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, 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 September 9,1998 was 4,128,273.
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, 1998 and October 31, 1997 2
Consolidated Condensed Statements of Operations
for the three months ended July 31, 1998
and July 31, 1997 3
Consolidated Condensed Statements of Operations
for the nine months ended July 31, 1998
and July 31, 1997 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, 1998
and July 31, 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 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Part I - Financial Information
Item I. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
July 31, October 31,
1998 1997
ASSETS:
CURRENT ASSETS:
Cash & cash equivalents $10,276 $6,802
Accounts receivable 4,700 2,828
Inventories 356 47
Deferred income taxes 821 205
Other current assets 508 279
Total current assets 16,661 10,161
Property , plant and equipment, net 8,190 8,254
Other assets, net 2,717 3,018
Total Assets $27,568 $21,433
LIABILITIES AND SHAREHOLDERS EQUITY:
Current Liabilities:
Current portion of long-term debt $ 784 $1,702
Accounts payable 806 865
Accrued liabilities 1,102 1,182
Customer advances 2,080 -
Current portion of deferred license fee income 1,417 46
Total current liabilities 6,189 3,795
Long Term Liabilities:
Long-term debt 2,111 2,699
Deferred income taxes 219 170
Total liabilities 8,519 6,664
Minority Interest 3,220 -
Shareholders Equity:
Convertible preferred stock, Series C($.01 par value);
30,000 shares issued and outstanding at
July 31, 1998 and October 31, 1997, respectively 600 600
Common Shareholders Equity:
Common stock, ($.0001 par value); 8,000,000 shares
authorized: 4,126,398 and 4,000,650 shares issued and
outstanding at July 31, 1998 and October 31, 1997,
respectively - -
Additional paid-in capital 12,514 11,460
Retained earnings 2,715 2,709
Total common shareholders equity 15,229 14,169
Total shareholders equity 15,829 14,769
Total Liabilities and Shareholders Equity $27,568 $21,433
See notes to consolidated condensed financial statements.
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 July 31,
1998 1997
Revenues $5,537 $6,448
Cost and Expenses:
Cost of Revenues 3,633 3,721
Administrative and selling expense 1,612 1,792
Depreciation 333 451
Research and development 548 383
6,126 6,347
Income/(loss) from operations (589) 101
License fee income, net (includes income from related parties of $62 and $79 for
the three months ended July 31, 1998 and 1997,
respectively) 53 207
Interest expense (57) (98)
Interest and other income, net 81 75
Income/(loss) before provision
for income taxes (512) 285
Provision for income taxes (163) 90
Net Income/(loss) ($349) $195
Earnings per share:
Basic earnings/(loss) per share ($.08) $.05
Basic shares outstanding 4,116,318 3,976,610
Diluted earnings per share N/A $.05
Diluted shares outstanding 4,302,487 4,158,878
See notes to consolidated condensed financial statements.
Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended July 31,
1998 1997
Revenues $16,056 $18,203
Cost and Expenses:
Cost of Revenues 9,931 11,521
Administrative and selling expense 3,998 4,248
Depreciation 1,225 1,416
Research and development 1,541 860
16,695 18,045
Income/(loss) from operations (639) 158
License fee income, net (includes income from related parties of $204 and $237
for the nine months ended July 31, 1998 and 1997,
respectively) 649 441
Interest expense (210) (271)
Interest and other income, net 201 234
Income before provision
for income taxes 1 562
Provision for income taxes (5) 216
Net Income $ 6 $346
Earnings per share:
Basic earnings per share $-0- $.09
Basic shares outstanding 4,065,357 3,941,176
Diluted earnings per share $-0- $.05
Diluted shares outstanding 4,227,457 4,179,869
See notes to consolidated condensed financial statements.
Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31,
1998 1997
Cash flows from operating activities:
Net Income $ 6 $ 346
Adjustments to reconcile net income to
net cash provided by/(used in) operating activities:
Compensation for options granted 206 -
Depreciation and amortization 1,536 1,697
Deferred income taxes (567) -
Conversion of accrued interest to principal
on long-term debt - 29
(Gain) loss on disposal of property 1 -
Changes in operating assets and liabilities:
Accounts receivable (1,872) 615
Inventories (309) (45)
Other current assets (229) (254)
Accounts payable (59) (558)
Accrued liabilities (80) (32)
Customer advances 2080 -
Income taxes payable - (2)
Deferred license fee income 1,371 38
Net cash provided by/(used in)
Operating activities 2,084 1,834
Cash flows from investing activities:
Capital expenditures (1,162) (2,415)
Proceeds from sale of marketable securities - 1,999
Payments on other assets (10) (42)
Net cash provided by/(used in) investing
activities (1,172) (458)
Cash flows from financing activities:
Repayments of long-term debt (1,506) (2,116)
Sale of minority interest in joint venture 3,220 -
Common stock issued 848 123
Net cash provided by/(used in)
financing activities 2,562 (1,993)
Net increase/(decrease) in cash and
cash equivalents 3,474 (617)
Cash and cash equivalents, beginning of period 6,802 7,597
Cash and cash equivalents, end of period $ 10,276 $ 6,980
Supplemental disclosure of cash paid during
the period for:
Interest $210 $267
Income taxes $377 $314
See notes to consolidated condensed financial statements.
