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, 1999
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) 825-6000
-----------------------------------------------------------------------------
(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 15, 1999 was 4,167,573.
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, 1999 and October 31, 1998 2
Consolidated Condensed Statements of Operations
for the three months ended January 31, 1999
and January 31, 1998 3
Consolidated Condensed Statements of Cash Flows
for the three months ended January 31, 1999
and January 31, 1998 4
Notes to Unaudited Consolidated Condensed
Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
1
ENERGY RESEARCH CORPORATION
Consolidated Condensed Balance Sheets
(Dollars in thousands, except share and per share amounts)
(Unaudited)
January 31, October 31,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $10,337 10,304
Accounts receivable 5,217 3,813
Inventories 266 30
Deferred income taxes 1,073 1,073
Other current assets 737 646
------- -------
Total current assets 17,630 15,866
Property, plant and equipment, net 8,428 8,347
Other assets, net 2,551 2,630
------- -------
Total assets $28,609 26,843
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 821 --
Current portion of long-term debt 723 755
Accounts payable 648 620
Accrued liabilities 4,031 2,928
Deferred license fee income 1,592 1,329
------- -------
Total current liabilities 7,815 5,632
Long-term liabilities:
Long-term debt 1,785 1,944
Deferred income taxes 177 177
------- -------
Total liabilities 9,777 7,753
------- -------
Minority interest 3,220 3,220
------- -------
Shareholders' equity:
Convertible preferred stock, Series C ($.01 par value);
30,000 shares outstanding at January 31, 1999
and October 31, 1998, respectively 600 600
------- -------
Common shareholders' equity:
Common stock, ($.0001 par value); 8,000,000 shares authorized:
4,135,873 and 4,129,273 shares issued and outstanding at
January 31, 1999, and October 31, 1998, respectively
Additional paid-in capital 13,033 12,943
Retained earnings 1,979 2,327
------- -------
Total common shareholders' equity 15,012 15,270
------- -------
Total shareholders' equity 15,612 15,870
------- -------
Total liabilities and shareholders' equity $28,609 26,843
======= =======
See notes to consolidated condensed financial statements.
2
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Three Months Ended January 31,
1999 1998
----------- -----------
Revenues $ 6,284 3,907
Costs and expenses:
Cost of revenues 4,355 2,447
Administrative and selling expenses 1,361 596
Depreciation 330 486
Research and development 823 429
----------- -----------
Total costs and expenses 6,869 3,958
----------- -----------
Income (loss) from operations (585) (51)
License fee income, net (includes income from
related parties of $62 and $67 for the three
months ended January 31, 1999 and 1998, respectively) (16) 211
Interest expense (53) (83)
Interest and other income, net 65 51
----------- -----------
Income (loss) before provision for
income taxes (589) 128
Provision (benefit) for income taxes (241) 21
----------- -----------
Net income (loss) $ (348) 107
=========== ===========
Earnings (loss) per share:
Basic earnings (loss) per share $ (0.08) 0.03
=========== ===========
Basis shares outstanding 4,164,992 4,008,849
Diluted earnings (loss) per share $ (0.08) 0.03
=========== ===========
Diluted shares outstanding 4,164,992 4,183,244
See notes to consolidated condensed financial statements
3
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(Dollars in thousands)
(Unaudited)
1999 1998
-------- --------
Cash flows from operating activities:
Net income (loss) $ (348) 107
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Compensation for options granted 33 62
Depreciation and amortization 433 570
Deferred income taxes -- (88)
Changes in operating assets and liabilities:
Accounts receivable (1,404) (1,302)
Inventories (236) (31)
Other current assets (91) (111)
Accounts payable 28 (391)
Accrued liabilities 1,103 81
Deferred license fee income 263 258
-------- --------
Net cash used in operating activities (219) (845)
-------- --------
Cash flows from investing activities:
Capital expenditures (412) (426)
Payments on other assets (23) (34)
-------- --------
Net cash used in investing activities (435) (460)
-------- --------
Cash flows from financing activities:
Proceeds from short term debt 821 --
Repayment on long-term debt (190) (938)
Common stock issued 57 92
-------- --------
Net cash provided by (used) in financing activities 688 (846)
-------- --------
Net increase (decrease) in cash and cash equivalents 33 (2,151)
-------- --------
Cash and cash equivalents-beginning of period 10,304 6,802
-------- --------
Cash and cash equivalents-end of period $ 10,337 4,561
======== ========
Supplemental disclosure of cash paid during the period for:
Interest $ 54 74
Income taxes $ 100 186
See notes to consolidated consensed 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 ARegistrant"), 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, 1999 and the results of operations for the three months ended January 31,
1999 and 1998 and cash flows for such three month periods have been included.
