SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-14204
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 organization) Identification No.)
3 Great Pasture Road, Danbury, Connecticut 06813
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (203) 792-1460
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
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 9, 1997 was 3,992,519.
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, 1997 and October 31, 1996 2
Consolidated Condensed Statements of Operations
for the three months ended July 31, 1997
and July 31, 1996 3
Consolidated Condensed Statements of Operations
for the nine months ended July 31, 1997
and July 31, 1996 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, 1997
and July 31, 1996 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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,
1997 1996
------- --------
ASSETS:
Current Assets:
Cash and cash equivalents $ 6,980 $ 7,597
Marketable securities - 1,956
Accounts receivable 2,233 2,848
Inventories 117 72
Deferred income taxes 209 209
Other current assets 485 231
------ ------
Total current assets 10,024 12,913
====== ======
Property, plant and equipment, net 8,247 7,245
Other assets, net 3,097 3,382
------ ------
Total Assets $21,368 $23,540
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 1,743 $ 2,380
Accounts payable 674 1,232
Accrued liabilities 1,076 1,108
Income taxes payable 9 11
Current portion of deferred license
fee income 150 95
------ ------
Total current liabilities 3,652 4,826
Long Term Liabilities:
Long-term debt 2,921 4,363
Capital lease obligation - 8
Deferred license fee income - 17
Deferred income taxes 264 264
------ ------
Total liabilities 6,837 9,478
------ ------
Shareholders' Equity:
Convertible preferred stock, Series
C ($.01 par value); 30,000
shares issued and outstanding at
July 31, 1997 and October 31, 1996,
respectively 600 600
------ ------
Common Shareholders' Equity:
Common stock,($.0001 par value);
8,000,000 shares authorized:
3,992,519 and 3,911,787 shares issued
and outstanding at July 31, 1997
and October 31, 1996, respectively - -
Additional paid-in capital 11,301 11,178
Retained earnings 2,630 2,284
------ ------
Total common shareholders' equity 13,931 13,462
------ ------
Total shareholders' equity 14,531 14,062
------ ------
Total Liabilities and Shareholders'
Equity $21,368 $23,540
====== ======
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,
1997 1996
==== ====
Revenues $ 6,448 $ 7,412
Costs and Expenses:
Cost of revenues 3,721 5,268
Administrative and selling expenses 1,792 1,070
Depreciation 451 477
Research and development 383 496
--------- ---------
6,347 7,311
--------- ---------
Income from operations 101 101
License fee income, net
(includes income from related parties
of $79 and $79 for the three
months ended July 31, 1997
and 1996, respectively) 207 89
Interest expense (98) (113)
Interest and other income, net 75 116
--------- ---------
Income before provision
for income taxes 285 193
Provision for income taxes 90 71
--------- ---------
Net income $ 195 $ 122
========= =========
Primary and fully diluted income
per common share $ .05 $ .03
========= =========
Weighted average common and common
equivalent shares outstanding 4,203,193 4,146,020
========= =========
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,
1997 1996
==== ====
Revenues $ 18,203 $ 22,194
Costs and Expenses:
Cost of revenues 11,521 16,167
Administrative and selling expenses 4,248 3,343
Depreciation 1,416 1,500
Research and development 860 920
--------- ---------
18,045 21,930
--------- ---------
Income from operations 158 264
License fee income, net
(includes income from related parties
of $237 and $237 for the nine
months ended July 31, 1997
and 1996, respectively) 441 267
Interest expense (271) (389)
Interest and other income, net 234 341
--------- ---------
Income before provision
for income taxes 562 483
Provision for income taxes 216 176
--------- ---------
Net income $ 346 $ 307
========= =========
Primary and fully diluted income
per common share $ .08 $ .08
========= =========
Weighted average common and common
equivalent shares outstanding 4,204,893 4,053,282
========= =========
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)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 346 $ 307
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,697 1,694
Deferred income taxes - (10)
Conversion of accrued interest
to principal on long-term debt 29 82
Gain (loss) on disposal of property - 3
Changes in operating assets and
liabilities:
Accounts receivable 615 790
Inventories (45) (601)
Other current assets (254) (164)
Accounts payable (558) (1,517)
Accrued liabilities (32) 30
Income taxes payable (2) (71)
Deferred license fee income 38 38
------- -------
Net cash provided by
operating activities 1,834 581
------- -------
Cash flows from investing activities:
Capital expenditures (2,415) (1,152)
Proceeds from sale of marketable
securities 1,999 -
Payments on other assets (42) (95)
------- -------
Net cash used in
investing activities (458) (1,247)
------- -------
Cash flows from financing activities:
Repayments of long-term debt (2,116) (3,588)
Proceeds from long-term financing - 4,113
Common stock issued 123 191
------- -------
Net cash provided by (used in)
financing activities (1,993) 716
------- -------
Net increase (decrease) in cash
and cash equivalents (617) 50
Cash and cash equivalents,
beginning of period 7,597 5,422
------- -------
Cash and cash equivalents,
end of period $ 6,980 $ 5,472
======= =======
Supplemental disclosure of cash paid
during the period for:
Interest $267 $317
Income taxes $314 $409
Non-cash preferred stock conversion to
common stock $-0- $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, 1997 and the
results of operations for the three and nine months ended July
31, 1997 and 1996 and cash flows for such nine month periods
have been included.
