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 January 31, 1998
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 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 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 March 13, 1998 was 4,055,222.
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
January 31, 1998 and October 31, 1997 2
Consolidated Condensed Statements of Operations
for the three months ended January 31, 1998 3
and January 31, 1997
Consolidated Condensed Statements of Cash Flows
for the three months ended January 31, 1998
and January 31, 1997 4
Notes to Unaudited Consolidated Condensed
Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
-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)
January 31, October 31,
1998 1997
---------- --------
ASSETS:
Current Assets:
Cash and cash equivalents $4,651 $6,802
Accounts receivable 4,130 2,828
Inventories 78 47
Deferred income taxes 265 205
Other current assets 390 279
------ ------
Total current assets 9,514 10,161
Property, plant and equipment, net 8,194 8,254
Other assets, net 2,968 3,018
------ ------
Total Assets $20,676 $21,433
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $959 $1,702
Accounts payable 474 865
Accrued liabilities 1,251 1,182
Income taxes payable 12 -
Deferred license fee income 304 46
------ ------
Total current liabilities $3,000 $3,795
Long Term Liabilities:
Long-term debt $2,504 $2,699
Deferred income taxes 142 170
------ ------
Total liabilities $5,646 $6,664
------ ------
Shareholders' Equity:
Convertible preferred stock, Series C ($.01 par value);
30,000 shares issued and outstanding
at January 31, 1998 and October 31, 1997, respectively
600 600
------ ------
Common Shareholders' Equity:
Common stock ($.0001 par value); 8,000,000 shares authorized:
4,019,254 and 4,000,650 shares issued and outstanding at
January 31, 1998 and October 31, 1997, respectively
Additional paid-in capital $11,614 $11,460
Retained earnings 2,816 2,709
------- --------
Total common shareholders' equity 14,430 14,169
------- --------
Total shareholders' equity 15,030 14,769
------- --------
Total Liabilities and Shareholders' Equity $20,676 $21,433
======= =======
See notes to consolidated condensed financial statements.
2
Part I - Financial Information
Item I. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended January 31,
1998 1997
---- ----
Revenues $3,907 $5,696
Costs and Expenses:
Cost of revenues 2,447 3,878
Administrative and selling expenses 596 1,049
Depreciation 486 512
------ ------
3,958 5,652
------ ------
Income/ (loss) from operations (51) 44
License fee income, net (includes income from
related parties of $67 and $79 for the three
months ended January 31, 1998 and 1997, respectively) 211 89
Interest expense (83) (101)
Interest and other income, net 51 99
----- -----
Income before provision
for income taxes 128 131
Provision for income taxes 21 56
----- -----
Net income $107 $75
======= =======
Earnings per share:
Basic earnings per share $.03 $.02
========== =========
Basic shares outstanding 4,008,849 3,915,646
--------- ---------
Diluted earnings per share $.03 $.02
======== ========
Diluted shares outstanding 4,183,244 4,222,877
See notes to consolidated condensed financial statements.
3
Part I - Financial Information
Item I. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATEDCONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(Dollars in thousands)
(Unaudited)
1998 1997
---- ----
Cash flows from operatig activities:
Net income $107 $75
net cash provided by (used in) operating activities:
Compensation for options granted 62 -
Depreciation and amortization 570 609
Deferred income taxes (88) -
Conversion of accrued interest to principal
on long-term debt - 11
Changes in operating assets and liabilities:
Accounts receivable (1,302) (505)
Inventories (31) 7
Other current assets (111) (293)
Accounts payable (391) (428)
Accrued liabilities 69 (116)
Income taxes payable 12 (11)
Deferred license fee income 258 246
------ ------
Net cash provided by (used in)
operating activities (845) (405)
Cash flows from investing activities:
Capital expenditures (426) (903)
Payments on other assets (34) (18)
------ ------
Net cash used in investing
activities (460) (921)
------ ------
Cash flows from financing activities:
Repayments of long-term debt (938) (1,575)
Common stock issued 92 38
------ ------
Net cash provided by (used in)
financing activities (846) (1,537)
------ ------
Net increase in cash and
cash equivalents (2,151) (2,863)
------ ------
Cash and cash equivalents, beginning of period 6,802 7,597
------ ------
Cash and cash equivalents, end of period $4,651 $4,734
Supplemental disclosure of cash paid during
the period for:
Interest $74 $93
Income taxes $186 $117
See notes to consolidated condensed financial statements.
4
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 January 31, 1998
and the results of operations for the three months ended January 31,
1998 and 1997 and cash flows for such three month periods have been
included.
Information included in the Consolidated Condensed Balance Sheet as of
October 31, 1997 has been derived from audited financial statements
included in the Company's Annual Report on Form 10-K for the year
ended October 31, 1997, but does not include all disclosures required
by generally accepted accounting principles.
The results of operations for the three months ended January 31, 1998
and 1997 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 1997 10-K.
NOTE 2: LICENSE AGREEMENTS AND SIGNIFICANT CONTRACTS
The Company recognizes from licensees income in each reporting period.