As described in the Company's Form 8-K filed March 9, 1999, the Company on
February 22, 1999, effected a spin-off to its stockholders of 100% of the shares
of Evercel, Inc. ("Evercel"), a newly formed, wholly-owned subsidiary of the
Company. The Company transferred to Evercel the principal assets and liabilities
related to the Battery Group. Following the transfer, the Company distributed to
its stockholders in a tax-free distribution one share of Evercel Common Stock
for every three shares of Common Stock of the Company held.
Information included in the Consolidated Condensed Balance Sheet as of October
31, 1998 has been derived from audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended October 31, 1998, but
does not include all disclosures required by generally accepted accounting
principles.
The results of operations for the three months ended January 31, 1999 and 1998
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 1998 10-K.
NOTE 2: LICENSE AGREEMENTS AND SIGNIFICANT CONTRACTS
The Company recognizes income from licensees 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.
5
In December 1994, the Company entered into a Cooperative Agreement with the U.S.
Department of Energy (DOE) pursuant to which the DOE agreed to provide funding
to the Company over the next five years to support the continued development and
improvement of the Company's commercial product. The current aggregate dollar
amount of that contract is $144,000,000 with the DOE providing $86,000,000 in
funding. 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 90% 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. Failure of the Company to obtain the required final 10% of the funding
from non-U.S. government sources on a timely basis, could result in delay or
reduction of DOE funding.
6
Part I - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
CONTINUED
NOTE 3: EARNINGS PER SHARE
For the Quarter Ended January 31, 1999
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) (Amount)
----------- ------------- --------
Basic EPS
Income available to
common shareholders $(348,000) 4,164,992 $(.08)
Effect of Dilutive Securities
Stock based compensation --
Preferred "C" convertible --
---------
Diluted EPS
Income available to
common shareholders $(348,000) 4,164,992 $(.08)
========= ========= =====
For the Quarter Ended January 31, 1999
--------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) (Amount)
----------- ------------- --------
Basic EPS
Income available to
common shareholders $ 107,000 4,008,849 $.03
Effect of Dilutive Securities
Stock based compensation 144,395
Preferred "C" convertible 30,000
---------
Diluted EPS
Income available to
common shareholders $ 107,000 4,134,999 $.03
========= ========= ====
The computation of diluted loss per share for the first quarter of fiscal 1999
follows the basic calculation since common stock equivalents were antidilutive.
The weighted average number of options outstanding for the period ending January
31, 1999 is 446,720.
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 January 31, 1999 and January 31, 1998
Revenue increased 61% to $6,284,000 in the first quarter of fiscal 1999 from
$3,907,000 for the same period last fiscal year. The expected increase was due
primarily to revenue recognized in the quarter related to the DOE contract and
the recognition of $1,100,000 in revenue on the completion of a contract for the
development and manufacture of fuel cell stack components. Revenue in each of
the remaining 1999 quarters is expected to be less than the current quarter.
Cost of revenues increased 77% to $4,335,000 in the first quarter of fiscal 1999
from $2,447,000 in the same period last fiscal year. The increase was due to the
increased revenues mentioned above, costs related to the development of
manufacturing processes associated with fuel cell stack development and
operating costs of the battery group.
Administrative and selling expense increased 128% to $1,361,000 in the first
quarter of fiscal 1999 period from $596,000 in the same period last fiscal year.
The Company's 1999 provisional overhead rates were approved by the government
which allowed the Company to bill and recognize revenue on allowable costs in
the quarter. During the first quarter of 1998, $916,000 of unbilled but
recoverable administrative and selling expenses were classified as an unbilled
receivable which was recognized as revenue and expense later in the year.
Additionally, the Company realized increased legal and professional and
administrative costs associated with the spin-off and commercialization of
Evercel, Inc.
Research and development expense increased 92% to $823,000 in the first quarter
of fiscal 1999 from $429,000 in the same period last fiscal year. This was
primarily a result of increased costs as compared to the same period last fiscal
year related to the commercialization of the battery technology.
Income from operations resulted in a loss of $585,000 in the first quarter of
fiscal 1999 compared to a loss of $51,000 in the same period last fiscal year.
The loss was primarily due to ERC absorbing the commercialization and operating
cost of the battery group for the entire quarter and to the added costs
associated with the development of manufacturing processes for fuel cell stack.
License fee income, net, resulted in a loss of $16,000 in the first quarter of
fiscal 1999 compared to $211,000 of income in the same period last fiscal year.
The loss resulted from the termination of the Company's battery license with
Corning in May 1998 and costs associated with battery acceptance testing under
the Nan Ya License Agreement.