Information included in the Consolidated Condensed Balance Sheet
as of October 31, 1996 has been derived from audited financial
statements included in the Company's Annual Report on Form 10-K
for the year ended October 31, 1996, but does not include all
disclosures required by generally accepted accounting
principles.
The results of operations for the nine months ended July 31,
1997 and 1996 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
1996 10-K.
6
PAGE
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, 1997 and July 31, 1996
Revenues decreased 13% to $6,448,000 in the 1997 period from
$7,412,000 in the 1996 period. The expected decrease in
revenues was due primarily to completion of the two-megawatt
Direct Fuel Cell power plant project in Santa Clara, California.
The decrease was partially offset by a increase in billings
under the Company's other contracts.
Cost of revenues decreased 29% to $3,721,000 in the 1997 period
from $5,268,000 in the 1996 period. The decrease was due
primarily to the decreased revenues mentioned above.
Administrative and selling expense increased 67% to $1,792,000
in the 1997 period from $1,070,000 in the 1996 period. The
increase was primarily associated with the recognition of
previously deferred recoverable administrative and selling
expenses. These costs have been recognized with their
associated revenue mentioned above. Depreciation decreased 5%
to $451,000 in the 1997 period from $477,000 in the 1996 period.
Research and development expenses decreased 23% to $383,000 in
the 1997 period from $496,000 in the 1996 period. The decrease
was due primarily to a decrease in subcontracted carbonate fuel
cell activity which has been partially offset by expanded
battery development activities.
Income from operations was unchanged at $101,000 for 1997 and
1996 periods.
License fee income, net increased 133% to $207,000 in the 1997
period from $89,000 in the 1996 period. The increase was
primarily due to recognition of the license income under the
Company's battery license with Corning, Inc.
Interest expense decreased 13% to $98,000 in the 1997 period
from $113,000 in the 1996 period. The decrease was due
primarily to the reduction of debt to MTU Friedrichshafen GmbH
(MTU) as a result of conversion of $666,000 of principal at $9
per share into common stock of the Company in fiscal 1996 and
the repayment of $684,000 of principal during the first quarter
of fiscal 1997. The decrease was also due to the Company
refinancing its bank debt at more favorable terms during the
third quarter of fiscal 1996.
7
Interest and other income, net decreased 35% to $75,000 in the
1997 period from $116,000 in the 1996 period. The decrease was
due primarily to the use of cash for debt repayment during the
first quarter of fiscal 1997.
Results of Operations
Comparison Nine Months Ended July 31, 1997 and July 31, 1996
Revenue decreased 18% to $18,203,000 in the 1997 period from
$22,194,000 in the 1996 period. The expected decrease in
revenues was due primarily to completion of the two-megawatt
Direct Fuel Cell power plant project in Santa Clara, California.
The decrease was partially offset by an increase in billings
under the Company's other contracts.
Cost of revenues decreased 29% to $11,521,000 in the 1997 period
from $16,167,000 in the 1996 period. The decrease was due
primarily to the decreased revenues mentioned above.
Administrative and selling expenses increased 27% to $4,248,000
in the 1997 period from $3,343,000 in the 1996 period. The 1997
period reflects an increase in various expenses including bid
and proposal activity, employment costs, amortization, legal and
professional fees. Depreciation decreased 6% to $1,416,000 in
the 1997 period from $1,500,000 in the 1996 period. The
decrease was due substantially to completion of the amortization
of costs associated with the manufacturing facility. Research
and development expense decreased 7% to $860,000 in the 1997
period from $920,000 in the 1996 period. The decrease was due
primarily to a decrease in subcontracted carbonate fuel cell
activity which was partially offset by expanded battery
development activity.
Income from operations decreased 40% to $158,000 in the 1997
period from $264,000 in the 1996 period. The decrease was due
primarily to the decrease in revenues mentioned above.
License fee income, net increased 65% to $441,000 in the 1997
period from $267,000 in the 1996 period. The increase was
primarily due to recognition of the license income under the
Company's battery license with Corning, Inc.
8
Interest expense decreased 30% to $271,000 in the 1997 period
from $389,000 in the 1996 period. The decrease was due
primarily to the reduction of debt to MTU Friedrichshafen GmbH
(MTU) as a result of conversion of $666,000 of principal at $9
per share into common stock of the Company in fiscal 1996 and
the repayment of $684,000 of principal during the first quarter
of fiscal 1997. The decrease was also due to the Company
refinancing its bank debt at more favorable terms during the
third quarter of fiscal 1996.
