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 April 30, 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 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 June 8,1998 was 4,118,169.
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
April 30, 1998 and October 31, 1997 2
Consolidated Condensed Statements of Operations
for the three months ended April 30, 1998
and April 30, 1997 3
Consolidated Condensed Statements of Operations
for the six months ended April 30, 1998
and April 30, 1997 4
Consolidated Condensed Statements of Cash Flows
for the six months ended April 30, 1998
and April 30, 1997 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 4. Submission of Matters to a Vote of Security
Holders 11
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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Part I - Financial Information
Item I. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
April 30, October 31,
1998 1997
--------- ---------
ASSETS:
CURRENT ASSETS:
Cash & cash equivalents $ 7,728 $ 6,802
Accounts receivable 4,214 2,828
Inventories 149 47
Deferred income taxes 314 205
Other current assets 339 279
--------- ---------
Total current assets 12,744 10,161
Property , plant and equipment, net 7,929 8,254
Other assets, net 2,995 3,018
--------- ---------
Total Assets 23,668 21,433
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 884 $ 1,702
Accounts payable 317 865
Accrued liabilities 1,424 1,182
Customer advances 1,217 -
Income taxes payable 77 -
Current portion of deferred license fee income 1,504 46
--------- ---------
Total current liabilities 5,423 3,795
Long Term Liabilities:
Long-term debt 2,308 2,699
Deferred income taxes 155 170
--------- ---------
Total liabilities 7,886 6,664
--------- ---------
Shareholders' Equity:
Convertible preferred stock, Series C($.01 par value);
30,000 shares issued and outstanding at
April 30, 1998 and October 31, 1997, respectively 600 600
--------- ---------
Common Shareholders' Equity:
Common stock, ($.0001 par value); 8,000,000 shares
authorized: 4,101,669 and 4,000,650 shares issued and
outstanding at April 30, 1998 and October 31, 1997,
respectively - -
Additional paid-in capital 12,118 11,460
Retained earnings 3,064 2,709
--------- ---------
Total common shareholders' equity 15,182 14,169
--------- ---------
Total shareholders' equity 15,782 14,769
--------- ---------
Total Liabilities and Shareholders' Equity 23,668 21,433
========= =========
See notes to consolidated condensed financial statements.
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Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended April 30,
---------------------------
1998 1997
Revenues $6,612 $6,059
Cost and Expenses:
Cost of Revenues 3,851 3,922
Administrative and selling expense 1,790 1,407
Depreciation 406 453
Research and development 564 264
--------- ---------
6,611 6,046
--------- ---------
Income/(loss) from operations 1 13
License fee income, net (includes income from
related parties of $67 and $79 for the three
months ended April 30, 1998 and 1997,
respectively) 385 145
Interest expense (70) (72)
Interest and other income, net 69 60
--------- ---------
Income before provision
for income taxes 385 146
Provision for income taxes 137 70
--------- ---------
Net Income $248 $76
========= =========
Earnings per share:
Basic earnings per share $.06 $.02
========= =========
Basic shares outstanding 4,071,067 3,931,067
========= =========
Diluted earnings per share $.06 $.02
========= =========
Diluted shares outstanding 4,196,802 4,157,748
========= =========
See notes to consolidated condensed financial statements
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Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Six Months Ended April 30,
--------------------------
1998 1997
---------- ----------
Revenues $10,519 $11,755
Cost and Expenses:
Cost of Revenues 6,298 7,800
Administrative and selling expense 2,386 2,456
Depreciation 892 965
Research and development 993 477
--------- ---------
10,569 11,698
--------- ---------
Income/(loss) from operations (50) 57
License fee income, net (includes income from
related parties of $142 and $158 for the six
months ended April 30, 1998 and 1997,
respectively) 596 234
Interest expense (153) (173)
Interest and other income, net 120 159
--------- ---------
Income before provision
for income taxes 513 277
Provision for income taxes 158 126
--------- ---------
Net Income $355 $151
========= =========
Earnings per share:
Basic earnings per share $.09 $.04
========= =========
Basic shares outstanding 4,039,442 3,923,278
========= =========
Diluted earnings per share $.09 $.04