8
Interest expense decreased 38% to $53,000 in the first quarter of fiscal 1999
from $83,000 in the same period last year. The decrease resulted from debt
repayment in 1998, partially offset by incurring short term debt in the quarter
to finance the battery group commercialization effort.
Interest and other income, net, increased 27% to $65,000 in the first quarter of
fiscal 1999 from $51,000 in the same period last year. Increased cash available
for investing resulted in the increase.
Liquidity and Capital Resources
The Company has funded its operations primarily through cash generated from
operations including government contracts and cooperative agreements,
borrowings, and sales of equity. In 1998, the Company also received license fees
of $1,500,000 from the Xiamen-Three Circles Co. (formerly Xiamen Daily-Used
Chemicals Co.,) and Nan Ya Plastics Corp. License Agreement and $3,000,000 from
the Xiamen-Three Circles Co. (formerly Xiamen Daily-Used Chemicals Co.) License
Agreement. The $3,000,000 was subsequently invested in the Joint Venture to
obtain a 50.5% ownership position therein.
At January 31, 1999, the Company had working capital of $9,815,000 including
$10,337,000 of cash and cash equivalents, compared to working capital of
$10,234,000 including $10,304,000 of cash and cash equivalents at October 31,
1998.
During the period, the Company used $219,000 of cash in operating activities.
During that period, accounts receivable increased $1,404,000 due to the
increased revenues in the quarter. The $1,103,000 increase in liabilities are
attributable to employees benefits, legal and professional fees and customer
advances.
The Company's capital expenditures are incurred primarily to support ongoing
contracts to replace existing equipment and outfit the Evercel manufacturing
facility. Capital expenditures for the 1998 period were $412,000.
On December 22, 1998, Evercel entered into a commitment to borrow up to
$1,000,000 for the purpose of acquiring machinery and equipment. As of January
31, 1999, Evercel had borrowed $821,000 against this commitment. The notes are
due on June 30, 1999. ERC has unconditionally guaranteed the commitment and has
pledged $1,000,000 of cash. The Note is payable from the proceeds of the planned
Evercel Rights Offering.
On February 5, 1999, Evercel, Inc. entered into a Loan agreement and Line of
Credit Note (Line of Credit) to borrow up to $3,450,000 (including borrowings
noted above) from ERC for working capital and capital expenditures purposes. Any
outstanding borrowings will be secured by all of the Company's tangible and
intangible personal property and bear interest at the London Interbank Offered
Rate (LIBOR) plus 1 1/2%, payable
9
monthly in arrears. The $3,450,000 Line of Credit represents the maximum
borrowing limit and is being reduced by the sum of the following: a) any
outstanding advances under the First Union Line of credit; b) any amounts ERC
has paid on account of the Lease Guaranty; c) the net proceeds received on
account of any sale or issuance of any equity securities by the Company,
including the Rights Offering; and d) the amount of any loans (excluding the
First Union Line of Credit) obtained by the company after the date of this
agreement, including the present value of the Company's lease obligations. The
Line of Credit terminates on August 5, 2000 or the date on which the company has
received net proceeds from items c) and d) above equal to at least $3,450,000,
whichever is earlier.
As described in the Company's Form 8-K filed March 9, 1999, the Company on
February 22, 1999, effected a spin-off to its stockholders of 100% of the shares
of Evercel, Inc. ("Evercel"), a newly formed, wholly-owned subsidiary of the
Company. The Company transferred to Evercel the principal assets and liabilities
related to the Battery Group. Following the transfer, the Company distributed to
its stockholders in a tax-free distribution one share of Evercel Common Stock
for every three shares of Common Stock of the Company held.
During the 1996 period, the Company entered lending arrangements with First
Union National Bank, a subsidiary of First Union Corporation, which provide for
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 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
term loan facility was fully repaid in 1998.
In December 1994, the Company entered into a Cooperative Agreement with the U.S.
department of Energy (DOE) pursuant to which the DOE agreed to provide funding
to the Company over the next five years to support the continued development and
improvement of the company's commercial product. The current aggregate dollar
amount of that contract is $144,000,000 with the DOE providing $86,000,000 in
funding. 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 90% 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. Approximately 90% 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. Failure of the Company to obtain the required final 10% of
the funding from non-U.S. government sources on a timely basis, could result in
delay or reduction of DOE funding.
The Company will need to raise additional funds to expand its Direct Fuel Cell
manufacturing facility to 50MW per year. Approximately $16 million has been
estimated for this step. The company cannot assure that this funding will be
available on favorable terms, if at all, or that such funding if obtained would
enable the Company to achieve the desired output level. In the interim, the
company is using existing funds to expand production capacity incrementally.