Interest and other income, net decreased 31% to $234,000 in the
1997 period from $341,000 in the 1996 period. The decrease was
due to the use of cash for debt repayment during the first
quarter of fiscal 1997.
Liquidity and Capital Resources
Working capital at July 31, 1997 was $6,372,000 including
$6,980,000 of cash and cash equivalents, compared to working
capital of $8,087,000 at October 31, 1996, including $7,597,000
of cash and cash equivalents and $1,956,000 of short term
investments.
During the 1997 period, $1,834,000 of cash was provided by
operating activities of the Company. During that period,
accounts receivable decreased $615,000 other current assets
increased $254,000 and accounts payable decreased $558,000. The
decrease in accounts receivable is due primarily to the payment
of unbilled deferred costs that were incurred earlier in the
1997 period. Accounts payable decreased $558,000 primarily due
to the decreased revenues during the period. Net cash from
operating activities also included the Company's net income of
$346,000.
The Company's capital expenditures are incurred primarily to
support ongoing contracts and to replace existing equipment.
Capital expenditures for the 1997 period were $2,415,000. A
portion of these expenditures were financed from the recovery of
depreciation expense under cost-reimbursement contracts and
cooperative agreements.
9
In fiscal year 1990, the Company borrowed $1,980,000 from MTU at
a rate of 6% per annum. During fiscal 1996, $877,000 of
principal and interest was converted into 97,397 shares of
common stock of the Company. The indebtedness, including
deferred interest, as of October 31, 1996 was $1,926,000.
During December 1996, the Company repaid to MTU $1,296,000 of
principal and interest. MTU extended the maturity of $630,000
of the original loan to November 30, 1997 with the right to
convert to common stock at $9 per share including interest. The
indebtedness, including deferred interest, as of July 31, 1997
was $658,665. This loan is secured by the pledge of Fuel Cell
Manufacturing Corporation (FCMC) stock and certain machinery,
equipment and leasehold improvements at the Torrington,
Connecticut facility.
In December 1994, the Company entered into a $136,000,000
Cooperative Agreement with the U.S. Department of Energy (DOE)
that provided that the DOE would furnish $78,000,000 to the
Company over the next five years to support the continued
development and improvement of the Company's commercial product.
During fiscal 1997, and 1996, an additional $8,000,000 was added
to the contract, raising the DOE funding level to $86,000,000.
The balance of the funding is expected to be provided by the
Company, the Company's partners or licensees, other private
agencies and utilities. Approximately 60% of the non-DOE
portion has been committed or credited to the project in the
form of in-kind or direct cost share from non-U.S. government
sources. There can be no assurance that the final 40% of the
private sector funding will be available on favorable terms, if
at all. Failure of the Company to obtain the required funding
could result in a delay or reduction of DOE funding.
The Company will need to raise additional funds to expand the
capacity of FCMC. The first stage in this process is to raise
the output capability to 50 MW per year. Approximately $16
million has been estimated for this step. There can be no
assurance that this funding will be available or if available
will result in an output level which will result in a cost
competitive fuel cell stack. Meanwhile, the Company is using
existing funds to expand production capacity incrementally.
During 1996, the Company (ERC) and the Santa Clara Demonstration
Project (SCDP) agreed to certain contract modifications.
10
ERC\Fuel Cell Engineering Corporation (FCE) agreed that at the
option of SCDP, ERC would be responsible for providing up to
$300,000 in funding from non-SCDP sources for use for certain
corrections, reconfigurations or additional test time for the
project. In consideration for the above, SCDP agreed to reduce
FCE's liability for unfunded rework from $1,000,000 to $500,000
and to eliminate certain provisions relating to supplying spare
stacks for the project. During 1996, FCE provided certain
services under this agreement. The balance of this obligation
was completed in the second quarter of 1997 as a result of
extending the power plant test period beyond that provided for
by project funds. This did not impact earnings in the quarter
and is not expected to impact earnings in 1997. The Company
could experience some costs associated with various options
relating to maintaining and/or restoration of the site. It is
not expected that these costs will have a material impact on
1997 operations.
The Company anticipates that its existing capital resources
together with anticipated revenues will be adequate to satisfy
its existing financial requirements and agreements through
fiscal 1997.
Part II Other Information
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION PAGE NO.
EXHIBIT NO.
11 Computation of Earnings (Loss) Per 13
Share for the Three Months Ended
July 31, 1997 and July 31, 1996
and for the Nine Months Ended
July 31, 1997 and July 31, 1996
27 Financial Data Schedule 14
(b) Reports On Form 8-K
NONE
11
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, 1997
12