========= =========
Diluted shares outstanding 4,173,507 4,170,304
========= =========
See notes to consolidated condensed financial statements
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Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30,
1998 1997
---------- ---------
Cash flows from operating activities:
Net Income $355 $151
Adjustments to reconcile net income to
net cash provided by/(used in) operating activities:
Compensation for options granted 134 -
Depreciation and amortization 1,077 1,156
Deferred income taxes (124) -
Conversion of accrued interest to principal
on long-term debt - 20
Changes in operating assets and liabilities:
Accounts receivable (1,386) 88
Inventories (102) (42)
Other current assets (60) (244)
Accounts payable (548) (490)
Accrued liabilities 242 (360)
Customer advances 1,217 -
Income taxes payable 77 (5)
Deferred license fee income 1,458 142
--------- ---------
Net cash provided by/(used in)
Operating activities 2,340 416
--------- ---------
Cash flows from investing activities:
Capital expenditures (567) (1,488)
Proceeds from sale of marketable securities - 2,000
Payments on other assets (162) (42)
--------- ---------
Net cash provided by/(used in) investing
activities (729) 470
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt (1,209) (1,846)
Common stock issued 524 63
--------- ---------
Net cash provided by/(used in)
financing activities (685) (1,783)
--------- ---------
Net increase/(decrease) in cash and
cash equivalents 926 (897)
Cash and cash equivalents, beginning of period 6,802 7,597
--------- ---------
Cash and cash equivalents, end of period $ 7,728 $ 6,700
========= =========
Supplemental disclosure of cash paid during
the period for:
Interest $149 $178
Income taxes $316 $203
See notes to consolidated condensed financial statements.
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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 April 30, 1998 and the results of operations for the three and six
months ended April 30, 1998 and 1997 and cash flows for such six 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 six months ended April 30, 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.
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Part I - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
CONTINUED
NOTE 3: EARNINGS PER SHARE
- - --------------------------
Basic and diluted earnings per share are calculated based upon the provisions of
SFAS 128, adopted in 1998, using the following data:
Three Months Six Months
------------ ----------
Ended April 30 Ended April 30
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average basic
Common shares 4,071,067 3,931,167 4,039,442 3,923,278
Effect of dilutive securities
Stock options 95,735 126,581 104,065 147,026
Preferred "C" convertible 30,000 30,000 30,000 30,000
Convertible debt 70,000 70,000
Weighted Average Basic
Common Shares Adjusted
--------- --------- --------- ---------
for diluted calculation 4,196,802 4,157,748 4,173,507 4,170,304
--------- --------- --------- ---------
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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 April 30, 1998 and April 30, 1997
Revenues increased 9% to $6,612,000 in the 1998 period from $6,059,000
in the 1997 period. The increase was due to activity under the United
States Navy contract involving Direct the fuel Cell for shipboard
application. The increase was partially offset by a decrease in other
contract activity. The revenues in the 1997 period included the activity
under the Company's two-megawatt Direct Fuel Cell power plant
demonstration project in Santa Clara, California. The Santa Clara
project was completed during 1997. Revenues for the remainder of fiscal
year 1998 are expected to be lower than fiscal year 1997.
Cost of revenues were relatively unchanged at $3,851,000 and $3,922,000
in the 1998 and 1997 periods, respectively.
Administrative and selling expense increased 27% to $1,790,000 in the
1998 period from $1,407,000 in the 1997 period. The increase was due
primarily to the incurrence of costs in connection with shareholder
relations and in preparation for commercialization, including employment
and consulting costs. Depreciation decreased 10% to $406,000 in the 1998
period from $453,000 in the 1997 period. The decrease is due primarily
to the completion of the depreciation of the original machinery and
equipment installed in the fuel cell manufacturing facility. Research
and development expense increased 114% to $564,000 in the 1998 period
from $264,000 in the 1997 period. The increase was substantially due to
expanded battery development activities.
