escrow accounts was approximately $9.1 million.
The Company purchased approximately $4.7 million of property, plant and
equipment utilizing cash received from the escrow accounts.
During fiscal 2001, financing activities used approximately $2.7
million due to payments on the project notes.
12
Results of Operations
Fiscal 2001 Compared to Fiscal 2000
Revenues include the sale of electric energy to utility customers by
the Big Spring and Trinidad facilities. Revenues also include power project
services such as engineering services, fuel procurement and other services. Cost
of revenues include fuel, payroll, depreciation and other operations and
maintenance costs. Revenues increased approximately $14,764,000 and cost of
revenues increased approximately $11,570,000 when comparing fiscal 2001 to
fiscal 2000. These increases are primarily the result of the commencement of
operations of the Trinidad project in September 1999 and increased revenues and
related costs of fuel of approximately $5,877,000 for the Warbasse facility.
The Big Spring project revenues increased approximately $322,000 and
cost of revenues increased approximately $1,881,000 when comparing fiscal 2001
to fiscal 2000. These increases are primarily the result of full commercial
operation being achieved in December 1999. Of the increase in cost of revenues,
approximately $1,215,000 relates to depreciation. Depreciation commenced January
1, 2000.
The Trinidad project revenues increased approximately $9,710,000 and
cost of revenues increased approximately $3,458,000 when comparing fiscal 2001
to fiscal 2000. These increases are due to the commencement of operations of the
Trinidad Project in September 1999. Of the increase in cost of revenues,
approximately $1,862,000 relates to depreciation. Depreciation commenced October
1, 1999. The Trinidad project has no fuel risk because the government provides
all the fuel utilized by the project.
Selling, general and administrative expenses decreased approximately
$2,309,000, when comparing fiscal 2001 to fiscal 2000. This decrease is
comprised of the following: (a) expenses incurred in developing power projects
decreased approximately $557,000 and (b) general corporate expenses decreased
approximately $1,752,000 as part of an overall effort to reduce costs. There was
a decrease of approximately $649,000 in professional fees, $375,000 in accretion
expenses on the Class B warrant redemption, $181,000 in advertising and public
relations, and $153,000 in travel and entertainment. The balance of the decrease
relates to various other costs.
Interest income decreased approximately $625,000 when comparing fiscal
2001 to fiscal 2000 due to decreased levels of cash available for investment
resulting principally from payments on construction of the Trinidad and Big
Spring projects. Interest income - WCTP increased approximately $534,000 due to
increases in the variable interest rate charged.
Interest expense increased approximately $9,409,000 when comparing
fiscal 2001 to fiscal 2000. The increase was primarily caused by the impact of
capitalizing construction period interest of approximately $9,365,000 during
fiscal 2000.
Other income increased approximately $3,503,000 when comparing fiscal
2001 to fiscal 2000. The change was primarily due to an increase in royalty fees
from BNYLP of approximately $2,957,000 as a result of increased BNYLP revenues
and a gain on sale of marketable securities of approximately $320,000.
13
Fiscal 2000 Compared to Fiscal 1999
Revenues include the sale of electric energy to utility customers in
the case of the Big Spring and Trinidad projects. Revenues also include power
project services such as engineering services, fuel procurement and other
services. Cost of revenues include fuel, payroll, depreciation and other
operations and maintenance costs. Revenue increased approximately $16,295,000,
and cost of revenues increased approximately $4,811,000, when comparing fiscal
2000 to fiscal 1999, as a result of the commencement of the operations of Big
Spring in December 1998, West Texas in June 1999 and Trinidad in September 1999.
The Big Spring project earned revenue of approximately $3,892,000 and
$342,000 respectively, and incurred costs of approximately $920,000 and $70,000
respectively, for the years ended February 28, 2000 and 1999. For fiscal 2000,
the Trinidad project earned revenues of approximately $9,296,000 and incurred
costs of approximately $2,226,000 of which approximately $1,287,000 relates to
depreciation. The Trinidad project has no fuel risk because the government
provides all the fuel utilized by the project. The amount earned on construction
of the West Texas facility (see Note 8C) also accounted for an increase in
revenues of approximately $1,388,000 for the year ended February 28, 2000.
Selling, general and administrative expenses increased approximately
$2,533,000, when comparing fiscal 2000 to fiscal 1999. This increase is
comprised of the following: (a) expenses incurred developing power projects
increased approximately $1,047,000. (b) general corporate expenses increased
approximately $1,486,000. There was in increase of approximately $492,000 due to
amortization of certain deferred charges related to the Portfolio Bond
Financing. The balance of this increase primarily relates to professional and
consulting fees and additional amounts spent on payroll and employee benefits as
a result of additional personnel.
Interest income decreased approximately $1,238,000 when comparing
fiscal 2000 to fiscal 1999, due to decreased levels of cash available for
investment resulting principally from construction of the Trinidad and Big
Spring projects.
Interest expense increased approximately $2,205,000 when comparing
fiscal 2000 to fiscal 1999. The increase was caused by the full year impact of
the Portfolio Bond Financing in fiscal 2000, net of interest capitalized on
construction costs incurred.
Other income increased approximately $597,000 when comparing fiscal
2000 and fiscal 1999. These changes were primarily due to an increase in royalty
fees from BNYLP of approximately $285,000 and an increase in general partner
fees received from BNYLP of approximately $176,000.
ITEM 7A DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's project notes payable.
The Company has no cash flow exposure due to rate changes for its debt
obligations. The Company primarily enters into debt obligations to support
general corporate purposes and capital expenditures for projects.
14
The table below presents principal amounts and related weighted average
interest rates by year of maturity for the Company's cash equivalents,
marketable securities, cash in escrow, notes receivable and debt obligations.
The Company's notes receivable from WCTP bear interest at a variable rate of
LIBOR plus 2% and have no specific maturity.
Year Ended Fair Value
February 28, 2001 Total February 28, 2001
----------------- ----- -----------------
Cash equivalents
Variable rate $627,000 $627,000 $627,000
Average interest rate 5.8% 5.8%
Marketable securities
Variable rate $1,446,000 $1,446,000 $1,446,000
Dividend rate 0% 0%
Cash in escrow
Variable rate $1,285,000 $1,285,000 $1,285,000
Average interest rate 5.7% 5.7%
Notes receivable
Variable rate -- $57,331,000 Not Determinable
Average interest rate -- 8.5%
The project notes, which for financial statement purposes have been classified
as a current liability, have a fixed rate of interest of 12% and a fair value at
February 28, 2001 of $147,312,000. (see Note 11).
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on Page 20.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
15
PART III
Items 10 through 13 are incorporated by reference from the Company's
Proxy Statement for its 2001 Annual Meeting to be mailed in June, 2001.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (a) (2): See Index to Consolidated Financial Statements at Page 20.
(a) (3) Exhibits:
3(a) Certificate of Incorporation of the Company, as amended. (1)
3(a) Certificate of Amendment to the Company's Certificate of
Incorporation as filed with the Secretary of State of the
State of Delaware on May 16, 1988. (1)
3(b) Bylaws of the Company. (1)
4(a) Form of Certificate evidencing Common Stock, $.01 par value
per share, of the Company. (2)
4(b) Trust Indenture, between York Power Funding (Cayman) Limited
and The Bank of New York, as Trustee, dated July 30,
1998. (12)
4(c) Form of 12% Senior Bonds due October 30, 2007 (included in
Exhibit 4(b) hereto). (12)
4(d) Form of 12% Series A Senior Bonds due October 30, 2007
(included in Exhibit 4(b) hereto). (12)
4(e) Exchange and Registration Rights Agreement between York Power
Funding (Cayman) Limited and Credit Suisse First Boston dated
August 4, 1998. (12)
10(o) Agreement for Construction of Additional Capacity, dated
May 7, 1990, between Warbasse-Cogeneration Technologies
Partnership, L.P. and York Research Corporation. (3)
10(q) Lease and Energy Sale Agreement, dated December 18, 1989
between the Brooklyn Navy Yard Development Corporation and
Cogeneration Technologies, Inc., a wholly owned subsidiary of
the Company. (4)
10(r) Amended and Restated Limited Partnership Agreement by and
between Mission Energy New York, Inc. and B-41 Associates,
L.P., dated November 1, 1997, with Exhibits thereto. (11)
10(s) Stipulation of Settlement among counsel to plaintiffs in
litigation entitled In Re York Research Corporation Securities
Litigation, United States District Court, Southern District of
New York, Master File No. 91 Civ. 5040 (LJF), and counsel for
all defendants therein, dated January 15, 1993, with Exhibits
thereto. (5)
10(t) Final Judgment of Dismissal with Prejudice, In Re York
Research Corporation Securities Litigation, United States
District Court, Southern District of New York, Master File No.
91 Civ. 5040 (LJF) (5)
16
10(u) Amended and Restated Agreement of Limited Partnership of B-41
Associates L.P., dated December 26, 1992. (5)
10(bb) Promissory Note, dated November 17, 1994, made by
Warbasse-Cogeneration Technologies Partnership L.P. payable to
the order of Cogeneration Technologies, Inc. (8)
10(cc) Security Agreement, dated as of November 17, 1994, made by
Warbasse-Cogeneration Technologies Partnership L.P. to
Cogeneration Technologies, Inc. (8)
10(dd) Assignment and Security Agreement, dated as of November 17,
1994, made by Warbasse-Cogeneration Technologies Partnership
L.P. to Cogeneration Technologies, Inc. (8)
10(ee) Intercreditor Agreement, dated as of November 17, 1994, by and
among Tomen Power Corporation, B-41 Associates, L.P.,
Cogeneration Technologies, Inc. and Warbasse-Cogeneration
Technologies Partnership L.P. (8)
10(ff) Restructuring Fee Agreement, dated as of November 17, 1994, by
and among Warbasse-Cogeneration Technologies Partnership L.P.,
B-41 Associates, L.P. and Cogeneration Technologies, Inc. (8)
10(gg) Subordinated Promissory Note, dated as of November 17, 1994,
made by Warbasse-Cogeneration Technologies Partnership L.P.
payable to the order of B-41 Associates, L.P. in the principal
amount of $3,000,000. (8)
10(hh) Subordinated Promissory Note, dated as of November 17, 1994,
made by Warbasse-Cogeneration Technologies Partnership L.P.
payable to the order of Cogeneration Technologies, Inc. in the
principal amount of $3,000,000. (8)
10(ii) Agreement of Limited Partnership of York Cogen Partners,
L.P. (11)
10(jj) Renegotiation and Payment Agreement dated February 28, 1997 by
and between Sanwa Business Credit Corporation and B-41
Associates, L.P. (11)
10(kk) York Partners Reimbursement Agreement (PMNC) dated as of
November 1, 1997, among B-41 Associates, L.P., Brooklyn Navy
Yard Cogeneration Partners, L.P. and Edison Mission Energy.
