SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1996
Commission file number 0-24852
ENERGY RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
New York 06-0853042
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
3 Great Pasture Road
Danbury, Connecticut 06813
(Address of principal (Zip code)
executive offices)
203-792-1640
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has
filed all documents and reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's
Common Stock, par value $.0001, as of September 2, 1996
was 3,836,390.
ENERGY RESEARCH CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Unaudited Consolidated Condensed
Financial Statements:
Consolidated Condensed Balance Sheets
as of July 31, 1996 and October 31, 1995 2
Consolidated Condensed Statements of
Operations for the three months ended
July 31, 1996 and July 31, 1995 3
Consolidated Condensed Statements
of Operations for the nine months
ended July 31, 1996 and July 31, 1995 4
Consolidated Condensed Statements of
Cash Flows for the nine months ended
July 31, 1996 and July 31, 1995 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
1
Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
July 31, Oct 31,
1996 1995
------- --------
ASSETS:
Current Assets:
Cash and cash equivalents $ 5,472 $ 5,422
Marketable securities 3,909 3,900
Accounts receivable 2,413 3,203
Inventories 780 179
Deferred income taxes 215 215
Other current assets 251 87
------ ------
Total current assets 13,040 13,006
====== ======
Property, plant and equipment, net 6,912 7,263
Other assets, net 3,470 3,578
------ ------
Total Assets $23,422 $23,847
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 3,605 $ 717
Accounts payable 866 2,383
Income taxes payable - 71
Accrued liabilities 1,554 1,524
Current portion of deferred license
fee income 183 95
------ ------
Total current liabilities 6,208 4,790
Long Term Liabilities:
Long-term debt 4,004 6,487
Capital lease obligation 11 25
Deferred license fee income 33 83
Deferred income taxes 214 224
------ ------
Total liabilities 10,470 11,609
------ ------
Shareholders' Equity:
Convertible preferred stock, Series
C ($.01 par value); 30,000 and 60,000
shares issued and outstanding at
July 31, 1996 and October 31, 1995,
respectively 600 1,200
------ ------
Common Shareholders' Equity:
Common stock,($.0001 par value);
8,000,000 shares authorized:
3,836,390 and 3,711,270 shares issued
and outstanding at July 31, 1996
and October 31, 1995, respectively - -
Additional paid-in capital 10,270 9,263
Retained earnings 2,082 1,775
------ ------
Total common shareholders' equity 12,352 11,038
------ ------
Total shareholders' equity 12,952 12,238
------ ------
Total Liabilities and Shareholders'
Equity $23,422 $23,847
====== ======
See notes to consolidated condensed financial statements.
-2-
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended
July 31,
1996 1995
==== ====
Revenues $ 7,412 $ 7,443
Costs and Expenses:
Cost of revenues 5,268 5,680
Administrative and selling expenses 1,070 1,052
Depreciation 477 441
Research and development 496 229
--------- ---------
7,311 7,402
--------- ---------
Income from operations 101 41
License fee income, net
(includes income from related parties
of $79 and $79 for the three
months ended July 31, 1996
and 1995, respectively) 89 89
Interest expense (113) (125)
Interest and other income, net 116 113
--------- ---------
Income before provision
for income taxes 193 118
Provision for income taxes 71 45
--------- ---------
Net income $ 122 $ 73
========= =========
Primary and fully diluted income
per common share $ .03 $ .02
========= =========
Weighted average common and common
equivalent shares outstanding 4,146,020 3,973,132
========= =========
See notes to consolidated condensed financial statements.