10
The Company anticipates that its existing capital resources together with
anticipated revenues will be adequate to satisfy its existing financial
requirements and agreements through 1999. However, the Company may require
additional capital beginning in 1999 if the aforementioned plan to expand
manufacturing capability in its Torrington, CT facility is implemented.
Year 2000 Readiness Disclosure
The Company is evaluating the Y2K issue with respect to its financial and
management information systems, its products and its suppliers. At this point in
its assessment, the Company is not currently aware of any Y2K problems that are
reasonably likely to have a material effect on the Company's business, results
of operations or financial condition, without taking into account the Company's
efforts to avoid such problems.
The Company believes that its accounting and information systems will be
compliant as a result of installing new software. The Company anticipates that
it will be able to complete, test and implement all upgrades of this software
that may be material to its business on a timely basis. The implementation of
this software is part of an on-going project to upgrade the information systems
at ERC. If this software is not implemented on a timely basis, the cost to
upgrade the existing software would be $18,000. There is a risk that
notwithstanding its internal review, if the Company has not properly identified
all year 2000 compliance issues with respect to its management and information
systems, the Company may not be able to implement all necessary changes to these
systems on a timely basis and within budget. Such a failure could result in a
material disruption to the Company's business, which could have a material
adverse effect on its business, results of operations and financial condition.
The Company is also exposed to the risk that it could experience material
payment or sales delays from its major customers, including the U.S. Government,
due to year 2000 issues relating either to their management information or
production systems. The Company has inquired of these third parties in an
attempt to ascertain their year 2000 readiness. At this time, the Company is
unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third parties, such as its suppliers and
customers, to achieve year 2000 compliance. Moreover, such third parties, even
if year 2000 compliant, could experience difficulties resulting from year 2000
issues that may affect their suppliers, service providers and customers. As a
result, although the Company does not currently anticipate that it will
experience any material shipment delays from their major product suppliers or
any material payment or sales delays from its major customers due to year 2000
issues, these third parties could experience year 2000 problems that could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Apart from its activities described herein, the Company plans to develop a
contingency plan to address Y2K issues. As the Company is primarily involved in
the research and development of fuel cell technology, it is not
11
subject to major supply issues at this time. The Company believes that alternate
sources of material are available to supply Company requirements and the Company
will prepare its plans to identify these. To the extent that the Company does
not identify any material non-compliant year 2000 issues affecting the Company
or third parties, such as the Company's suppliers, service providers and
customers, the most reasonably likely worst case year 2000 scenario is a
systemic failure beyond the control of the Company, such as a prolonged
telecommunications or electrical failure, or a general disruption in United
States or global business activities that could result in a significant economic
downturn. The Company believes that the primary business risk will be limited
to, loss of customers or orders, increased operating costs, inability to obtain
materials on a timely basis or other business interruptions of a material
nature, as well as claims of mismanagement, misrepresentation, or breach of
contract, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Exposure
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long term debt obligations.
The investment portfolio includes short term United States Treasury instruments
with maturities of three months or less. Cash is invested overnight with high
credit quality financial institutions. The Company's notes payable expire in
2000 and 2001. Based on the Company's overall interest exposure including all
interest rate sensitive instruments, a near-term change in interest rate
movements would not materially affect the consolidated results of operations or
financial position of the Company.
Currency Rate Exposure
The Company's functional currency is the U.S. dollar. During 1998, the Company
invested $3,000,000 in a joint venture. This investment is currently being
maintained in U.S. dollars. Since the cash deposit with the joint venture is in
U.S. dollars, the Company's foreign currency risk is limited to the investment
in the joint venture. To the extent that the Company expands its international
operations, the Company will be exposed to increased risk of currency
fluctuation.
12
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION PAGE NO.
EXHIBIT NO.
27 Financial Data Schedule 15
(b) Reports On Form 8-K
The Registrant filed a Form 8-K March 9, 1999 to report that on February
22, 1999 the Registrant effected a special tax-free distribution to its
stockholders of one share of Common Stock, $.01 par value, of Evercel, Inc.
for every three shares of Common Stock, $.0001 par value, of the Registrant
held of record as of the close of business on February 19, 1999; Evercel,
Inc. was formerly a wholly-owned subsidiary of the Registrant to which the
Registrant had transferred, effective February 16, 1999, the principal
assets and liabilities related to the Registrant's battery business group.
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/ Joseph G. Mahler
---------------------------------------
Joseph G. Mahler
Senior Vice President, CFO
Treasurer/Corporate Secretary
Dated: March 17, 1999
14