(11)
10(ll) Amended and Restated Agreement of Limited Partnership of New
World Power Texas Renewable Energy Limited Partnership dated
as of September 29, 1997. (11)
10(mm) Renewable Resource Energy Purchase Agreement between Texas
Utilities Electric Company and New World Power Texas Renewable
Energy Limited Partnership dated September 13, 1994, and
Amendment No. 1 thereto dated November 25, 1996, Amendment No.
2 thereto dated February 19, 1997 and Amendment No. 3 thereto
dated August 29, 1997. (11)
10(nn) Wind Turbine Equipment Sales and Installation Contract dated
as of March 31, 1998 between York Research Corporation and
Vestas-American Wind Technology, Inc. (11)
10(oo) Covenant Agreement dated as of August 4, 1998 between York
Research Corporation and The Bank of New York, as Bond
Trustee. (10)
17
10(pp) Equity Cash Flow Participation Agreement dated as of August 4,
1998 among Brooklyn Navy Yard Power LLC, Warbasse Power I LLC,
Warbasse Power II LLC, New World Power Texas Renewable Energy
Limited Partnership, York T&T Holdings, Inc., and The Bank of
New York, as administrative agent for the benefit of certain
holders. (10).
10(qq) U.S. Project Loan Agreement among Brooklyn Navy Yard Power
LLC, Warbasse Power I LLC, Warbasse Power II LLC, New World
Power Texas Renewable Energy Limited Partnership and York
Power Funding (Cayman) Limited, dated as of August 4, 1998.
(13)
10(rr) Trinidad Project Loan Agreement between York Ex International
SRL and York Power Funding (Cayman) Limited, dated as of
August 4, 1998. (13)
10(ss) Trinidad Loan Agreement between InnCOGEN, Limited and York
Holdings (Barbados) SRL, dated as of August 4, 1998. (13)
10(tt) U.S. Deposit and Disbursement Agreement among York Power
Funding (Cayman) Limited, Brooklyn Navy Yard Power LLC,
Warbasse Power I LLC, Warbasse Power II LLC, New World Power
Texas Renewable Energy Limited Partnership and The Bank of New
York, dated as of August 4, 1998. (13)
10(uu) Trinidad Deposit and Disbursement Agreement among York Power
Funding (Cayman) Limited, York Ex International SRL, York
Holdings (Barbados) SRL, InnCOGEN, Limited and The Bank of New
York, dated as of August 4, 1998. (13)
10(vv) U.S. Project Note Pledge Agreement between York Power Funding
(Cayman) Limited and The Bank of New York, dated as of August
4, 1998. (13)
10(ww) Trinidad Project Note Pledge Agreement between York Power
Funding (Cayman) Limited and The Bank of New York, dated as of
August 4, 1998. (13)
10(xx) Trinidad U.S. Pledge Agreement between York Research
Corporation and The Bank of New York, dated as of August 4,
1998. (13)
10(yy) Big Spring Guarantee between New World Power Texas Renewable
Energy Limited Partnership and The Bank of New York, dated as
of August 4, 1998. (13)
10(zz) Brooklyn Navy Yard Guarantee between Brooklyn Navy Yard Power
LLC and The Bank of New York, dated as of August 4, 1998. (13)
10.53 Trinidad Guarantee between York Holdings (Barbados) SRL and
The Bank of New York, dated as of August 4, 1998. (13)
10.54 Warbasse I Guarantee between Warbasse Power I LLC and The Bank
of New York, dated as of August 4, 1998. (13)
10.55 Warbasse II Guarantee between Warbasse Power II LLC and The
Bank of New York, dated as of August 4, 1998. (13)
10.56 Collateral Agency and Intercreditor Agreement among York Power
Funding (Cayman) Limited, Brooklyn Navy Yard Power LLC,
Warbasse Power I LLC, Warbasse Power II LLC, New World Power
Texas Renewable Energy Limited Partnership, York Ex
International SRL, York Holdings (Barbados) SRL, InnCOGEN,
Limited and The Bank of New York, dated as of August 4,
1998. (13)
18
10.57 Assignment and Security Agreement between York Power Funding
(Cayman) Limited and The Bank of New York, dated as of August
4, 1998. (13)
10.58 Agency Agreement among York Power Funding (Cayman) Limited,
Brooklyn Navy Yard Power LLC, Warbasse Power I LLC, Warbasse
Power II LLC and New World Power Texas Renewable Energy
Limited Partnership, dated as of August 4, 1998. (13)
10.59 Employment Agreement dated December 9, 1998, as amended
between the Company and Robert M. Beningson. (9)
10.60 Second amendment to Employment Agreement dated December 9,
1998, between the Company and Robert M. Beningson.
21 Subsidiaries of the Company
23 Consent of Independent Certified Public Accountants.
(b) Reports on Form 8-K
All other exhibits and financial statement schedules have been omitted
because they have been previously filed or incorporated by reference,
are inapplicable, or the required information is included elsewhere in
the Consolidated Financial Statements or the notes thereto.
The following reports on Form 8-K were filed during the quarter ended
February 28, 2001:
None
(1) Previously filed as an Exhibit, under the corresponding exhibit number,
to the Company's Form 10-K for the fiscal year ended September 30,
1982, Commission file number 0-72, and incorporated herein by
reference.
(2) Previously filed as an Exhibit, under the corresponding exhibit number
with Registration Statement No. 33-13899 on April 30, 1987 and
incorporated herein by reference.
(3) Previously filed as an Exhibit with the Company's Form 10-Q for the
quarter ended June 30, 1990 and incorporated herein by reference.
(4) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended September 30, 1990 and incorporated herein by reference.
(5) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended February 28, 1993 and incorporated herein by reference.
(6) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended February 28, 1994 and incorporated herein by reference.
(7) Previously filed as an Exhibit with the Company's Form 10-Q for the
quarter ended August 31, 1994 and incorporated herein by reference.
(8) Previously filed as an Exhibit with the Company's Form 10-Q for the
quarter ended November 30, 1994 and incorporated herein by reference.
(9) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended February 28, 2000 and incorporated herein by reference.
(10) Previously filed as an Exhibit with the Company's Form 10-Q for the
quarter ended August 31, 1998, and incorporated herein by reference.
(11) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended February 28, 1998 and incorporated herein by reference.
(12) Previously filed as an Exhibit with the Registration Statement
333-68839 filed by York Power Funding (Cayman) Limited and incorporated
herein by reference.
(13) Previously filed as an Exhibit with the Company's Form 10-K for the
year ended February 28, 1999 and incorporated herein by reference.
19
YORK RESEARCH CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
York Research Corporation and Subsidiaries:
Report of Independent Certified Public Accountants 21
Consolidated Financial Statements:
Consolidated Balance Sheets - February 28, 2001 and 2000 22
Consolidated Statements of Operations for the Years Ended 23
February 28, 2001, February 28, 2000 and February 28,
1999
Consolidated Statement of Stockholders' Equity for the 24
Years Ended February 28, 2001, February 28, 2000 and
February 28, 1999
Consolidated Statements of Cash Flows for the 25
Years Ended February 28, 2001, February 28, 2000
and February 28, 1999
Notes to Consolidated Financial Statements 26 through 50
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
York Research Corporation:
We have audited the accompanying consolidated balance sheets of York
Research Corporation and Subsidiaries at February 28, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended February 28, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
York Research Corporation and Subsidiaries at February 28, 2001 and 2000, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended February 28, 2001, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company does not have
sufficient cash to settle the obligations to the NAEC creditors. This matter
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Grant Thornton LLP
New York, New York
June 12, 2001
21
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, February 28,
2001 2000
-------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,438,864 $ 7,490,106
Marketable securities 1,445,520 1,199,600
Trade accounts receivable 3,637,654 4,301,512
Other receivables - related parties 9,457,308 4,625,043
Cash in escrow 1,284,558 10,422,747
Deferred tax asset 8,920,143 8,214,200
Other current assets 324,966 1,118,751
------------- -------------
Total current assets 27,509,013 37,371,959
Property, plant and equipment, net 130,016,474 134,811,684
Long-term notes and other receivables - WCTP 81,695,602 71,664,476
Intangible assets, net 15,570,329 17,884,133
Deferred tax asset 6,019,000 6,002,000
Other assets (including advances to employees of $817,757
and $769,136, respectively) 2,640,739 2,151,979
------------- -------------
Total assets $ 263,451,157 $ 269,886,231
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Project payables $ 6,049,732 $ 10,758,415
Accrued expenses and other payables 11,151,629 12,037,342
Income tax payable 289,008 933,883
Project notes payable 147,312,000 2,688,000
Net liabilities of discontinued operations 49,997,637 53,756,278
------------- -------------
Total current liabilities 214,800,006 80,173,918
Project notes payable - 147,312,000
Other long-term liabilities 1,724,437 654,635
Deferred revenue and other credits 2,768,000 2,941,000
Minority interest in partnership 3,424,254 2,801,860
Commitments and contingencies
Stockholders' equity
Common stock, Class A, $.01 par value; authorized 10,000,000
shares; none issued - -
Common stock, $.01 par value; authorized 50,000,000 shares;
issued 16,420,821 and 15,270,156 shares, respectively 164,208 152,702
Additional paid-in capital 69,473,128 68,702,128
Accumulated deficit (26,233,745) (29,993,869)
Accumulated other comprehensive income (net of tax of $450,857
and $353,696, respectively) 875,308 686,625
------------- -------------
44,278,899 39,547,586
Less:
Treasury stock, at cost (158,124 shares) (1,564,713) (1,564,713)
Notes receivable - sale of common stock (377,322) (463,669)
Deferred compensation (1,602,404) (1,516,386)
------------- -------------
Total stockholders' equity 40,734,460 36,002,818
------------- -------------
Total liabilities and stockholders' equity $ 263,451,157 $ 269,886,231
============= =============
The accompanying notes are an integral part of these financial statements.