-3-
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended
July 31,
1996 1995
==== ====
Revenues $ 22,194 $ 26,231
Costs and Expenses:
Cost of revenues 16,167 20,399
Administrative and selling expenses 3,343 3,314
Depreciation 1,500 1,389
Research and development 920 740
--------- ---------
21,930 25,842
--------- ---------
Income from operations 264 389
License fee income, net
(includes income from related parties
of $237 and $237 for the nine
months ended July 31, 1996
and 1995, respectively) 267 267
Interest expense (389) (323)
Interest and other income, net 341 201
--------- ---------
Income before provision
for income taxes 483 534
Provision for income taxes 176 182
--------- ---------
Net income $ 307 $ 352
========= =========
Primary and fully diluted income
per common share $ .08 $ .09
========= =========
Weighted average common and common
equivalent shares outstanding 4,053,282 3,971,663
========= =========
See notes to consolidated condensed financial statements.
-4-
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31,
(Dollars in thousands)
(Unaudited)
1996 1995
---- ----
Net cash flows from operating activities:
Net income $ 307 $ 352
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Bad debt (recovery) - (27)
Depreciation and amortization 1,694 1,673
Deferred income taxes (10) (10)
Conversion of accrued interest
to principal on long-term debt 82 90
(Gain) loss on disposal of property 3 3
Realized loss on sale of
marketable securities - 64
Changes in operating assets and liabilities:
Accounts receivable 790 4,401
Inventories (601) (332)
Other current assets (164) (116)
Accounts payable (1,517) (1,426)
Accrued liabilities 30 597
Income taxes payable (71) 58
Deferred license fee income 38 88
Other - -
------- -------
Net cash provided by
operating activities 581 5,415
------- -------
Cash flows from investing activities:
Capital expenditures (1,152) (718)
Proceeds from sale of marketable securities - 2,341
Payments on other assets (95) (1,018)
Purchase of marketable securities - (29)
------- -------
Net cash provided by
(used in) investing activities (1,247) 576
------- -------
Cash flows from financing activities:
Repayments of long-term debt (3,588) (417)
Proceeds from long-term financing 4,113 709
Common stock issued 191 62
------- -------
Net cash provided by
financing activities 716 354
------- -------
Net increase in cash and
cash equivalents 50 6,345
Cash and cash equivalents,
beginning of period 5,422 2,038
------- -------
Cash and cash equivalents,
end of period $ 5,472 $ 8,383
======= =======
Supplemental disclosure of cash paid
during the period for:
Interest $317 $276
Income taxes $409 $203
Noncash preferred stock conversion to
common stock $600 -
See notes to consolidated condensed financial statements.
-5-
Part I - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements
for Energy Research Corporation ("the Registrant"), have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In
the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
financial position of the Company as of July 31, 1996 and the
results of operations for the nine months ended July 31, 1996
and 1995 and cash flows for such nine month periods have been
included.
Information included in the Consolidated Condensed Balance
Sheet as of October 31, 1995 has been derived from audited
financial statements included in the Company's Annual Report
on Form 10-KSB for the year ended October 31, 1995, but does
not include all disclosures required by generally accepted
accounting principles.
The results of operations for the nine months ended July 31,
1996 and 1995 are not necessarily indicative of the results to
be expected for the full year.
The reader should supplement the information in this document
with prior disclosures in the form of previous 10-Q's and the
1995 10-KSB.
NOTE 2: COMMITMENTS/CONTINGENCIES
Following audits performed by the State of Connecticut
Department of Revenue Services ("DRS") for the period from
July 1, 1982 through December 31, 1992, the Company has been
assessed sales and use taxes of $800,000 together with
penalties of $39,000 plus applicable interest. The Company
has filed a complaint against the Commissioner of the DRS in
the Connecticut Superior Court, Judicial District of
Hartford/New Britain at Hartford, requesting that such
assessments be set aside on the basis that taxation of
purchases of goods and materials pursuant to contracts between
the Company and the U.S. Government is prohibited by the
United States Constitution. The Company and the DRS have
agreed not to pursue the action pending resolution of the case
of United Technologies
6
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
NOTE 2: COMMITMENTS/CONTINGENCIES (Continued)
Corporation v. Commissioner of Revenue Services and Noreen
Systems, Inc. v. Commissioner of Revenue Services (the "United
Technology Case") before the same Court. The United
Technology Case involves substantially similar facts and
questions of law as are being disputed in the Company's
pending action against the DRS. On May 19, 1995, the
Connecticut Superior Court, Judicial District of Hartford/New
Britain at Hartford ruled in the United Technologies Case that
use taxes assessed by the DRS were owed by the plaintiffs in
that case, with the exception of certain engineering services
which the Court held were not taxable services within the
meaning of the State of Connecticut's sales and use tax law.
