Reflection on the past two years
Our original investment basis was the acceleration of growth of independent power producers fueled by the deregulation of the power industry and the emergence of the resulting power marketing and this was worldwide. We liked York because of then expected steady cash flows from the about to be completed Brooklyn Navy Yard plant and the already operating Warbassee with good prospects of new projects adding to these cash flows. We were especially excited about the then future cash flows from wind systems which we then foresaw as an important long term growth element driven in the U.S. by green energy tax incentives and fueled by dropping per KW production costs resulting from technology advancements coming to market. We were impressed with York's plans, prospects and its then low stock price at about $6 and relatively low outstanding shares of about 7 million. Another prospect we looked for was the shift of earnings derivation away from erratic development fees to steady income from production facilities and marketing operations.
We were right about the fundamentals but wrong about the management. The number of shares has about doubled, none of the shares going to the public shareholders as the incremental shares derived from options, warrants etc, mostly going to a few management persons. Earnings have been depressed because of the increased shares outstanding which is about to again dramatically increase due to more management options(over 700,000 in FY 99) and now another proposed 3 million as indicated in the Proxy for the future options program. Earnings have also been depressed because of mis-steps in the electricity brokering business segment in which York had claimed industry expertise and stated that its contracts were substantially hedged. This business segment was declared "discontinued" last August with a whopping about $6 million loss then and these losses now have risen to an accumulated $10.6 million and still are accumulating each quarter. Earnings also have been depressed because the company elected not to partner its major new projects and instead issued high yield 12% bonds in a low interest environment. This resulted in underwriting charges and high interest expenses. Had we partnered a portion of the new projects, as was expected in the original business plan, upon which we based our investment judgement, we would have seen rising earnings from a combination of some development fees and operating income while still seeing significant growth to the top line.
Earnings have also been depressed resulting from a significant rise in G/A expenses which just for FY alone was about $1.1 million in employee salary and benefits INCREASES with a total increase of about $3.3 million. This expense increase for just fy99 represents an approximate 24 Cents/share. The increased salary and benefits portion of this alone is about 8 Cents/share.
We also had expected, as had been committed, a significant improvement in quality and frequency of investor communications along with a website to facilitate this. We have heard about the website for about one year that it is about to be up and it is still not up.
Early last year, we believed that good times were ahead and the the expectations we had foreseen would be realized. But, the recent disclosures in the 10K and Proxy just released indicates that the company marches onward and grows with sound operating fundamentals but shareholder values keep being depreciated in the ways described above.
Will the stock rise still from the present $6 level? We believe it will but our original assumptions are no longer valid as to price for the reasons given above. Therefore, we will gradually phase down this investment to make room for other opportunities.
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