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, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 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 11, 1997 was 3,922,124.
<PAGE>
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, 1997 and October 31, 1996 2
Consolidated Condensed Statements of Operations
for the three months ended January 31, 1997 3
Consolidated Condensed Statements of Cash Flows
for the three months ended January 31, 1997
and January 31, 1996 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 2. Changes in Securities 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
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<PAGE>
Part 1 - Financial Information
Item 1. Financial Statements
<TABLE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
January 31, Oct 31,
1997 1996
------- --------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 4,734 $ 7,597
Marketable securities 1,980 1,956
Accounts receivable 3,353 2,848
Inventories 65 72
Deferred income taxes 209 209
Other current assets 524 231
------ ------
Total current assets 10,865 12,913
====== ======
Property, plant and equipment, net 7,636 7,245
Other assets, net 3,279 3,382
------ ------
Total Assets $21,780 $23,540
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 1,724 $ 2,380
Accounts payable 804 1,232
Accrued liabilities 992 1,108
Income taxes payable - 11
Current portion of deferred license
fee income 358 95
------ ------
Total current liabilities 3,878 4,826
Long Term Liabilities:
Long-term debt 3,462 4,363
Capital lease obligation 1 8
Deferred license fee income - 17
Deferred income taxes 264 264
------ ------
Total liabilities 7,605 9,478
------ ------
Shareholders' Equity:
Convertible preferred stock, Series
C ($.01 par value); 30,000
shares issued and outstanding at
January 31, 1997 and October 31, 1996,
respectively 600 600
------ ------
Common Shareholders' Equity:
Common stock,($.0001 par value);
8,000,000 shares authorized:
3,921,124 and 3,911,787 shares issued
and outstanding at January 31, 1997
and October 31, 1996, respectively - -
Additional paid-in capital 11,216 11,178
Retained earnings 2,359 2,284
------ ------
Total common shareholders' equity 13,575 13,462
------ ------
Total shareholders' equity 14,175 14,062
------ ------
Total Liabilities and Shareholders'
Equity $21,780 $23,540
====== ======
</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
January 31,
1997 1996
==== ====
<S> <C> <C>
Revenues $ 5,696 $ 6,942
Costs and Expenses:
Cost of revenues 3,878 5,120
Administrative and selling expenses 1,049 1,118
Depreciation 512 512
Research and development 213 166
--------- ---------
5,652 6,916
--------- ---------
Income from operations 44 26
License fee income, net
(includes income from related parties
of $79 and $79 for the three
months ended January 31, 1997
and 1996, respectively) 89 89
Interest expense (101) (126)
Interest and other income, net 99 105
--------- ---------
Income before provision
for income taxes 131 94
Provision for income taxes 56 33
--------- ---------
Net income $ 75 $ 61
========= =========
Primary and fully diluted income
per common share $ .02 $ .02
========= =========
Weighted average common and common
equivalent shares outstanding 4,204,613 4,018,712
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(Dollars in thousands)
(Unaudited)
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 75 $ 61
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 609 512
Deferred income taxes - (10)
Conversion of accrued interest
to principal on long-term debt 11 28
Changes in operating assets and
liabilities:
Accounts receivable (505) 1,023
Inventories 7 (534)
Other current assets (293) (346)
Accounts payable (428) (668)
Accrued liabilities (116) 396
Income taxes payable (11) (71)
Deferred license fee income 246 246
------- -------
Net cash provided by (used in)
operating activities (405) 637
------- -------
Cash flows from investing activities:
Capital expenditures (903) (78)
Payments on other assets (18) (11)
------- -------
Net cash used in
investing activities (921) (89)
------- -------
Cash flows from financing activities:
Repayments of long-term debt (1,575) (158)
Proceeds from long-term financing - 571
Common stock issued 38 21
------- -------
Net cash provided by (used in)
financing activities (1,537) 434
------- -------
Net increase in cash and
cash equivalents (2,863) 982
Cash and cash equivalents,
beginning of period 7,597 5,422
------- -------
Cash and cash equivalents,
end of period $ 4,734 $ 6,404
======= =======
Supplemental disclosure of cash paid
during the period for:
Interest $ 93 $107
Income taxes $117 $243
</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE>
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, 1997 and
the results of operations for the three months ended January 31, 1997
and 1996 and cash flows for such three month periods have been
included.