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,
1998 and the results of operations for the three and nine months ended July 31,
1998 and 1997 and cash flows for such nine 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 nine months ended July 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 earned. 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) in which 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.
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 Nine Months
Ended July 31 Ended July 31
1998 1997 1998 1997
Weighted average basic
Common shares 4,116,318 3,976,610 4,065,357 3,941,176
Effect of dilutive securities
Stock options 156,169 82,268 132,100 138,693
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 4,302,487 4,158,878 4,227,457 4,179,869
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, 1998 and July 31, 1997
Revenues decreased 14% to $5,537,000 in the 1998 period from $6,448,000 in the
1997 period. The decrease was due primarily to the completion of the
two-megawatt Direct Fuel Cell power plant project in Santa Clara, California in
the 1997 period. The decrease in revenues was partially offset by an increase in
billings under the Companys other contracts.
Cost of Revenues were relatively unchanged at $3,633,000 and $3,721,000 in the
1998 and 1997 periods, respectively.
Administrative and selling expense decreased 10% to $1,612,000 in the 1998
period from $1,792,000 in the 1997 period. The administrative and selling
expense includes approximately $571,000 of costs associated with the
commercialization of the Company's battery business. Approximately 35% of these
costs included expenses associated with several agreements in China including a
nickel-zinc battery license for bicycles, scooters and other applications and
the formation of a joint venture to manufacture and sell batteries and a second
joint venture to develop various electrochemistry based products. Approximately
35% of these costs were associated with the negotiations to acquire a privately
held battery company. After due diligence issues arose, the Company decided not
to proceed with the transaction. The remainder of the costs were internal
expenses associated with the above as well as internal costs associated with the
potential battery company spinoff currently being considered. Depreciation
decreased 26% to $333,000 in the 1998 period from $451,000 in the 1997 period.
The decrease is due primarily to the completion of the depreciation of the
original equipment installed in the fuel cell manufacturing facility. Research
and development expense increased 43% to $548,000 in the 1998 period from
$383,000 in the 1997 period. The increase was substantially due to expanded
battery development activities.
Income from operations resulted in a loss of $589,000 in the 1998 period
compared to $101,000 of income in the 1997 period. In addition to the $571,000
administrative and selling expense discussed above, the Company also included
$65,000 of other internal expenses in cost of revenues associated with the
battery activity explained above. Income from operations also included certain
non-recoverable employment costs associated with the hiring of the chief
executive officer in the fourth fiscal quarter of 1997. Income from operations
during the remainder of 1998 will be
reduced by certain non-recoverable employment costs.
License fee income, net, decreased 74% to $53,000 in the 1998 period from
$207,000 in the 1997 period. The decrease is primarily due to Corning, Inc.
terminating the battery license agreement with the Company during the second
fiscal quarter 1998. The remainder of the decrease was due to the incurrence of
cost associated with a battery test as part of the electric vehicle battery
license with Nan Ya Plastics Corporation of Taiwan and Xiamen Three Circles Co.,
Ltd of Xiamen, Peoples Republic of China. 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 second fiscal
quarter 1998. As anticipated, Sanyo did not renew its license with the Company.
License fee income, net, is expected to be higher in the fiscal year 1998 than
in fiscal year 1997. The previously deferred license fee income of $1,300,000 is
expected to be recognized as income during the second fiscal quarter 1999.
Interest expense decreased 42% to $57,000 in the 1998 period from $98,000 in the
1997 period. The decrease was due primarily to the complete repayment of debt to
MTU-Friedrichshafen (MTU) during the first fiscal quarter 1998. The Company also
completed the repayment of a machinery and equipment loan to First Union Bank
during the current 1998 period.
Interest and other income, net, increased 8% to $81,000 in the 1998 period from
$75,000 in the 1997 period.
Results of Operations
Comparison Nine Months Ended July 31, 1998 and July 31, 1997
Revenues decreased 12% to $16,056,000 in the 1998 period from $18,203,000 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 Companys other contracts. Revenues for fiscal
year 1998 are expected to be lower than fiscal year 1997.
Cost of revenues decreased 14% to $9,931,000 in the 1998 period from $11,521,000
in the 1997 period. The decrease was due primarily to the lower revenues
mentioned above. During the 1998 period approximately $847,000 of unbilled, but
recoverable engineering and manufacturing overhead costs were incurred. These
costs will be recognized with the associated revenues during the remainder of
the fiscal year.