22
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28,
2001 2000 1999
------------ ------------ -------------
Revenues $ 37,297,868 $ 22,533,494 $ 6,238,207
Costs of revenues 22,388,243 10,818,658 6,007,344
------------ ------------ ------------
Gross Profit 14,909,625 11,714,836 230,863
------------ ------------ ------------
Selling, general and administrative:
Power project services 2,147,868 2,704,933 1,657,787
General corporate expenses 6,801,584 8,553,089 7,066,754
------------ ------------ ------------
Total selling, general and administrative 8,949,452 11,258,022 8,724,541
------------ ------------ ------------
Other income (expense):
Interest income - WCTP 4,944,830 4,411,197 4,343,975
Interest income 561,822 1,186,771 2,425,168
Interest expense (17,891,649) (8,482,517) (6,277,199)
Other income 10,071,343 6,568,031 5,970,575
Minority interest in partnership (622,395) (555,497) (546,766)
------------ ------------ ------------
(2,936,049) 3,127,985 5,915,753
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 3,024,124 3,584,799 (2,577,925)
Benefit for income taxes: (736,000) - (1,360,810)
------------ ------------ ------------
Income (loss) from continuing operations 3,760,124 3,584,799 (1,217,115)
Discontinued operations:
Loss from discontinued operations - (11,034,007) (3,289,299)
Estimated loss on disposal - (23,692,380) (1,483,229)
------------ ------------ ------------
Total loss from discontinued operations - (34,726,387) (4,772,528)
------------ ------------ ------------
Net income (loss) $ 3,760,124 $(31,141,588) $ (5,989,643)
============ ============ ============
Earnings (loss) per share - Basic:
Continuing operations $ 0.25 $ 0.24 $ (0.09)
Discontinued operations $ - $ (2.36) $ (0.33)
------------ ------------ ------------
Total $ 0.25 $ (2.12) $ (0.42)
============ ============ ============
Weighted average number of common shares used
in computing basic earnings (loss) per share 15,105,481 14,705,314 14,286,106
============ ============ ============
Earnings (loss) per share - Diluted:
Continuing operations $ 0.24 $ 0.23 $ (0.09)
Discontinued operations $ - $ (2.26) $ (0.33)
------------ ------------ ------------
Total $ 0.24 $ (2.03) $ (0.42)
============ ============ ============
Weighted average number of common shares and
common share equivalents used in computing diluted
earnings (loss) per share 15,435,288 15,330,787 14,286,106
============ ============ ============
The accompanying notes are an integral part of these financial statements.
23
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 2001, 2000 AND 1999
Common Stock
------------------------ Additional Accumulated
Shares Shares Paid-in Earnings Treasury Notes
Issued Amount Capital (Deficit) Stock Receivable
-----------------------------------------------------------------------------
Balance, February 28, 1998 14,961,438 $ 149,614 $ 67,791,168 $ 7,137,362 $(1,409,401) $(6,832,938)
Exercise of options 51,250 513 221,394 -- -- (57,543)
Exercise and issuance of warrants 5,838 58 157,828 -- -- --
Deferred compensation accrual -- -- 226,726 -- -- --
Tax effect of options and warrants -- -- 48,000 -- -- --
Forgiveness of notes receivable -- -- -- -- -- 100,000
Cash receipts -- -- -- -- -- 275,000
Transfer of note receivable to minority interests -- -- -- -- -- 5,696,500
Net loss -- -- -- (5,989,643) -- --
-----------------------------------------------------------------------------
Balance, February 28, 1999 15,018,526 150,185 68,445,116 1,147,719 (1,409,401) (818,981)
Comprehensive loss:
Net loss -- -- -- (31,141,588) -- --
Holding gains on marketable securities,
net of tax of $353,696 -- -- -- -- -- --
Total comprehensive loss -- -- -- -- -- --
Exercise of options 251,630 2,517 40,505 -- -- --
Deferred compensation accrual -- -- 216,507 -- -- --
Forgiveness of notes receivable -- -- -- -- -- 200,000
Cash receipts -- -- -- -- -- --
Settlements of notes receivable -- -- -- -- (155,312) 155,312
-----------------------------------------------------------------------------
Balance, February 28, 2000 15,270,156 152,702 68,702,128 (29,993,869) (1,564,713) (463,669)
Comprehensive income:
Net income -- -- -- 3,760,124 -- --
Holding gains on marketable securities,
net of tax of $153,210 -- -- -- -- -- --
Reclassification adjustment for gains included in
net income for the period, net of tax of $56,010 -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
Exercise of warrant 1 -- -- -- -- --
Deferred compensation accrual -- -- -- -- -- --
ESOP contribution 150,664 1,506 -- -- -- --
Deferred compensation 1,000,000 10,000 771,000 -- -- --
Forgiveness of note receivable -- -- -- -- -- 86,347
Cash receipts -- -- -- -- -- --
-----------------------------------------------------------------------------
Balance, February 28, 2001 16,420,821 $ 164,208 $ 69,473,128 $(26,233,745) $(1,564,713) $ (377,322)
=============================================================================
[RESTUB]
Accumulated
Other
Deferred Comprehensive
Compensation Income Total
-------------------------------------------
Balance, February 28, 1998 $(3,089,248) -- $ 63,746,557
--
Exercise of options -- -- 164,364
Exercise and issuance of warrants -- -- 157,886
Deferred compensation accrual 451,310 -- 678,036
Tax effect of options and warrants -- -- 48,000
Forgiveness of notes receivable -- -- 100,000
Cash receipts -- -- 275,000
Transfer of note receivable to minority interests -- -- 5,696,500
Net loss -- -- (5,989,643)
----------------------------------------
Balance, February 28, 1999 (2,637,938) -- 64,876,700
Comprehensive loss:
Net loss -- -- (31,141,588)
Holding gains on marketable securities,
net of tax of $353,696 -- 686,625 686,625
------------
Total comprehensive loss -- -- (31,141,588)
------------
Exercise of options -- -- 43,022
Deferred compensation accrual 491,552 -- 708,059
Forgiveness of notes receivable -- -- 200,000
Cash receipts 630,000 -- 630,000
Settlements of notes receivable -- -- --
----------------------------------------
Balance, February 28, 2000 (1,516,386) 686,625 36,002,818
Comprehensive income:
Net income -- -- 3,760,124
Holding gains on marketable securities,
net of tax of $153,210 -- 297,408 297,408
Reclassification adjustment for gains included in
net income for the period, net of tax of $56,010 -- (108,725) (108,725)
-----------
Total comprehensive income -- -- 3,948,807
-----------
Exercise of warrant -- -- --
Deferred compensation accrual 93,958 -- 93,958
ESOP contribution -- -- 1,506
Deferred compensation (781,000) -- --
Forgiveness of note receivable -- -- 86,347
Cash receipts 601,024 -- 601,024
----------------------------------------
Balance, February 28, 2001 $(1,602,404) $ 875,308 $ 40,734,460
========================================
The accompanying notes are an integral part of these financial statements.
24
YORK RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28,
2001 2000 1999
----------- ----------- -------------
OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 3,760,124 $ 3,584,799 $ (1,217,115)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation 4,799,386 1,705,347 139,101
Amortization of goodwill 39,372 39,372 39,372
Amortization of deferred charges 2,313,804 2,158,218 1,106,776
Amortization of deferred credits (173,000) (173,000) (173,000)
Deferred taxes (820,000) (1,142,000) (2,586,000)
Minority interest in partnership 622,394 555,497 546,766
ESOP contribution 309,920 708,059 678,036
Forgiveness of note receivable 86,347 200,000 100,000
Gain on sale of marketable securities (319,780) -- --
Common shares and warrants issued for services and donation -- -- 120,000
Tax benefit of stock options and warrants -- -- 48,000
Loss on disposal of fixed assets -- -- 30,788
Changes in operating assets and liabilities:
Net increase in receivables (9,254,703) (9,504,167) (3,536,124)
Net increase in notes receivable, other current assets,
and other assets (4,679,174) (1,288,129) (5,063,145)
Net increase in accounts payable, accrued expenses,
deferred revenue and long-term liabilities 570,657 5,089,968 11,971,103
Increase (decrease) in accrued taxes (644,875) 2,535,682 (1,689,977)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF
CONTINUING OPERATIONS (3,389,528) 4,469,646 514,581
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF
DISCONTINUED OPERATIONS 6,830,691 8,293,456 (20,526,527)
----------- ----------- ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,712,859) (54,307,359) (79,751,002)
Deposits into cash in escrow (15,198,031) (17,074,364) (124,612,000)
Receipts from cash in escrow 24,336,220 53,831,154 77,432,463
Proceeds from sale of marketable securities 359,600 -- --
Purchase of marketable securities -- -- (159,279)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,784,930 (17,550,569) (127,089,818)
----------- ----------- ------------
FINANCING ACTIVITIES:
Payment of project notes (2,688,000) -- --
Amounts received from ESOP -- 630,000 --
Gross proceeds from Bond Financing -- -- 150,000,000
Payment of financing costs -- (294,669) (7,982,251)
Repayment of notes receivable -- -- 275,000
Proceeds from exercise of stock options and warrants -- 43,022 202,249
Net change in minority interest in partnership -- -- (2,211,113)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
OF CONTINUING OPERATIONS (2,688,000) 378,353 140,283,885
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
OF DISCONTINUED OPERATIONS (10,589,335) (6,380,805) 18,150,727
----------- ----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,051,242) (10,789,919) 11,332,848
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,490,106 18,280,025 6,947,177
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,438,864 $ 7,490,106 $ 18,280,025
============ =========== ============
Supplemental disclosure of cash flow information:
Interest paid $18,049,169 $18,021,092 $ 4,398,703
----------- ----------- ------------
Income taxes paid $ 775,000 $ 157,000 $ 1,547,000
----------- ----------- ------------
Non-cash investing and financing activities:
During fiscal 2001, a non-cash transaction of $781,000 occurred as a result of
the issuance of one million shares to the Chairman of the Company for deferred
compensation.
During fiscal 2001, 2000 and 1999, a non-cash transaction of $86,347, $200,000
and $100,000, respectively, occurred as a result of the forgiveness of a loan
from a former employee.
During fiscal 2000, a non-cash transaction of $155,312 occurred as a result of
35,000 shares that were given back to the Company by a former employee to pay
down a note.
During fiscal 2000, the Company transferred approximately $135,525,000 of
construction in progress to property, plant and equipment.
During fiscal 1999, a non-cash transaction of $5,696,500 occurred as a result of
the transfer of a note receivable from the Chairman of the Company to the
minority interests.
During fiscal 1999, the Company received $57,544 of notes receivable on the sale
of common stock for options exercised.
The accompanying notes are an integral part of these financial statements.
25
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
York Research Corporation ("York" or the "Company") is a developer,
owner and marketer of energy related projects and products through its
subsidiaries, partnerships, joint ventures and affiliates. The Company currently
operates in one segment of the energy business; Greenpower project development
and services, including cogeneration and renewable wind energy.
The principal current markets for the Company's products and services
are the United States and the Republic of Trinidad and Tobago.
2. Liquidity and Basis of Presentation
North American Energy Conservation, Inc. ("NAEC"), an 85% owned
subsidiary of York, estimates that the total third party obligations that would
be subject of its Chapter 11 proceedings approximates $66 million, all of which
have been accrued as of February 28, 2000 (see Note 17) York has guaranteed
approximately $46 million of the total pre-petition debt of NAEC. York and NAEC
have conducted extensive discussions with both the guaranteed and non-guaranteed
creditor groups and had arrived at a settlement agreement which was approved by
the bankruptcy court on January 8, 2001. Pursuant to the settlement agreement,
among other requirements, the Company was required to fund $13 million into a
trust for the benefit of the creditors by May 1, 2001. To date, both NAEC and
the Company have been unable to fund the initial cash payment into the trust.