Information included in the Consolidated Condensed Balance Sheet as of
October 31, 1996 has been derived from audited financial statements
included in the Company's Annual Report on Form 10-K for the year ended
October 31, 1996, but does not include all disclosures required by
generally accepted accounting principles.
The results of operations for the three months ended January 31, 1997
and 1996 are not necessarily indicative of the results to be expected
for the full year.
The reader should supplement the information in this document with
prior disclosures in the form of previous 10-Q's and the 1996 10-K.
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<PAGE>
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
COMPARISON THREE MONTHS ENDED JANUARY 31, 1997 AND JANUARY 31, 1996
Revenues decreased 18% to $5,696,000 in the 1997 period from $6,942,000
in the 1996 period. The expected decrease was due primarily to the
completion in the 1996 period of the manufacture of the fuel cell
modules for the commercial scale two-megawatt direct fuel cell power
plant in Santa Clara, California. Revenues in the 1997 period are
expected to continue to be lower than the comparable periods in 1996.
Cost of revenues decreased 24% to $3,878,000 in the 1997 period from
$5,120,000 in the 1996 period. The decrease was due substantially to
the decreased revenues mentioned above.
Administrative and selling expenses decreased 6% to $1,049,000 in the
1997 period from $1,118,000 in the 1996 period. The decrease was due
to the incurrence of $264,000 of unbilled, but recoverable costs in the
1997 period. These costs will be recognized with the associated
revenues during the remainder of the fiscal year. Depreciation was
unchanged at $512,000 in the 1997 and 1996 periods, respectively.
Research and development expense increased 28% to $213,000 in the 1997
period from $166,000 in the 1996 period. The increase was due to
expanded battery development activities.
Income from operations increased 69% to $44,000 in the 1997 period from
$26,000 in the 1996 period. The increase was due to lower than
expected unrecoverable legal fees in the 1997 period.
License fee income, net, was unchanged at $89,000 in the 1997 and 1996
periods, respectively. License fee income, net, is expected to
increase commencing with April 1997. One month of the battery license
income is expected to be recognized in the second fiscal quarter 1997.
The first full quarter of license income is expected to be recognized
during the third fiscal quarter 1997. The battery license income is
expected to double no later than the quarter commencing with August
1998.
Interest expense decreased 20% to $101,000 in the 1997 period from
$126,000 in the 1996 period. The decrease was due primarily to the
reduction of debt to MTU-Friedrichshafen GmbH (MTU) as a result of
conversion of $666,000 of principal at $9 per share into common stock
of the Company in fiscal 1996 and the repayment of $684,000 of
principal during the current period. The decrease was also due to
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<PAGE>
the Company refinancing its bank debt at more favorable terms during
the 1996 third fiscal period.
Interest and other income, net, decreased 6% to $99,000 in the 1997
period from $105,000 in the 1996 period. The decrease was due
primarily to use of cash for debt repayment during the 1997 period.
Liquidity and Capital Resources
- -------------------------------
Working capital at January 31, 1997 was $6,987,000, including
$4,734,000 of cash and cash equivalents and $1,980,000 of short term
investments, compared to working capital of $8,087,000 at October 31,
1996, including $7,597,000 of cash and cash equivalents and $1,956,000
of short term investments.
During the 1997 period, the Company used $405,000 of cash in operating
activities. During that period, accounts receivable increased
$505,000, other current assets increased $293,000 and accounts payable
decreased $428,000. Accounts receivable increased $505,000 primarily
due to the incurrence of $264,000 of unbilled but recoverable costs
that will be recognized with the associated revenues during the
remainder of the fiscal year. Accounts payable decreased $428,000
primarily due to the lower revenues during the period. Net cash from
operating activities also included the Company's net income of $75,000
and a decrease in accrued liabilities of $116,000.