On August 13, 1996, the Connecticut Supreme Court reversed the
Superior Court's decision in part, holding that United
Technologies was not liable for sales and use taxes for the
purchase and use of the tangible personal property in
question, but that it was liable for sales and use taxes on
its purchase of personal services used to fulfill its
government contracts. The Company expects that, as a result
of this favorable holding, the DRS will drop its assessment of
sales and use taxes for the Company's purchase and use of
tangible personal property in connection with its government
contracts which will result in the reversal of substantially
all of the above-described tax assessment, including penalties
and interest. While the Company will be liable for the
payment of sales and use taxes in connection with its purchase
of personal services in accordance with the Connecticut
Supreme Court's holding, in the Company's case, such services
were minimal; therefore the Company's ultimate liability for
sales and use taxes will be immaterial.
7
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON THREE MONTHS ENDED JULY 31, 1996 AND JULY 31, 1995
Revenues were relatively unchanged at $7,412,000 in the 1996
period compared to $7,443,000 in the 1995 period. The decrease
in revenues was due primarily to the completion of the
manufacture of the fuel cell modules and the completion of the
construction of the commercial scale, two-megawatt direct fuel
cell power plant in Santa Clara, California. Revenues in the
fourth quarter of 1996 are anticipated to be similar to the
levels of the fourth quarter of 1995.
Cost of Revenues decreased 7% to $5,268,000 in the 1996 period
compared to $5,680,000 in the 1995 period. The decrease was
due substantially to the change in the contract revenues
mentioned above.
Administrative and selling expenses were relatively unchanged
at $1,070,000 in the 1996 period from $1,052,000 in the 1995
period. Depreciation increased 8% to $477,000 in the 1996
period from $441,000 in the 1995 period. The increase was due
primarily to assets placed in service at the Company's
manufacturing facility. Research and development costs
increased 117% to $496,000 in the 1996 period from $229,000 in
the 1995 period. The increase was due primarily to carbonate
fuel cell activity. The remainder of the increase was due to
increased activity in the battery area, including the
manufacture of a nickel-zinc battery for a test application in
a hybrid electric vehicle.
Income from operations increased 146% to $101,000 in the 1996
period from $41,000 in the 1995 period. The increase was due
substantially to the profitability associated with the change
in the contract revenues mentioned above.
Interest expense decreased 10% to $113,000 in the 1996 period
from $125,000 in the 1995 period. The decrease was due
substantially to the capitalization of interest associated
with assets under construction and lower interest rates.
Interest and other income, net, was relatively unchanged at
$116,000 in the 1996 period from $113,000 in the 1995 period.
8
RESULTS OF OPERATIONS
COMPARISON NINE MONTHS ENDED JULY 31, 1996 AND JULY 31, 1995
Revenues decreased 15% to $22,194,000 in the 1996 period from
$26,231,000 in the 1995 period. A decrease in revenues
realized under the Company's two-megawatt power plant
contracts was offset by an increase in activity under the
Company's other contracts. The expected decrease in revenues
was partially offset by an increase in billings under the
Company's other contracts.
Cost of revenues decreased 21% to $16,167,000 in the 1996
period from $20,399,000 in the 1995 period. The decrease was
due substantially to the decreased revenues mentioned above.
Administrative and selling expenses were relatively unchanged
at $3,343,000 in the 1996 period from $3,314,000 in the 1995
period. Depreciation increased 8% to $1,500,000 in the 1996
period from $1,389,000 in the 1995 period. The increase was
due primarily to assets placed in service at the Company's
manufacturing facility. Research and development costs
increased 24% to $920,000 in the 1996 period from $740,000 in
the 1995 period. The increase was due primarily to carbonate
fuel cell activity. The remainder of the increase was due to
the manufacture of a nickel-zinc battery for a test
application in a hybrid electric vehicle.