The time for the Company to perform has been extended while it continues
negotiations with the creditors. The trust is expected to be funded, upon
formation, with a minimum of $13 million, six million shares of common stock
which would be sold over time under controlled conditions to liquidate the
obligations, a warrant for one million shares at an exercise price to be
determined and a carried interest in the Company's net available cash flow, as
defined, which will be used to the extent the sale of the common stock is
insufficient to liquidate all obligations. To the extent the trust has not
previously been liquidated, the total amount to be liquidated via the trust is
expected to increase by $2 million on the third anniversary and additional
amounts up to a cap of $4 million on each anniversary thereafter. Included in
the total settlement amount is an expected debt obligation of $1 million,
collateralized by certain assets, due December 31, 2009 or earlier under certain
circumstances as defined.
Based on the fact that the Company does not have sufficient available
cash to settle the NAEC obligations to the creditors, this raises substantial
doubt about the Company's ability to continue as a going concern. The financial
Statements do not include any adjustments that might result from the outcome of
this uncertainty.
Management's plan in regard to this matter is to reach agreement with
the NAEC creditors as discussed above. In addition York, with the help of Credit
Suisse First Boston ("CSFB") and other consultants is pursuing several
alternative means, including the potential sale of all or part of York's
interest in various projects, of raising the funds necessary to fund the trust
and meet its other ongoing obligations.
There can be no assurance that an agreement will be reached with the
creditor group or that the Company will be able to raise sufficent funds.
26
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General corporate, pre-financing project development and negative
working capital needs have historically been met by the cash flow derived from
the Company's power projects. The Company believes that such cash flow sources
and potential development fees received on future projects, will provide
sufficient cash flow for continuing operations for at least twelve months.
For information regarding the Portfolio Project Bond Financing see
Note 11.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of York
Research Corporation and its subsidiaries and all majority owned partnerships
and limited liability companies (collectively "York" or the "Company"). All
material intercompany transactions and accounts have been eliminated in
consolidation. The accompanying consolidated financial statements reflect the
Company's former natural gas marketing and electric marketing businesses as
discontinued operations (see Note 17).
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash held in foreign
institutions amounted to approximately $225,000 and $292,000 as of February 28,
2001 and 2000, respectively.
Marketable Securities
Investment in marketable securities consists solely of publicly traded
equity securities in a foreign corporation and is recorded at fair value based
on quoted market prices. These securities are accounted for as available for
sale for financial statement purposes. Unrealized gains, net of taxes, are
included in comprehensive income or loss. As of February 28, 2001, these
securities had a cost of $119,459 and a market value of $1,445,520 resulting in
an unrealized holding gain of $1,326,061. As of February 28, 2000, these
securities had a cost of $159,279 and a market value of $1,199,600 resulting in
an unrealized holding gain of $1,040,321.
Revenue Recognition
The Company recognizes service revenues and energy sales in the period
in which the work is performed or the energy is delivered. Development fee
revenue is either amortized over the related development period, or recognized
as revenue, based on the nature of the fee.
27
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are being
depreciated or amortized on the straight-line method over their estimated useful
lives as follows:
-------------------------------------------- ------------------
Plant 30 years
-------------------------------------------- ------------------
Machinery and equipment 5-10 years
-------------------------------------------- ------------------
Furniture and fixtures 5-10 years
-------------------------------------------- ------------------
Motor vehicles 3 years
-------------------------------------------- ------------------
Leasehold improvements 5-8 years
-------------------------------------------- ------------------
During fiscal 2000, construction in progress costs of approximately
$135,525,000 were transferred to property, plant and equipment. Construction in
progress includes all costs related to construction such as sub-contractors,
equipment, engineering, professional fees, and other costs related to the
projects. The Company follows the policy of capitalizing interest expense as a
component of construction in progress. Interest capitalized amounted to
approximately $9,365,000 and $4,149,000, for the years ended February 28, 2000
and 1999, respectively. Certain internal costs directly related to the
construction of the power projects, including salaries of certain employees are
capitalized. Such costs amounted to approximately $169,000 and $536,000 for the
years ended February 28, 2000, and 1999, respectively. There were no interest or
internal costs capitalized for the year ended February 28, 2001.
Income Taxes
The Company utilizes the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
including any net operating loss carryforwards and alternative minimum and
windpower tax credit carryforwards, using the enacted marginal tax rate.
Deferred income tax expense or benefits are based on the changes in the asset or
liability from period to period. Deferred tax assets are recognized to the
extent realization of such benefits are more likely than not.
Long-Term Notes and Other Receivables - WCTP
The realizability of the long-term notes and other receivables -
Warbasse Cogeneration Technologies Partnership L.P. ("WCTP") is evaluated by the
Company in accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan" by comparing the net present value of the currently expected future
cash flow from the Warbasse facility to the gross amount of the notes
receivable.
28
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Per Share Data
Basic earnings per share excludes dilution and is computed by dividing
net income by the number of weighted-average common shares outstanding for the
period. Diluted earnings per share reflects the number of weighted average
common shares outstanding plus the potential dilutive effect of securities or
contracts which are in the money and convertible to common shares, such as
options and warrants, unless they are antidilutive based upon income (loss) from
continuing operations. The following is a reconciliation of the number of shares
used in the basic and diluted computation of earnings (loss) per share for the
years ended February 28, 2001, 2000 and 1999:
Fiscal 2001 Fiscal 2000 Fiscal 1999
----------- ----------- -----------
Weighted average number of
common shares outstanding - basic 15,348,194 15,020,015 14,881,280
Average of unreleased ESOP
shares (242,713) (314,701) (595,174)
---------- ---------- ----------
Weighted average number of
common shares outstanding - basic 15,105,481 14,705,314 14,286,106
Dilution (warrants and options) 329,807 625,473 --
---------- ---------- ----------
Weighted average number of common
share and common share equivalents
outstanding - diluted 15,435,288 15,330,787 14,286,106
========== ========== ==========
The amounts shown as average of unreleased ESOP shares and dilution
(warrants and options) reflect the averages for the periods presented.
The following chart summarizes the number of options and warrants not
included in the computation of diluted earnings per share for fiscal 2001, 2000
and 1999, as the results would have been antidilutive. The options and warrants
expire between March 2001 and January 2011.
------------------------------ ------------------------- ------------------------ ----------------------
Fiscal 2001 Fiscal 2000 Fiscal 1999
------------------------------ ------------------------- ------------------------ ----------------------
Options and Warrants 2,932,217 1,696,992 3,141,256
------------------------------ ------------------------- ------------------------ ----------------------
Price Range $1.63 to $7.31 $5.88 to $11.00 $4.50 to $11.00
------------------------------ ------------------------- ------------------------ ----------------------
29
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, marketable
securities, cash in escrow, accounts and other receivables, accrued expenses,
accounts payable and projects payable approximate fair value, principally
because of the short maturity of these items. The fair value for long-term
receivables and notes receivable-WCTP are not practical to estimate based on the
inability to estimate the exact maturity and cash flows of these receivables
(see Note 5 for terms). The project notes payable are stated at fair value based
on rates and terms currently available to the Company.
Cash in Escrow
Included in cash in escrow, are amounts used to pay various obligations
related to the portfolio project bond financing as of February 28, 2001 and 2000
(see Note 11). Cash held in escrow in foreign institutions amounted to
approximately $634,000 and $2,976,000 as of February 28, 2001 and 2000,
respectively.
Intangible Assets
Included in intangible assets are deferred financing costs, finders'
fees, costs related to acquiring a power purchase agreement ("PPA") and other
costs related to acquisition and development of the projects. Such costs are
being amortized over their estimated useful lives, which range from four to nine
years.
Reclassifications
Certain amounts in the 2000 and 1999 consolidated financial statements
were reclassified to conform to the 2001 presentation.
Significant New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133")
which requires entities to recognize all derivatives in their financial
statements as either assets or liabilities measured at fair value. SFAS 133 also
specifies new methods of accounting for hedging transactions, prescribes the
items and transactions that may be hedged, and specifies detailed criteria to be
met to qualify for hedge accounting. SFAS 133, as amended, is effective for
fiscal years beginning after June 15, 2000. The Company has determined that SFAS
133 will have no material impact on the Company's consolidated financial
statements and disclosures.
4. Brooklyn Navy Yard
Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP") is owned
equally by a subsidiary of Edison Mission Energy ("Mission"), which is an
indirect wholly-owned subsidiary of Edison International, and B-41 Associates,
L.P. ("B-41LP"). BNYLP was formed to develop, construct, finance, own and
operate the 286 megawatt ("MW") natural-gas-fired, combined-cycle Brooklyn Navy
Yard ("BNY") facility.
The BNY facility supplies Consolidated Edison Company of New York, Inc.
("Con Ed") with both electricity and steam under a 40 year contract. The
facility also supplies energy to the host industrial park and to an adjacent
waste water facility.
30
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The profit sharing and ownership percentages in the B-41LP partnership
agreement, as amended, are as follows:
(1) RV Associates L.P. ("RVA") is a 5% general partner. B-41
Management Corporation ("B-41MC"), a wholly owned subsidiary
of York, is also a 5% general partner (see Note 16).
(2) RVA is also a 15% limited partner.
(3) Cogeneration Technologies, Inc. ("Cogen"), a wholly owned
subsidiary of York, is a 22% limited partner.
(4) York Cogen Partners L.P. ("YCP") is a 53% limited partner.
RRR'S Ventures Ltd. ("RRR'S"), (see Note 16) is the 10%
general partner of YCP, and York is the 90% limited partner in
YCP.
Through February 28, 2001 BNYLP has incurred both book and tax losses.
Accordingly, since B-41LP accounts for its investment in BNYLP under the equity
method, and has no funding obligations to BNYLP, B-41LP has recorded no losses.
The summarized financial information of BNYLP as of and for the years
ending December 31, 2000 and 1999, which were audited by a firm other than the
Company's auditors, is as follows:
2000 1999 1998
---- ---- ----
Current Assets $ 47,045,000 $ 27,235,000 $ 27,622,000
=============== ============ ============
Non Current Assets $ 443,311,000 $460,103,000 $474,820,000
=============== ============ ============
Current Liabilities $ 50,225,000 $ 31,886,000 $ 24,603,000
=============== ============ ============
Non Current Liabilities $ 500,118,000 $507,544,000 $500,285,000
=============== ============ ============
Partners' Deficiency $ (59,987,000) $(52,092,000) $(22,446,000)
=============== ============ ============
Total Revenues $ 176,024,000 $129,691,000 $131,915,000
=============== ============ ============
Net Loss $ (7,895,000) $(29,647,000) $(16,706,000)
=============== ============ ============
Long-term project financing for the BNY facility consists of $100
million aggregate principal amount of Senior Secured Bonds Due 2020 and $307
million aggregate principal amount of New York City Industrial Development
Agency Industrial Development Revenue Bonds due from 2022 to 2036. The Company
provided no guarantees with regard to this financing, and has no obligation to
provide funding of any sort. The Company expects to receive continuing general
partner and other fees over the 40 year life of the project.