Income from operations decreased 92% to $1,000 in the 1998 period from
$13,000 in the 1997 period. The decrease was primarily due to the
incurrence of certain non-recoverable employment costs associated with
the hiring of the chief executive officer in the fourth fiscal quarter
of 1997. Income from operations in the remaining 1998 periods will be
reduced by certain non-recoverable employment costs.
License fee income, net, increased 166% to $385,000 in the 1998 period
from $145,000 in the 1997 period. The increase was due substantially to
the battery license agreement with Nan Ya Plastics Corporation of Taiwan
and Xiamen Daily-Used Chemicals Co., Ltd of Xiamen, People's Republic
of China (the "Xiamen License"). The increase was also due to the
battery license agreement with Corning, Inc. During the 1998
period Corning, Inc. terminated its license with the Company,
therefore, license fee income, net, in future periods is not
expected to include payments from Corning, Inc. The amortization
of the ten-year paid-up fuel cell license, which was pre-paid in 1988
with Sanyo Electric Co., Ltd(Sanyo) in Japan, (the "Sanyo License")
ended during the 1998 period. As anticipated, Sanyo did not renew its
license with the Company. License fee income, net, is expected to
-8-
increase substantially during the future periods as a result of the
Xiamen License agreement mentioned above and the Chinese license
agreement for nickel-zinc batteries for electric bicycles announced
subsequent to the 1998 reporting period.
Interest expense was relatively unchanged at $70,000 and $72,000 in
the 1998 and 1997 periods, respectively.
Interest and other income, net, increased 15% to $69,000 in the 1998
period from $60,000 in the 1997 period. The increase is due
substantially to the higher amount of cash on hand as a result of the
China battery license payment.
Results of Operations
- - ---------------------
Comparison Six Months Ended April 30, 1998 and April 30, 1997
Revenues decreased 11% to $10,519,000 in the 1998 period from $11,755,000
in the 1997 period. The expected decrease was due primarily to the
completion of the two-megawatt Direct Fuel Cell power plant demonstration
project in Santa Clara, California in the 1997 period. The decrease in
revenues was partially offset by an increase in billings under the
Company's other contracts. Revenues for the remainder of fiscal year 1998
are expected to be lower than fiscal year 1997.
Cost of revenues decreased 19% to $6,298,000 in the 1998 period from
$7,800,000 in the 1997 period. The decrease was due primarily to the
decreased revenues mentioned above.
Administrative and selling expense decreased 3% to $2,386,000 in the 1998
period from $2,456,000 in the 1997 period. During the 1998 period,
approximately $1,056,000 of unbilled, but recoverable administrative and
selling expenses were incurred. These costs will be recognized with the
associated revenues during the remainder of the fiscal year. Depreciation
decreased 8% to $892,000 in the 1998 period from $965,000 in the 1997
period. The decrease is due primarily to the completion of the
depreciation of the original machinery and equipment installed in the
fuel cell manufacturing facility. Research and development expense
increased 108% to $993,000 in the 1998 period from $477,000 in the 1997
period. The increase was substantially due to expanded battery
development activities including the manufacture and successful testing
of a nickel-zinc electric vehicle battery.
Income from operations resulted in a loss of $50,000 in the 1998 period
compared to $57,000 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 during the
fourth fiscal quarter of l997. The remainder of the decrease was due
to the decrease in 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 155% to $596,000 in the 1998 period
from $234,000 in the 1997 period. The increase was primarily due to the
Xiamen License. The remainder of the increase was due to the battery
-9-
license agreement with Corning, Inc. License fee income, net, during
the remainder of fiscal 1998 is not expected to include payments from
Corning, Inc. due to the termination of the battery license by Corning,
Inc. The amortization of the Sanyo License ended during the 1998 period.
Sanyo did not renew the license with the Company. License fee income,
net, is expected to increase substantially during the future periods as
a result of the Xiamen License agreement mentioned above and the Chinese
license agreement for nickel-zinc batteries for electric bicycles
announced subsequent to the 1998 reporting period.