Income from operations decreased 32% to $264,000 in the 1996
period from $389,000 in the 1995 period. The decrease was due
primarily to the decrease in revenues mentioned above,
including a reduction in activity under a fee-bearing
contract.
Interest expense increased 20% to $389,000 in the 1996 period
from $323,000 in the 1995 period. The increase was due
primarily to the full utilization of the $2,500,000 credit
facility in the 1996 period. The increase has been partially
offset by the capitalization of interest for assets under
construction and lower interest rates.
Interest and other income, net, increased 70% to $341,000 in
the 1996 period from $201,000 in the 1995 period. The
increase was due primarily to increased interest income. The
interest income has increased due to the availability of
additional cash form working capital resulting from a more
favorable payment procedure under the Company's cooperative
agreements. During the 1995 period, a final charge against
income was taken due to the reduction in value of certain
investments.
The Santa Clara Demonstration power plant, which began
operating during the second quarter, was shut down in the
third quarter. After repairing the pipe dielectrics and other
items, the power plant was restarted on August 5, 1996. At
this time, the power plant is operating at partial load. The
cost for repairs was provided from existing contract funds. As
previously reported, one of the sixteen fuel cell stacks is
not performing well. This stack is limiting the performance
of the power plant. The Company is seeking ways to bypass or
supplement this stack output, but there can be no assurance
that the power plant will return to prior
9
operating power output levels.
The Company has reached an agreement with the City of Santa
Clara to provide services in an amount up to $300,000, if
needed, to cover either operating test time or reconfiguration
of the power plant. The above amount combined with funds
provided by subcontractors have been credited to reduce the
Company's engineering subsidiary's liability for unfunded
rework on the balance of plant from $1,000,000 to $500,000.
The latter warranty is backed by subcontractor and vendor
warranties for various time periods.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at July 31, 1996 was $6,832,000, including
$5,472,000 of cash and cash equivalents and $3,909,000 of
short term investments, compared to working capital of
$8,216,000 at October 31, 1995, including $5,422,000 of cash
and cash equivalents and $3,900,000 of short term investments.
During the 1996 period, $581,000 of cash was provided by the
Company's operating activities. During that period, accounts
receivable decreased $790,000 and accounts payable decreased
$1,517,000 primarily due to decreased revenues associated with
the completion of the manufacturing of the fuel cell modules
for, and the construction of, the Santa Clara power plant. Net
cash from operating activities also included the Company's net
income of $307,000 and an increase in accrued liabilities of
$30,000. These sources of cash were partially offset by a
$601,000 increase in inventory primarily attributable to
materials acquired to meet future production requirements and
unbilled costs that are expected to be billed during the
fourth quarter of 1996.
The Company's capital expenditures are incurred primarily to
support ongoing contracts and to replace existing equipment.
Capital expenditures for the 1996 period were $1,152,000. All
of these expenditures were financed from the recovery of
depreciation expense under cost-reimbursement contracts and
cooperative agreements.
The Company has entered into more favorable lending
arrangements with First Union Bank of Connecticut, a
subsidiary of First Union Corporation, which provide for (i) a
$2,250,000 five-year term loan facility, which bears interest
at a floating rate equal to 1.75 percent above London
Interbank Offered Rates (LIBOR), and (ii) a $600,000 term loan
facility to the Company's fuel cell manufacturing subsidiary,
which bears interest at a floating rate equal to 1.75% percent
above LIBOR. The credit facilities were previously with Fleet
Bank, N.A. The Company discontinued the line of credit
because it was unnecessary with the favorable payment
procedures associated with the cooperative agreements.