In consideration for certain development services for the BNY facility
performed by the Company, RVA assumed the obligation for certain loans from
Mission totaling $6,750,000 which are repayable only from amounts received from
third party BNYLP financings or BNY facility operating cash flow. In addition,
RVA accepted a reduced share of development fees and reimbursements.
In prior years, a commission revenue of $3,460,000 was deferred, which
represented one half of the nonrefundable commission deferred until the
equipment upon which the commission was earned was placed in service. In each of
fiscal 2001, 2000 and 1999, $173,000 was recognized as revenue. The deferred
balance will be recognized over the remaining estimated useful life of the
related equipment which is twenty years.
31
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the BNYLP partnership agreement, the Company
provides engineering services for the BNY facility. During fiscal 2001, 2000,
and 1999, the Company performed engineering services of approximately $277,000,
$253,000, and $444,000, respectively, which are reflected in revenues and cost
of revenues. At February 28, 2001 and 2000, the Company had receivables from
BNYLP of approximately $45,000, and $37,000, respectively, related to
engineering services. These amounts are included in other receivables - related
parties and were fully collected subsequent to the respective year-ends.
Pursuant to the amended partnership agreement, the general partner fee
was reduced to .5% of gross revenues for the four years commencing January 1,
1998. In the years ended February 28, 2001, 2000 and 1999, B-41MC recognized
general partner fees of approximately $499,000, $336,000, and $320,000
respectively, with receivables of approximately $600,000 and $209,000 at
February 28, 2001 and 2000. Royalty fees of approximately $9,003,000, $6,047,000
and $5,761,000 were recognized during fiscal 2001, 2000 and 1999, respectively.
These general partner fees and royalty fees were fully collected subsequent to
the respective year ends. These royalties, which are equal to 4.5% of gross
revenues, commenced in January 1998, and will continue for four years. RVA has
agreed not to share in these royalties (see Note 16).
On August 4, 1998, pursuant to the Portfolio Project Bond Financing,
B-41LP's right to receive distributions from BNYLP was assigned to Brooklyn Navy
Yard Power LLC, which is wholly owned by B41LP (see Note 11).
BNYLP is subject to certain litigation for which B-41LP has agreed to
reimburse Mission for 25% of the excess over $10 million of such costs, if any,
with an aggregate limit of $10 million, payable solely out of B-41LP's
partnership fees and distributions and further limited to $2 million per year.
To date there has been no request for reimbursement.
Like other large projects of this nature, the BNY facility is subject
to various risks. There can be no assurance that the facility, although
completed, will operate at sufficient levels to cover all operation and
maintenance expenses and debt service. The Company has no liability for any such
shortfalls, although if the shortfalls occur, they could impact the general
partner and royalty fees mentioned above.
5. Warbasse Facility
The Company, through an operations and maintenance agreement, operates
the Warbasse facility, supplying on a continuous basis all the thermal and
electric energy needs of the host, Amalgamated Warbasse Houses, Inc., and
supplying up to the full capacity requirements of its electric power contract
with Con Edison, when dispatched. During fiscal 2001, 2000, and 1999, the
Company recognized revenues and cost of revenues each of approximately
$13,600,000, $7,700,000, and $5,500,000, respectively, for operations and
maintenance services. These revenues and cost of revenues include a
reimbursement of general and administrative expenses equal to 20% of direct
costs incurred.
The note obligation of WCTP to B-41LP (the "YCP Note") of $28,522,000
has been included in Long-term notes and other receivables - WCTP. This
obligation is payable from a portion of the net operating cash flow of the
Warbasse project. On December 1, 1996, this note was assigned to YCP by B-41LP.
The YCP Partnership Agreement was amended to provide that the amounts received
by YCP in respect of the note obligation shall be distributed 74.7% to York and
25.3% to RRR'S, its minority partner, which are the same distribution
percentages as were held by York and affiliates of RRR'S in B-41LP.
32
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 17, 1994, the YCP Note was restructured along with other
long-term debt of WCTP. Such other long-term debt of WCTP includes a note
payable to Tomen Power Corporation ("Tomen") and includes a note payable to
Cogen. The three notes will share in the net operating cash flow of WCTP, as
defined, pro rata in proportion to the principal balances of the notes, and
would share proportionately in the collateral of WCTP in the event of a default.
Management expects that all three notes will be paid from the operations of
WCTP, and each note carries an interest rate of LIBOR plus 2%. In addition, YCP
and Cogen will receive a restructuring fee of $3,000,000 each, to be paid the
year after the three notes are fully paid.
On August 1, 1996, the Warbasse facility was transferred by Cogen to
WCTP, in exchange for a note receivable of $28,808,535. The note receivable
represents the total construction cost of the facility, plus other amounts owed
by WCTP to the Company.
On August 4, 1998, the YCP Note was assigned to Warbasse Power II LLC,
a majority owned subsidiary of the Company, and the Cogen Note was assigned to
Warbasse Power I, LLC, a wholly owned subsidiary of the Company, pursuant to the
Portfolio Financing (see Note 11).
Interest income on these notes amounted to approximately $4,945,000,
$4,411,000 and $4,344,000 for fiscal 2001, 2000 and 1999, respectively.
On May 1, 2001 $10,667,482 of the long-term receivable related to
operations and maintenance services was transferred to an uncollateralized note
receivable from WCTP. This note bears interest at LIBOR plus 1%, is due on May
1, 2006, unless extended by mutual agreement and has no prepayment penalty. This
note is superior to WCTP's existing notes described above. The net present value
of the currently expected future cash flow from the Warbasse facility exceeds
the total of all notes and other receivables from WCTP but there can be no
assurance that WCTP will have sufficient excess cash flow from operations to
make any material payments against this note for the next several years.
Therefore, the caption Long-term notes and other receivables -WCTP on
the consolidated balance sheets includes:
2001 2000
---- ----
YCP Note $28,522,000 $28,522,000
Cogen Note 28,808,535 28,808,535
Interest 13,697,585 8,752,755
Other receivables 10,667,482 5,581,186
----------- -----------
Total $81,695,602 $71,664,476
=========== ===========
6. Receivables - Related Parties
Other receivables - related parties at February 28, 2001 and 2000
consist of the following:
2001 2000
---- ----
Service and other receivables - WCTP $3,397,000 $2,493,124
Engineering service and general
partner and royalty fee receivables -BNYLP 6,060,308 2,131,919
---------- ----------
Total $9,457,308 $4,625,043
========== ==========
33
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Property, Plant and Equipment
Property, plant and equipment at February 28, 2001 and 2000 consist of
the following:
2001 2000
---- ----
Plant $135,495,433 $135,525,409
Machinery and Equipment 494,035 449,560
Furniture and Fixtures 215,883 212,224
Motor Vehicles 225,421 225,421
Leasehold Improvements 517,924 531,906
------------ ------------
136,948,696 136,944,520
Less: Accumulated depreciation and amortization (6,932,222) (2,132,836)
------------ ------------
Total $130,016,474 $134,811,684
============ ============
8. Facilities and Projects
a) Big Spring Wind Energy Facility
On October 21, 1997, York acquired 100% of the partnership interests in
New World Power Texas Renewable Energy Limited Partnership, whose significant
asset was a 15 year Power Purchase Agreement ("PPA") with Texas Utilities
Electric Company ("TU"), with two five year renewal options. York achieved
commercial operation of this windpower project in May 1999 in accordance with
the PPA.
The facility has a capacity of 34 MW and includes 46 turbines,
including four 1,650 Kilowatt ("kW") wind turbines. At February 28, 2001 and
2000, the total costs capitalized related to the development and construction of
this project were approximately $44,282,000 and $43,914,000, respectively, which
are included in property, plant and equipment. Revenues from the Big Spring Wind
Energy Facility for fiscal 2001 and 2000 were approximately $4,200,000 and
$3,900,000, respectively.
b) Trinidad Power Project
On February 12, 1998, InnCOGEN Limited ("InnCOGEN"), a wholly owned
indirect Trinidadian subsidiary of York, signed a 30 year PPA with Trinidad and
Tobago Electricity Commission ("T&TEC"), the government owned transmission and
distribution company, under which T&TEC will purchase the bulk of the project
output. The Company constructed a 225 MW natural gas fueled combustion turbine
project which began commercial operation in September 1999 in accordance with
the PPA. At February 28, 2001 and 2000, the total costs capitalized related to
the development and construction of this project were approximately $91,213,000
and $91,612,000, respectively, which are included in property, plant and
equipment. Revenues from the Trinidad Power Project for fiscal 2001 and 2000
were approximately $19,000,000 and $9,300,000, respectively.
c) West Texas Project
On February 26, 1999, West Texas Renewables Limited Partnership ("West
Texas L.P.") signed a PPA with Texas Utilities Electric Company ("TU Electric")
for 6.6MW of capacity from a wind energy facility located on property adjacent
to the Big Spring facility.
The PPA requires TU Electric to buy all of the power generated by the
facility for 15 years plus options for two additional five year periods, in a
similar manner to the Big Spring facility.
34
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
West Texas LP, is a partnership in which a subsidiary of York is a 1%
general partner and Primesouth Inc., a subsidiary of SCANA Corporation, is a 99%
limited partner. The Company accounts for its general partner interest on the
equity method. Primesouth, Inc. purchased its limited partnership interest for a
capital contribution which was used to fund York's construction of the wind
turbine facility. Primesouth's capital contribution was also used to pay York
for supervising construction and to reimburse York for certain expenses incurred
in developing the project which amounted to approximately $1,388,000 during the
year ended February 28, 2000. The West Texas Wind facility was completed in June
1999, achieved commercial operation and was transferred to West Texas L.P. In
the years ended February 28, 2001 and 2000, the general partner of West Texas
L.P. recognized general partner fees of approximately $60,000 and $34,000,
respectively.
9. Intangible assets, net
Intangible assets, net at February 28, 2001 and 2000 consist of the
following:
2001 2000
---- ----
Deferred Financing Costs $ 14,130,764 $ 14,130,764
Project Acquisition Costs 5,518,362 5,518,362
Power Purchase Agreement 1,500,000 1,500,000
------------ ------------
21,149,126 21,149,126
Less: Accumulated amortization (5,578,797) (3,264,993)
------------ ------------
Total $ 15,570,329 $ 17,884,133
============ ============
10. Accrued Expenses and Other Payables
Accrued expenses and other payables at February 28, 2001 and 2000
include:
2001 2000
---- ----
Accounts payable $ 2,803,617 $ 3,689,694
Professional fees 434,933 550,559
Accrued payroll and benefits 850,341 431,338
Interest payable to bondholders 5,892,480 6,050,000
Other 1,170,258 1,315,751
------------ ------------
Total $ 11,151,629 $ 12,037,342
============ ============
11. Portfolio Project Bond Financing
On August 4, 1998, a $150 million, 12%, portfolio project bond
financing due October 30, 2007 (the "Bond Financing") was completed by York
Power Funding (Cayman) Limited ("Funding Company"), a special purpose
unaffiliated limited liability company formed for the purpose of issuing the
Bonds.