Interest expense decreased 12% to $153,000 in the 1998 period from
$173,000 in the 1997. The decrease was due primarily to the repayment
of debt in full to MTU-Friedrichshafen GmbH during the 1998 period.
Interest and other income, net, decreased 25% to $120,000 in the 1998
period from $159,000 in the 1997 period. The decrease was due primarily
to the use of cash for the repayment of debt and the use of cash for
unbilled, but recoverable administrative and selling expenses mentioned
above.
Liquidity and Capital Resources
- - -------------------------------
Working capital at April 30,1998 was $7,321,000, including $7,728,000 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.
During the 1998 period, $2,340,000 of cash was provided by operating
activities of the Company. During that period, accounts receivable
increased $1,386,000, and accounts payable decreased $548,000. Accounts
receivable includes the incurrence of $1,494,000 of unbilled but
recoverable costs that will be recognized with the associated revenues
during the remainder of the fiscal year. Accounts payable decreased
$548,000 primarily due to the lower revenues during the period. Net cash
from operating activities also included the Company's net income of
$355,000 and an increase in accrued liabilities of $242,000. During the
period the Company received customer advances of $1,217,000.
The Company's capital expenditures are incurred primarily to support
ongoing contracts and to replace existing equipment. Capital
expenditures for the 1998 period were $567,000. 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
stock in the Company's manufacturing subsidiary 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
-10-
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 the Company's manufacturing facility. 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.
Part II Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
Energy Research Corporation's Annual Shareholders' Meeting was held on
March 11,1998.
The meeting involved an election of the following directors to hold
office until the next annual meeting of shareholders and until a
successor is elected and qualified. All of the directors on the slate
were elected.
Bernard S. Baker Jerry D. Leitman Thomas L. Kempner
Hansraj C. Maru William A. Lawson Michael Bode
Warren D. Bagatelle James D. Gerson Richard M.H.Thompson
Christopher R. Bentley
The results of the voting were as follows:
-11
ELECTION OF DIRECTORS
- - ---------------------
VOTES VOTES
NAME OF DIRECTOR FOR WITHHELD
- - ---------------- ----- --------
Bernard S. Baker 3,597,154 23,650
Jerry D. Leitman 3,597,754 23,050
Thomas L. Kempner 3,587,754 33,050
Hansraj C. Maru 3,598,154 22,650
William A. Lawson 3,598,154 22,650
Michael Bode 3,597,754 23,050
Warren D. Bagatelle 3,586,754 34,050
James D. Gerson 3,597,754 23,050
Richard M.H. Thompson 3,598,154 22,650
Christopher R. Bentley 3,598,154 22,650
AMENDMENT OF 1988 STOCK OPTION PLAN
- - -----------------------------------
An amendment to the Company's 1988 Stock Option Plan, to increase
the number of shares available for issuance thereunder, was
presented and approved at the meeting.
BROKER
VOTES FOR VOTES AGAINST ABSTAIN NON-VOTES
--------- ------------- ------- ---------
1,686,738 149,607 27,105 1,757,124
ADOPTION OF 1998 EQUITY INCENTIVE PLAN
- - --------------------------------------
The adoption of the Company's 1998 Equity Incentive Plan was
presented and approved at the meeting.
BROKER
VOTES FOR VOTES AGAINST ABSTAIN NON-VOTES
--------- ------------- ------- ----------
1,733,940 147,266 26,405 1,712,963
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Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
--------------
(a) EXHIBIT DESCRIPTION
EXHIBIT NO.
- - -----------
10.50 Technology Transfer and License Agreement between Energy Research
Corporation and the Joint Venture ("JV") owned jointly by the Xiamen
Daily-Used Chemicals Co., LTD of China ("XDC") and Nan Ya Plastics
Corporation of Taiwan ("Nan Ya") dated February 21, 1998.
(confidential treatment requested for certain portions of this
document)
27 Financial Data Schedule
(b) Reports On Form 8-K
NONE
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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: June 15, 1998
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