The Company is not obligated to return any of the license income
payments. A royalty is payable to the Company on commercial product
sales. To date the Company has not received any royalty payments. The
Company is obligated to share new technological developments with the
licensee concerning the licensed technology. Under the licenses the
Company is not obligated to continue development of the technology.
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 provide $78,000,000 to the Company over the next five
years to support the continued development and improvement of the
Company's commercial product. 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.
5
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 January 31, 1998 and January 31, 1997
Revenues decreased 31% to $3,907,000 in the 1998 period from
$5,696,000 in the 1997 period. The expected decrease was due
primarily to the completion of the two-megawatt Direct Fuel Cell power
plant project in Santa Clara, California. Revenues in the remaining
1998 periods are expected to continue to be lower than the comparable
periods in 1997.
Cost of revenues decreased 37% to $2,447,000 in the 1998 period from
$3,878,000 in the 1997 period. The decrease was due substantially to
the decreased revenues mentioned above.
Administrative and selling expenses decreased 43% to $596,000 in the
1998 period from $1,049,000 in the 1997 period. The decrease was due
to the incurrence of $916,000 of unbilled, but recoverable costs in
the 1998 period. These costs will be recognized with the associated
revenues during the remainder of the fiscal year. Depreciation
decreased 5% to $486,000 in the 1998 from $512,000 in the 1997 period.
Research and development expense increased 101% to $429,000 in the
1998 period from $213,000 in the 1997 period. The increase was
substantially due to expanded battery development activities.
Income from operations resulted in a loss of $51,000 in the 1998
period compared to $44,000 of income in the 1997 period. The loss was
primarily due to the incurrence of certain non-recoverable employment
costs associated with the hiring of the chief executive officer in the
1997 period. The remainder of the decrease was due to the decrease in
the revenues mentioned above. Income from operations in the remaining
1998 periods will be reduced by certain non-recoverable employment
costs.
License fee income, net, increased 137% to $211,000 in the 1998 period
from $89,000 in the 1997 period. The increase was due primarily to
the recognition of license income under the Company's battery license
with Corning, Inc.
Interest expense decreased 18% to $83,000 in the 1998 period from
$101,000 in the 1997 period. The decrease was due primarily to the
complete repayment of debt to MTU-Friedrichshafen GmbH (MTU) during
the 1998 period and the repayment of $684,000 of principal
to MTU during the 1997 period.
Interest and other income, net, decreased 48% to $51,000 in the 1998
period from $99,000 in the 1997 period. The decrease was primarily
due to the use of cash for debt repayment during the 1998 and 1997
periods.
Liquidity and Capital Resources
Working capital at January 31, 1998 was $6,514,000, including
$4,651,000 of cash and cash equivalents, compared to working capital
of $6,366,000 at October 31, 1997, including $6,802,000 of cash and
cash equivalents.
6
During the 1998 period, the Company used $845,000 of cash in operating
activities. During that period, accounts receivable increased
$1,302,000,and accounts payable decreased $391,000. Accounts
receivable increased $1,302,000 primarily due to the incurrence of
$1,675,000 of unbilled but recoverable costs that will be recognized
with the associated revenues during the remainder of the fiscal year.
Accounts payable decreased $391,000 primarily due to the lower
revenues during the period. Net cash from operating activities also
included the Company's net income of $107,000.
The Company's capital expenditures are incurred primarily to support
ongoing contracts and to replace existing equipment. Capital
expenditures for the 1998 period were $426,000. The capital
expenditures were financed from the recovery of depreciation expense
under cost-reimbursement contracts and cooperative agreements.
In fiscal year 1990, the Company borrowed $1,980,000 from MTU at a
rate of 6% per annum. The payment of principal and interest was
deferred until November 30, 1996. The indebtedness, including
deferred interest, as of October 31, 1996 was $1,926,000. This loan
was secured by the pledge of FCMC stock and certain machinery,
equipment and leasehold improvements at the Torrington, Connecticut,
facility. The accrued interest on the loan was payable at the
Company's option. The principal amount of the loan could 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 fiscal 1996,
$877,000 of this loan was converted into 97,397 shares of common stock
of the Company. MTU extended the maturity of $630,000 of the loan to
November 30, 1997 with the right to convert to common stock at $9 per
share. During December 1996, the Company paid to MTU $1,296,000 of
principal and interest. During December, 1997 the Company paid the
entire balance of principal and interest due in the amount of
$673,000.
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 provide $78,000,000 to the Company over the next five
years to support the continued development and improvement of the
Company's commercial product. 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.
The Company has reviewed the hardware and software of its information
systems. The Company believes the year 2000 will not have a material
impact on its financial position.
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
1998.
7
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION PAGE NO.
EXHIBIT NO.
11 Reconciliation of numerators and denominators 10
of the basic and dilutive EPS computation
January 31, 1998 and January 31, 1997.
27 Financial Data Schedule 11
(b) Reports On Form 8-K
NONE
8
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: March 17, 1998
9