10
During the fiscal year 1995, the Company entered into a
$2,500,000 credit facility with MetLife Capital Corporation,
an affiliate of Metropolitan Life Insurance Company. The
credit facility bears interest at the 30-day commercial paper
rate plus 2.5 percent. The Company had fully utilized the
credit facility through the 1996 period to acquire machinery
and equipment. The credit facility provides for repayment over
36-50 months commencing with the completion of the equipment
acquisition.
In fiscal year 1990, the Company borrowed $1,980,000 from MTU
Friedrichshafen GmbH (MTU) at a rate of 6% per annum. The
payment of principal and interest is deferred until November
30, 1996. The indebtedness, including deferred interest, as
of July 31, 1996 was $2,559,000. This loan is secured by the
pledge of FCMC stock and certain machinery, equipment and
leasehold improvements at the Torrington, CT, facility. The
accrued interest on the loan is payable at the Company's
option. The principal amount of the loan may be converted at
MTU's option, into the Company's common stock at a conversion
rate of $9 per share prior to November 30, 1996. During
December 1995, MTU converted $216,000 of this loan into 24,000
shares of common stock of the Company.
Full 1996 funding was finally approved for the Company's
Cooperative Agreement with DOE in June, 1996 under the 1996
budget legislation. Additionally, Defense Advanced Research
Projects Agency funds in the amount of $6,500,000 have been
transferred to DOE for release by DOE to the Company. These
funds have been received in the Company's fourth fiscal
quarter and the total federal funding of the Cooperative
Agreement with the Company has been increased from
approximately $78,000,000 to $84,500,000.
The Company obtains most of its funding for research and
development from cooperative agreements or contracts with
United States Government agencies. To continue to obtain
funding for these contracts, the Company must continue to
prove the benefits of its technologies and be successful in
its competitive bidding. Failure to obtain these contracts
could have an adverse effect upon the Company. Because the
Company receives a significant portion of its revenues from
contracts and cooperative agreements with the Department of
Energy and other government agencies, future revenues and
income of the Company could be materially affected by changes
in procurement policies, a reduction in expenditures for the
services provided by the Company, and other risks generally
associated with government contracts. In general, the
Company's government contracts may be terminated, in whole or
in part, at the convenience of the government. Future deficit
reduction measures could adversely affect the Company's
existing contract and its ability to obtain future government
contracts and grants. Reduction or delays in the Company's
government funding could have a material adverse effect on the
Company's ability to commercialize its fuel cell technology.
11
The U.S. Department of Energy (DOE) Congressional budget for
1997 under the Interior and Related Agencies bill presently
contains $36,500,000 million for the carbonate fuel cell
product improvement Cooperative Agreements. The bill has not
yet been signed into law and is, therefore, still subject to
change. In the event the bill is passed in its present form,
the Company expects the DOE to allocate these funds primarily
between the two carbonate fuel cell Cooperative Agreement
contractors, one of which is the Company. Depending on DOE
allocations, the funds may or may not be sufficient to
maintain the annual funding at the required contract levels.
Delays in the 1996 funding combined with delays and costs
associated with the Santa Clara project have moved the
expected commercialization into the 2000 time frame from the
previously indicated 1999-2000 period.
12
Part II - Other Information
Item 1 - Legal Proceedings
See Note 2 to the Unaudited Consolidated Condensed Financial
Statements.
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION PAGE NO.
EXHIBIT NO.
10.43 Loan Agreements, dated June 28, 1996, 15
with First Union Bank of Connecticut
10.44 Notes, dated June 28, 1996, in favor of 39
First Union Bank of Connecticut
10.45 Security Agreements, dated June 28, 1996, 53
with First Union Bank of Connecticut
11 Computation of Earnings (Loss) Per 104
Share for the Three Months Ended
July 31, 1996 and 1995 and for the
Nine Months Ended July 31, 1996 and
1995
(b) Reports On Form 8-K
NONE
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGY RESEARCH CORPORATION
/s/ Louis P. Barth
__________________
Louis P. Barth
Senior Vice President, CFO
Treasurer/Corporate Secretary
Dated: September 12, 1996
14