Administrative and selling expense decreased 6% to $3,998,000 in the 1998 period
from $4,248,000 in the 1997. The administrative and selling expense includes
approximately $571,000 of costs
associated with the commercialization of the Company's battery business,
including licenses, joint ventures, a terminated acquisition and spinoff costs
mentioned above in the comparison of the three months ended July 31, 1998.
During the 1998 period, approximately $1,201,000 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 13% to $1,225,000 in the 1998 period from $1,416,000 in
the 1997 period. The decrease is due primarily to the completion of the
depreciation of the original equipment installed in the fuel cell manufacturing
facility. Research and development expense increased 79% to $1,541,000 in the
1998 period from $860,000 in the 1997 period. The increase was substantially due
to expanded battery activities including the manufacture and successful testing
of a nickel-zinc electric vehicle battery. A second electric vehicle battery is
currently being manufactured.
Income from operations resulted in a loss of $639,000 in the 1998 period
compared to $158,000 of income in the 1997 period. In addition to the $571,000
administrative and selling expense discussed above, the Company also included
$65,000 of other internal expenses in cost of revenues associated with the
battery activity explained above. Income from operations also included certain
non-recoverable employment costs associated with the hiring of the chief
executive officer in the fourth fiscal quarter of 1997. Income from operations
during the remainder of 1998 will be reduced by certain non-recoverable
employment costs.
License fee income, net, increased 47% to $649,000 in the 1998 from $441,000 in
the 1997 period. The increase was due substantially to the battery license
agreement with Nan Ya Plastics Corporation of Taiwan and Xiamen Three Circles
Co., Ltd.( formerly Xiamen Daily- Used Chemicals Co., Ltd.) of Xiamen, Peoples
Republic of China. 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 Sanyo
License ended during the second fiscal quarter 1998. As anticipated, Sanyo did
not renew its license with the Company. License fee income, net, is expected to
be higher in the fiscal year 1998 than in fiscal year 1997. The previously
deferred license fee income of $1,300,000 is expected to be recognized as income
during the second fiscal quarter 1999.
Interest expense decreased 23% to $210,000 in the 1998 period from $271,000 in
the 1997 period. The decrease was due primarily to the complete repayment of
debt to MTU-Friedrichshafen (MTU) during the first fiscal quarter 1998. The
Company also completed the repayment of a machinery and equipment loan to First
Union Bank during the current 1998 period.
interest and other income, net, decreased 14% to $201,000 in the 1998 period
from $234,000 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
expenses mentioned above.
Liquidity and Capital Resources
Working capital at July 31,1998 was $10,472,000, including $10,276,000 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. The cash and cash
equivalents at July 31, 1998 is also inclusive of $3,220,000 in two majority
owned joint ventures in China.
During the 1998 period, $2,084,000 of cash was provided by operating activities
of the Company. During that period, accounts receivable increased $1,872,000,
and accounts payable decreased $59,000. Accounts receivable includes the
incurrence of $2,048,000 of unbilled but recoverable costs that will be
recognized with the associated revenues during the remainder of the fiscal year.
Net cash from operating activities also included the Companys net income of
$6,000 and an increase in deferred license fee income $1,371,000. During the
period the Company received customer advances of $2,080,000.
The Company's capital expenditures are incurred primarily to support ongoing
contracts and to replace existing equipment. Capital expenditures for the 1998
period were $1,162,000. The capital expenditures were financed from the recovery
of depreciation expense under cost-reimbursement contracts and cooperative
agreements.
During the 1998 period the Company invested $481,000 in the aggregate in two
majority owned joint ventures in the People's Republic of China. The Company
obtained a 51% ownership in Xiamen Three Circles-ERC Battery Company, Ltd. and
granted the joint venture a nickel-zinc license for certain market applications
including electric bicycles, scooters and other applications. The Company also
obtained a 66 2/3% ownership of Xiamen-ERC Technology Company, Ltd. to develop
and commercialize various advanced electrochemical technologies.
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
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) in which 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.
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION
EXHIBIT NO.
10.51 Technology Transfer and License Contract, dated May 29,
1998 for Ni-Zn Battery Technology among Xiamen ERC
Battery Corp., Ltd., and Xiamen Daily-Used Chemicals Co.,
Ltd. and Energy Research Corporation. (confidential
treatment requested)
10.52 Cooperative Joint Venture Contract, dated as of July 7,
1998, between Xiamen Three Circles Co., Ltd. and Energy
Research Corporation for the establishment of Xiamen Three
Circles-ERC Battery Corp., Ltd., a Sino Foreign
Manufacturing Joint Venture.(confidential treatment
requested)
10.53 Amendment to the Energy Research Corporation 1988 Stock
Option Plan, as amended.
10.54 The Energy Research Corporation 1998 Equity Incentive Plan.
27 Financial Data Schedule
(b) Reports On Form 8-K
NONE
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 14, 1998