The terms of the project notes issued to the Funding Company are
identical to the terms of the Bond Financing. The Bond Financing is non-recourse
to York and collateralized by all of the assets and future cash flow of the
225MW Trinidad power project, and the 34 MW Big Spring Windpower project and
certain assets and cash flow related to the Brooklyn Navy Yard and Warbasse
projects. The book value of the collateralized assets is approximately $187
million at February 28, 2001.
35
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the terms of the Bond Financing, an aggregate of 10% of the
net equity distributions, if any, to be received by certain York subsidiaries
from the projects that pledged cash flow or assets as collateral for the Bond
Financing will be paid to the bondholders. In addition, York entered into a
covenant agreement with the bond trustee, whereby York agreed to certain
limitations, as long as the bonds are outstanding, on incurring new debt,
granting of new liens, declaring cash dividends in excess of $.01 per share, and
continuing a business or activity that incurs net losses, as defined. Pursuant
to the Bond Financing, the Funding Company is obligated to use its best efforts
to register the bonds. Failure to register the bonds could result in an
additional .5% interest on the bonds and the project notes payable.
The Company has met all required principal and interest payments on the
project notes payable to date. The project notes payable are non-recourse to
York. However, as a result of the Bond trustee's inability to set up certain
foreign escrow accounts pursuant to provisions included in the bond indenture,
the project notes payable have been classified as a current liability as of
February 28, 2001.
As a result of the Bond Financing, approximately $8,434,000 of deferred
financing costs were incurred. These deferred financing costs are being
amortized over the life of the Bond Financing. Amortization for the years ended
February 28, 2001 and 2000 was $922,000 and $769,000, respectively.
Project notes payable are classified as a current liability, however,
future principal payments on the project notes are payable as follows pursuant
to the indenture:
2002 $ 3,252,000
2003 1,467,000
2004 1,065,000
2005 2,222,000
2006 3,621,000
Thereafter $135,685,000
------------
Total $147,312,000
============
12. Stockholders' Equity
Common Stock
The Company has authorized 50,000,000 shares of common stock. In
addition, the Company has authorized 10,000,000 shares of Class A common stock,
none of which have been issued. Each Class A common share has one/hundredth of a
vote as compared with the regular common stock and is entitled to a $.20
dividend priority before any dividends are payable on the full voting common
stock.
Incentive Stock Option ("ISO") Plan
In 1982, the Company authorized 1,400,000 qualified stock options,
which have all been granted. The 1982 Plan expired on April 26, 1992. In
September 1993, the Company adopted the 1993 ISO Plan, authorizing a total of
3,000,000 qualified and nonqualified stock options, of which 2,955,500 qualified
stock options were granted to employees, and 37,400 nonqualified stock options
were granted to two consultants to the Company. In July 1999, the Company
adopted the 1999 ISO Plan, authorizing a total of 2,500,000 qualified and
non-qualified stock options, of which 2,295,000 qualified stock options were
granted to employees. In September 1998, 470,000 options previously granted to
certain employees were cancelled, and new options were issued at the fair market
value on that date.
36
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options granted under these plans may not be granted at a price less
than the fair market value of the common stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting stock
of the Company). Options granted under the stock option plans will expire not
more than ten years from the date of grant. The exercise price of the options is
equal to the fair market value of the common stock at the date of the grant.
These options generally vest over a five year period.
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, Accounting for Stock Based Compensation ("FAS
123"). It applies APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans and does not recognize
compensation expense for its stock based employee compensation plans since the
options are granted at exercise prices equal to or greater than the fair market
value at the date of grant. If the Company had elected to recognize employee
compensation expense based upon the fair value at the grant date for awards
under these plans and for the director warrants discussed below consistent with
the methodology prescribed by FAS 123, the Company's net income (loss) and
income (loss) per share would be decreased (increased) to the pro forma amounts
indicated below for the years ended February 28, 2001, 2000 and 1999:
Year Ended February 28, 2001 As Reported Pro forma
---------------------------- ----------- ---------
Income:
Net Income $ 3,760,124 $ 3,063,470
Income Per Share:
Basic:
Net income $ 0.25 $ 0.20
Diluted:
Net income $ 0.24 $ 0.20
Year ended February 28, 2000
----------------------------
Income (loss):
Income from continuing operations $ 3,584,799 $ 2,752,774
Net loss $(31,141,588) $ (31,973,613)
Income (loss) Per Share:
Basic:
Income from continuing operations $ 0.24 $ 0.19
Net loss $(2.12) $(2.17)
Diluted:
Income from continuing operations $ 0.23 $ 0.18
Net loss $(2.03) $(2.09)
Year ended February 28, 1999
----------------------------
Loss:
Loss from continuing operations $ (1,217,115) $ (2,350,782)
Net loss $ (5,989,643) $ (7,123,310)
Loss Per Share:
Basic:
Loss from continuing operations $(0.09) $(0.16)
Net loss $(0.42) $(0.50)
Diluted:
Loss from continuing operations $(0.09) $(0.16)
Net loss $(0.42) $(0.50)
37
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before March 1, 1995. The fair value of these options was estimated
at the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for the years ended February 28, 2001,
2000 and 1999:
For the Year Ended February 28,
2001 2000 1999
---- ---- ----
Volatility 61% 53% 51%
Risk Free Rate 5.59% 5.54% 5.11%
Expected Life 7 years 10 years 10 years
Forfeiture Rate 0% 0% 0%
The weighted average fair value of options granted during fiscal 2001,
2000 and 1999 for which the exercise price equals the market price on the grant
date, was $.65, $3.25, and $2.25, respectively, and the weighted average
exercise price was $.86, $4.64 and $3.31, respectively.
The weighted average fair value of options granted during fiscal 2001
and 1999, for which the exercise price is greater than the market price on the
grant date was $.49 and $2.19, respectively, and the weighted average exercise
price was $.95 and $3.64, respectively. There were no options granted during
fiscal 2000 which had the exercise price exceeding the market price.
Stock option activity during fiscal 2001, 2000 and 1999 is summarized
below:
Weighted-Average
Options Exercise Price
------- ----------------
Balance, February 28, 1998 2,003,108
Granted 1,270,000 3.31
Exercised ( 49,850) 4.13
Cancelled (690,000) 7.05
---------
Balance, February 28, 1999 2,533,258
Granted 125,000 4.64
Exercised (251,630) 3.13
Cancelled (288,122) 3.07
----------
Balance, February 28, 2000 2,118,506
Granted 3,023,000 .90
Exercised -- --
Cancelled (585,000) 4.11
----------
Balance February 28, 2001 4,556,506
==========
At February 28, 2001, 2000 and 1999, 2,530,856, 1,474,006 and 1,853,125
options, respectively, were exercisable.
38
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information concerning currently
outstanding and exercisable stock options:
Weighted-
Average
Remaining Weighted- Weighted-
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ .70- $ 1.20 3,023,000 7.32 $ .90 1,500,000 .95
$3.10- $ 5.30 1,463,006 3.56 $3.96 981,506 3.88
$5.31- $ 9.10 70,500 6.28 $6.88 49,350 6.88
--------- ---------
4,556,506 2,530,856
========= =========
Warrants
All warrants are exercisable upon grant, although the underlying shares
may not necessarily be registered, and the warrants expire up to ten years from
date of grant. The exercise prices of the warrants are the NASDAQ closing prices
of the Company's common stock at the dates of grant.
The following table summarizes information concerning currently
outstanding stock warrants:
Issued Year Ended February 28,
Warrants Outstanding
Issued to 2001 2000 1999 at February 28, 2001
--------- ---- ---- ---- --------------------
Robert M. Beningson -- -- -- 700,000
Stanley Weinstein 20,000 -- 20,000 80,000
Howard Sommer 20,000 -- 20,000 60,000
Harvey Schultz 20,000 -- 20,000 40,000
Frederic S. Berman 20,000 -- 20,000 40,000
------ ------ ------- ---------
Total Directors 80,000 -- 80,000 920,000
Other Consultants and
former Directors -- -- 50,000 478,711
------ ------ ------- ---------
Total 80,000 -- 130,000 1,398,711
====== ====== ======= =========
The above warrants were granted at prices ranging from $1.63 to $7.31,
and expire from March, 2001 through July, 2010. For fiscal 1999, the Company
recorded an expense of $120,000 relating to the issuance or modification of
warrants issued to consultants.
The weighted average fair value of warrants granted to Directors during
fiscal 2001 and 1999 was $1.60 and $2.38, respectively, and the weighted average
exercise price was $1.63 and $3.50, respectively. There were no warrants issued
during fiscal 2000. There were no warrants exercised or cancelled during each of
the three years ended February 28, 2001, 2000 and 1999.
39
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company issued common stock purchase warrants in connection with
the settlement of litigation in 1993. As of February 28, 2001 and 2000, there
were outstanding Class B Warrants evidencing the right to purchase 83,449 and
101,980 shares, respectively, which had the following attributes: (i) an
exercise price of $6.15; and (ii) the Company had the right to reduce the
exercise price at any time. Pursuant to an agreement dated October 31, 1997, the
Company redeemed 10% of outstanding B Warrants at $11.50 per warrant, in each of
April, 1998, April, 1999 and April, 2000. Pursuant to amendments to the
agreement, the Company redeemed $100,000 worth of the remaining warrants on
December, 2000 and $100,000 on March, 2001 at $12.00 per warrant with the
balance to be redeemed on July 31, 2001 or as extended. The redemption
obligation is secured by a 17.5% limited partnership interest in BNYLP, held by
B-41LP. The Company has accreted this obligation of approximately $1,001,000 and
$1,129,000 as of February 28, 2001 and 2000, respectively, which is included in
accrued expenses. During the years ended February 28, 2001, 2000 and 1999 the
Company recorded expenses of approximately $89,000, $464,000 and $683,000,
respectively, relating to this redemption.
In connection with the settlement of the shareholder litigation, in
1993, the Company issued Class A Warrants, which were surrendered under a letter
of credit posted by Mission. Total amounts drawn on the letter of credit
amounted to approximately $6.9 million, which will be repaid only from future
operating and financing cash flows of BNYLP.
13. Employee Benefit Plans
Employee Savings Plan
The Company maintains a 401(k) plan which allows employees of the
Company to defer a portion of their earnings on a pre-tax basis through
contributions to the 401(k) plan up to limits specified by the IRS. The Company,
may at its discretion, make a contribution to the 401(k) plan. To date, the
Company has elected not to contribute to the 401(k) plan.
Defined Benefit Plan
The Company has a defined benefit pension plan covering substantially
all employees not covered by a collective bargaining agreement. The benefits are
based on years of service and the highest consecutive five years of the
employees' compensation. The Company's funding policy is to contribute annually
the amount necessary to satisfy the Internal Revenue Service's funding
standards. Contributions are intended to provide, not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
Pension cost for the years ended February 28, 2001, 2000 and 1999
include the following components:
2001 2000 1999
---- ---- ----
Service cost - benefits earned
during the current period $ 59,455 $ 51,876 $ 51,099
Interest cost on projected benefit
obligation 92,033 80,388 94,837
Expected return on plan assets (52,937) (36,059) (71,245)
Net amortization and deferral 77,579 47,962 32,992
-------- -------- --------
Net pension cost $176,130 $144,167 $107,683
======== ======== ========
40
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For all periods presented, the weighted average discount rate was 8.5%
and the rate of increase in future compensation levels was 3%, which were used
in determining the actuarial present value of the projected benefit obligation.
The expected long-term rate of return on plan assets is 8.5%.
The following tables set forth the plan's benefit obligations, change
in plan assets and funded status as of February 28, 2001 and 2000:
2001 2000
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,082,738 $ 945,739
Service cost 59,455 51,876
Interest cost 92,033 80,388
Actuarial loss 330,538 31,232
Benefits paid (153,854) (26,497)
----------- ----------
Benefit obligation at end of year 1,410,910 1,082,738
----------- ----------
Change in plan assets:
Fair value of plan assets at beginning of year 530,274 375,365
Actual return on plan assets 19,883 15,960
Employer contribution 200,000 165,446
Benefits paid (153,854) (26,497)
----------- ----------
Fair value of plan assets at end of year 596,303 530,274
----------- ----------
Funded status (814,607) (552,464)
Unrecognized net actuarial loss 606,494 305,985
Unrecognized transition amount 53,913 68,422
----------- ----------
Accrued benefit cost $ (154,200) $ (178,057)
=========== ==========
41
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan
During 1988, the Company adopted an Employee Stock Ownership Plan
("ESOP") that covers substantially all employees. The Company utilizes the
provisions of Statement of Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans". The following table presents the number of shares of
common stock, that the ESOP purchased from the Company, at prices which
represented 70% of the NASDAQ closing prices at the date of purchase:
Purchased in Fiscal Year # Shares Purchased Purchase Price
------------------------ ------------------ --------------
1996 288,500 $ 1,092,219
1993 and prior 3,500,000 13,370,000
--------- -----------
3,788,500 $14,462,219
========= ===========
Management believes the valuation represented the fair market value of
the unregistered shares on those dates.
The Company contributed approximately $404,000, $708,000 and $678,000,
to the ESOP during fiscal 2001, 2000, and 1999, respectively. The Company makes
annual contributions to the ESOP as determined by the Board of Directors and
subject to certain limitations dictated by tax regulations.
To purchase the shares from the Company, the ESOP borrowed funds from
the Company. Repayment of these loans has been and is expected from employer
contributions, borrowing by the ESOP from third parties, and by sale of
unreleased ESOP shares to third parties. The Company has recorded all amounts
loaned to the ESOP as deferred compensation, a contra-equity account, and has
included the third party loans to the ESOP in other long-term liabilities.
Certain of the unreleased ESOP shares were used as collateral for a third party
loan to the ESOP which was repaid in full in May, 2000.
During the quarter ended August 31, 1993, the ESOP borrowed $1,150,000
from third parties. These funds, along with an additional $12,987,000 generated
through February 28, 2000 by the sale of the Company's stock owned by the ESOP,
were used to repay portions of the demand purchase money loans due to the
Company. The $1,150,000 initially borrowed by the ESOP was included in other
long-term liabilities and as deferred compensation, a contra-equity account, and
had a balance of zero and $601,000 at February 28, 2001 and 2000 as a result of
repayments by the ESOP.
ESOP shares are released and allocated to participant accounts based
upon Company contributions and certain payments made to reduce ESOP debt to the
Company. The Company reports compensation expense as shares are committed to be
released equal to the current market price of the shares, and the shares then
become outstanding for earnings-per-share ("EPS") computations.
A summary of the ESOP shares, at February 28, 2001 and 2000 is as
follows:
2001 2000
---- ----
Allocated shares 470,447 714,428
Shares released for allocation 61,759 151,519
Unreleased shares 202,689 282,737
-------- ----------
734,895 1,148,684
======== ==========
Fair value of unreleased shares $456,050 $ 901,224
======== ==========
42
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Income Taxes
The provision (benefit) for income taxes, for each of the three years
in the period ended February 28, is as follows:
2001 2000 1999
---- ---- ----
Current:
Federal $ -0- $ (457,000) $ (309,841)
State and local 84,000 1,599,000 290,288
------------- ----------- -----------
84,000 1,142,000 (19,553)
------------- ----------- -----------
Deferred:
Federal (918,000) 694,000 (412,825)
State and Local 98,000 (1,836,000) (871,432)
Foreign -- -- (105,000)
------------- ----------- -----------
(820,000) (1,142,000) (1,389,257)
------------- ----------- -----------
Tax benefits allocated directly to
additional paid-in capital:
Federal -- -- 34,000
State and local -- -- 14,000
------------- ----------- -----------
-- -- 48,000
------------- ----------- -----------
Benefit $ (736,000) $ -0- $(1,360,810)
------------- ----------- -----------
The Government of Trinidad and Tobago granted InnCOGEN a tax holiday,
which includes relief from corporation income and certain other taxes for 8
years beginning September 9, 1999.
At February 28, 2001, the Company has a net operating loss
carryforward, for Federal income tax purposes, of approximately $62 million
which expires through February 28, 2021. After carrybacks to the fiscal years
ended February 28, 1997 and 1998, the Company has approximately a $51 million
alternative minimum tax net operating loss carryforward, which also expires
through February 28, 2021. The difference between the loss carryforward amounts
is attributable to adjustments required in the alternative minimum tax
computation.
Internal Revenue Code Section 382 places a limitation on the
utilization of carryforwards when an ownership change, as defined in the tax
law, occurs. Generally, an ownership change occurs when there is a greater than
50 percent change in ownership. If such a change should occur, the actual
utilization of carry forwards, for tax purposes, would be limited annually to a
percentage of the fair market value of the Company at the time of such change.
Income (loss) from continuing operations before income taxes, for each
of the three years ended February 28, is as follows:
2001 2000 1999
---- ---- ----
Domestic $2,368,194 $3,112,132 $ 213,559
Foreign 655,930 472,667 (2,791,484)
---------- ---------- -----------
$3,024,124 $3,584,799 $(2,577,925)
========== ========== ===========
43
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation between the effective tax rate and the statutory
Federal income tax rate for each of the three years ended February 28, is as
follows:
2001 2000 1999
---- ---- ----
Amount computed using the statutory rate $1,028,000 $ 1,219,000 $ (876,495)
Increase (reduction) in taxes resulting from:
Wind tax credit (1,645,000) (1,553,000) --
Imputed interest on loans 18,000 -- 56,000
Nondeductible expenses -- -- 989,000
Canadian subsidiary -- -- (1,147,000)
Intangibles -- -- (102,000)
Foreign operation not subject to tax (229,000) -- --
State and local taxes, net of federal
tax benefit and state loss carryforwards 120,000 273,000 (428,000)
Capital loss (69,000) -- --
Other 41,000 61,000 147,685
---------- ----------- ------------
$( 736,000) -0- $(1,360,810)
========== =========== ===========
44
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net current deferred tax asset and long-term
deferred tax asset (liability) at February 28, 2001 and 2000 are as follows:
Deferred tax assets (liabilities) - Current 2001 2000
--------------------------------------------------------- ---- ----
Marketable securities $ (450,857) $ (353,800)
Accrued expenses 9,371,000 8,568,000
----------- -----------
8,920,143 8,214,200
----------- -----------
Deferred tax assets (liabilities) - Non-current
---------------------------------------------------------
Loss carryforwards 24,730,000 22,019,000
Credit carryovers 3,745,000 2,092,000
Long-term note receivable -WCTP (8,491,000) (8,491,100)
Partnership items (510,000) (402,000)
Depreciation and amortization (8,904,000) (6,631,900)
----------- -----------
10,570,000 8,586,000
----------- -----------
19,490,143 16,800,200
Valuation allowance (4,551,000) (2,584,000)
----------- -----------
Net deferred tax asset (liability) $14,939,143 $14,216,200
=========== ===========
The valuation allowance increased by $2,877,000 due to utilization of
higher effective state tax rates. This increase was offset by the Company
recognizing certain state tax benefits resulting in the reduction of the
valuation allowance of $910,000.
15. Lease Obligations
The Company has a lease for its office space which expires on June 30,
2005. On July 1, 1998, the Company exercised an option to increase its space to
16,700 square feet.
The Company has entered into land leases (the "Big Spring Project
Leases") with three land owners who own the land on which the Big Spring
facility was constructed and is being operated. Each of the Big Spring Project
Leases has an initial term of 15 years, commencing on the Big Spring Commercial
Operations date, as defined in the leases, and may be extended for two
additional periods of five years each. The Company has also entered into a
separate infrastructure agreement with one of the land owners which provides for
additional rights beyond those conveyed pursuant to the lease (the
"Infrastructure Agreement"). The term of the infrastructure agreement is for
twenty-five years, commencing with the Commercial Operations date, as defined in
the agreement.
45
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All rental payments on the leases are calculated as the greater of the
leases' minimum payment or a percentage of the gross revenues derived from the
wind turbines.
In June 1998, InnCOGEN entered into a lease to sublease the land on
which the Trinidad Project was built. The sublease has an original term of 32
years. The rent is $.40 per square meter per year for the first five years and
$.50 per square meter per year for the second five years. Total square meters
leased is approximately 33,000. Thereafter, the rent is to be adjusted in
five-year intervals based on the consumer price index. However, the rent cannot
be less than the rent for the preceding five-year period or increase by more
than 10%.
Total rent expense for operating leases was approximately $813,000 in
fiscal 2001, $720,000 in fiscal 2000 and $641,000 in fiscal 1999.
Future minimum annual rental payments for operating leases having terms
of more than one year at February 28, 2001 are as follows:
Operating
Leases
-----------
2002 $ 821,000
2003 795,000
2004 680,000
2005 681,000
2006 291,000
Thereafter 2,091,000
----------
Total minimum lease payments $5,359,000
==========
16. Related Party Transactions
Mr. Beningson, the Chairman and Chief Executive Officer of the Company,
is a stockholder of RRR'S, which is a 25% general partner of WCTP, a 20% limited
partner of RVA, and a 10% general partner of YCP. In fiscal 2001, 2000, and
1999, RVA was allocated approximately $622,000, $555,000 and $547,000
respectively, of the interest income on the YCP Note (see Note 5). York's
chairman controls 15% of the common stock of NAEC.
As discussed in Note 5, WCTP contracted with the Company to procure,
construct, design and place in operation a cogeneration facility. The Company's
Chairman and the Company's Chief Financial Officer are shareholders of the
general partner of WCTP, which receives a general partners fee of 1% of WCTP
revenues and an administrative services payment of 4% of WCTP revenues. In
fiscal 2001, 2000 and 1999, the general partner of WCTP received from WCTP
approximately $631,000, $495,000, and $491,000, respectively, for general
partner and administrative fees. The Company's Chief Financial Officer received
an aggregate of $86,000, $90,000 and $86,000 in fiscal 2001, 2000 and 1999,
respectively, from RRR'S and WCTP. The limited partners of WCTP are not related
parties to the Company.
At February 28, 2001 and 2000 no amounts were owed to the Company by
Mr. Beningson. At February 28, 1998, Mr. Beningson owed the Company $5,971,500
related to the exercise of warrants. On May 31, 1998, the Chairman paid $275,000
of the long-term note he owed to the Company. Also on May 31, 1998, an agreement
was reached to facilitate and maximize the Bond Financing. The agreement was
between the Company, YCP and the minority interests in YCP and B-41LP. Pursuant
to this agreement, the minority interests have agreed to assign and subordinate
their interests in various cash flows from the Brooklyn Navy Yard and Warbasse
facilities to the bondholders.
46
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the minority interests in B-41LP have agreed as of January
1, 1998 to forego completely their 25.3% interest in the royalty to be received
from the BNY facility. This royalty will continue through December 31, 2001. In
exchange, the Company transferred the balance of the note due from the Chairman
of $5,696,500 to a minority interest. This transfer resulted in a deferred
charge on the Company's balance sheet. The deferred charge is being amortized
partially over the life of the Bond Financing, and the balance over the
remaining term of the BNY royalty agreement. Amortization for fiscal 2001, 2000
and 1999 was approximately $1,146,000, $1,143,000 and $651,000, respectively.
As a condition of the settlement agreement reached with the NAEC
creditors, the Chairman agreed to certain restrictions regarding his holdings in
York common stock and agreed, upon formation of the trust, to take one half of
his compensation in the form of York common stock. In connection therewith, one
million shares were issued to the Chairman, which are reflected as deferred
compensation at February 28, 2001.
17. Discontinued Operations
A. Natural Gas Marketing
As of February 28, 2000, NAEC discontinued its natural gas marketing
business. On March 2, 2000, NAEC filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of New York. NAEC ceased the
wholesale natural gas business as of February 28, 2000, but continued its retail
natural gas business until it sold the retail business to Amerada Hess
Corporation on April 20, 2000 for $250,000 payable between July 1, 2000 and
December 31, 2000, which has been paid in full, net of certain offsets. Amerada
Hess assumed all obligations in connection with the Syracuse office and
equipment leases and hired all Syracuse personnel. The filing of Chapter 11 was
necessitated by an extreme credit crunch which rendered NAEC unable to purchase
natural gas to meet its commitments and unable to pay its creditors for natural
gas previously delivered (see Note 2).
As of February 28, 2000, the Company accounted for the NAEC wholesale
and retail natural gas marketing business as a discontinued operation, as well
as the electric marketing business, which was discontinued previously.
The natural gas marketing operations of NAEC are reflected as a
discontinued operation for all periods presented. The operating results of the
discontinued operation are summarized as follows:
For the Year Ended February 28,
-------------------------------
2001 2000 1999
---- ---- ----
Revenues $ 2,734,250 $1,025,741,170 $967,829,511
Income (loss) before tax benefit (4,588,947) (16,761,841) 10,384,366
Tax provision (benefit) -- (5,727,834) 4,315,087
Net Income (loss) $ (4,588,947) $ (11,034,007) $ 6,069,279
The operating results for the year ended February 28, 2001 had been
accrued in the estimated loss on disposal as of February 28, 2000.
47
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. Electric Marketing
During the quarter ended August 31, 1998, unprecedented turmoil in the
electric marketing business was caused in part by widely reported failures of
certain suppliers to deliver contracted power to a multitude of utilities and
marketers, including York's subsidiary, NAEC. NAEC and many others were required
to immediately meet existing fixed price commitments. The resulting turmoil
caused prices to immediately increase from normal prices in the range of $30 per
megawatt hour to as much as $7,000 per megawatt hour.
Repercussions from the suppliers' failures caused continuing
instability throughout the summer, as market participants found themselves with
unbalanced portfolios and a shortage of available sources. NAEC met many of its
commitments at substantially increased cost.
As a result, in August 1998, York determined that NAEC should
discontinue the electric marketing business due to the volatility, lack of
liquidity and unacceptable risk parameters. Operations ceased in December 1999,
when all commitments were met.
The electric marketing operations of NAEC are reflected as a
discontinued operation for all periods presented. The operating results of the
discontinued operation are summarized as follows:
For the Year Ended February 28,
-------------------------------
2001 2000 1999
---- ---- ----
Revenues $ -- $61,664,756 $242,903,270
Loss before tax benefit -- (10,337,843) (17,527,807)
Tax benefit -- (3,520,522) (6,686,000)
Net loss $ -- $(6,817,321) $(10,841,807)
C. Net Assets (Liabilities) of discontinued operations
As of February 28, 2001 and 2000 net liabilities of discontinued
operations consisted mainly of trade accounts receivable, trade accounts payable
and an accrual of alleged liquidated damages due certain suppliers.
In addition NAEC also maintained a line of credit that is
collateralized by all of the assets of NAEC and is guaranteed by the Company.
The line of credit bears interest at 1/2% per annum over the prime rate. Amounts
outstanding as of February 28, 2001 and 2000 were approximately $1,181,000 and
$11,770,000, respectively, which are included in the net liabilities from
discontinued operations.
D. Summary of Significant Accounting Policies
The company recognized revenues from energy sales in the period in
which the commodity was delivered. Inventory consisted of natural gas held in
storage. The Company accounted for its natural gas inventory using lower of cost
or market, cost being determined using the average cost method.
48
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of
operations for fiscal 2001 and 2000 and reflect the natural gas and electric
marketing operations as discontinued operations (in thousands of dollars except
per share data).
For the Quarter Ended
---------------------
Fiscal 2001 May 31 August 31 November 30 February 28 Full Year
----------- ------ --------- ----------- ----------- ---------
Total revenues $ 8,107 $ 8,963 $10,120 $10,108 $37,298
======= ======= ======= ======= =======
Gross profit $ 4,163 $ 3,685 $ 3,335 $ 3,727 $14,910
======= ======= ======= ======= =======
Net income $ 580 $ 811 $ 751 $ 1,618 $ 3,760
======= ======= ======= ======= =======
Earnings per share - Basic:
Net income $ 0.04 $ 0.05 $ 0.05 $ 0.10 $ 0. 25
======= ======= ======= ======= =======
Earnings per share - Diluted:
Net income $ 0.04 $ 0.05 $ 0.05 $ 0.10 $ 0.24
======= ======= ======= ======= =======
For the Quarter Ended
---------------------
Fiscal 2000 May 31 August 31 November 30 February 28 Full Year
----------- ------ --------- ----------- ----------- ---------
Total revenue $ 3,465 $ 3,138 $ 7,195 $ 8,735 $ 22,533
======= ======= ======= ======== ========
Gross profit $ 1,981 $ 1,443 $ 4,530 $ 3,761 $ 11,715
======= ======= ======= ======== ========
Income (loss) from
continuing operations $ 961 $ 191 $ 2,664 $ (231) $ 3,585
Loss from
discontinued operations (100) (5,133) (3,185) (26,308) (34,726)
------- ------- ------- -------- --------
Net income (loss) $ 861 $(4,942) $ (521) $(26,539) $(31,141)
======= ======= ======= ======== ========
Earnings (loss) per share-Basic:
Continuing operations $ 0.07 $ 0.01 $ 0.18 $ (0.02) $ 0.24
Discontinued operations (0.01) (0.35) (0.21) (1.79) (2.36)
------- ------- ------- -------- --------
Net income (loss) $ 0.06 $ (0.34) $ (0.03) $ (1.81) $ (2.12)
======= ======= ======= ======== ========
Earnings (loss) per share - Diluted:
Continuing operations $ 0.06 $ 0.01 $ 0.18 $ (0.02) $ 0.23
Discontinued operations -- (0.33) (0.21) (1.72) (2.26)
------- ------- ------- -------- --------
Net income (loss) $ 0.06 $ (0.32) $ (0.03) $ (1.74) $ (2.03)
======= ======= ======= ======== ========
49
YORK RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Significant Customers and Contracts, Commitments and Contingencies
Each of the power projects is dependent on one customer, typically a
utility, for substantially all of its revenue.
The Company has entered into an employment agreement with the Chief
Executive Officer, which expires May 2004. Such agreement requires a minimum
annual base salary and sets bonuses tied to pre-tax operating income.
Previously reported legal actions against the Company based upon
guarantees of NAEC obligations have either been discontinued or are not being
prosecuted by mutual consent. All remaining plaintiffs have executed a
settlement agreement which was approved by the bankruptcy court on January 8,
2001. The Company anticipates that the remaining actions will now be
discontinued. The settlement agreement called for the Company to settle these
obligations with the formation and funding of a trust by May 1, 2001 which date
has now been extended. See Note 2 for further details on the Company's efforts
and continuing negotiations.
In addition, NAEC's lender for the line of credit has reached an
accommodation with the Company pursuant to which it has agreed not to oppose the
entry of an injuction preventing it from pursuing its litigation against the
Company. Such litigation is therefore stayed. Included in NAEC's estimate of its
total pre-petition obligations, NAEC has accrued its estimate of the maximum
liability to these creditors as well as to the lender for the line of credit.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
YORK RESEARCH CORPORATION
(Registrant)
/s/Robert M. Beningson /s/Michael Trachtenberg
---------------------- -----------------------
Robert M. Beningson Michael Trachtenberg
President, Chief Executive Officer Executive Vice President
Chairman of the Board Chief Financial and Accounting
June 21, 2001 Officer, Secretary
June 21, 2001
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
/s/ Robert M. Beningson /s/ Harvey W. Schultz
----------------------- ---------------------
Robert M. Beningson Harvey W. Schultz
Director Director
June 21, 2001 June 21, 2001
/s/ Stanley Weinstein /s/ Frederic S. Berman
--------------------- ----------------------
Stanley Weinstein Frederic S. Berman
Director Director
June 21, 2001 June 21, 2001
/s/ Howard Sommer
------------------
Howard Sommer
Director
June 21, 2001
51