The Company's capital expenditures are incurred primarily to support
ongoing contracts and to replace existing equipment. Capital
expenditures for the 1997 period were $903,000. A portion of these
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. During fiscal 1996, $877,000 of principal and interest
was converted into 97,397 shares of common stock of the Company. The
indebtedness, including deferred interest, as of October 31, 1996 was
$1,926,000. During December 1996, the Company repaid to MTU $1,296,000
of principal and interest. MTU extended the maturity of $630,000 of
the original loan to November 30, 1997 with the right to convert to
common stock at $9 per share including interest. The indebtedness,
including deferred interest, as of January 31, 1997 was $640,000. This
loan is secured by the pledge of Fuel Cell Manufacturing Corporation
(FCMC) stock and certain machinery, equipment and leasehold
improvements at the Torrington, Connecticut facility.
In December 1994, the Company entered into a $136,000,000 Cooperative
Agreement with the U.S. Department of Energy (DOE) that provided that
the DOE would furnish $78,000,000 to the Company over the next five
years to support the continued development and improvement of the
Company's commercial product. In the fourth quarter 1996, an additional
$6,000,000 was added to the contract, raising the DOE funding level to
$84,000,000. The balance of the
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<PAGE>
funding is expected to be provided by the Company, the Company's
partners or licensees, other private agencies and utilities.
Approximately 60% of the non-DOE portion has been committed or credited
to the project in the form of in-kind or direct cost share from non-U.S.
government sources. There can be no assurance that the final 40%
of the private sector funding will be available on favorable terms, if
at all. Failure of the Company to obtain the required funding could
result in a delay or reduction of DOE funding.
The Company will need to raise additional funds to expand the capacity
of FCMC. The first stage in this process is to raise the output
capability to 50 MW per year. Approximately $16 million has been
estimated for this step. There can be no assurance that this funding
will be available or if available will result in an output level which
will result in a cost competitive fuel cell stack. Meanwhile, the
Company is using existing funds to expand production capacity
incrementally.
During 1996, the Company (ERC) and the Santa Clara Demonstration
Project (SCDP) agreed to certain contract modifications. ERC\Fuel
Cell Engineering Corporation (FCE) agreed that at the option of SCDP,
ERC would be responsible for providing up to $300,000 in funding from
non-SCDP sources for use for certain corrections, reconfigurations or
additional test time for the project. In consideration for the above,
SCDP agreed to reduce FCE's liability for unfunded rework from
$1,000,000 to $500,000 and to eliminate certain provisions relating to
supplying spare stacks for the project. During 1996, FCE provided
certain services under this agreement. The balance of this obligation
will be completed in the second quarter of 1997 as a result of
extending the power plant test period beyond that provided for by
project funds. This is not expected to impact earnings in the quarter
or in 1997. The Company could experience some costs associated with
various options relating to maintaining and/or restoration of the site.
It is not expected that these costs will have a material impact on 1997
operations.
The Company anticipates that its existing capital resources together
with anticipated revenues will be adequate to satisfy its existing
financial requirements and agreements through fiscal 1997.
-8-
<PAGE>
Part II - Other Information
Item 2 - Changes in Securities
On December 10, 1996, the Company issued 361 shares of its Common Stock
to MTU upon the conversion by MTU of certain Promissory Notes of the
Company. Accrued interest of $3,249 was converted in the transaction.
With regard to the foregoing transaction, the Company relied upon
Section 4(2) of the Act, as an exemption from the registration
requirements of the Act. No commissions were paid to any underwriter
in connection with the securities issued in the foregoing transaction.
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
-------------
(a) EXHIBIT DESCRIPTION
EXHIBIT NO.
- -----------
10.48 Technology Transfer and License Agreement
between Energy Research Corporation and
Corning Inc. dated January 20, 1997.
(confidential treatment requested for
certain portions of this document)
11 Computation of Earnings (Loss) Per
Share for the Three Months Ended
January 31, 1997 and January 31, 1996.
27 Financial Data Schedule
(b) Reports On Form 8-K
NONE
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<PAGE>
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 14, 1997
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<PAGE>
EXHIBIT 10.48 (CONFIDENTIAL TREATMENT REQUESTED ON
CERTAIN PORTIONS OF THIS DOCUMENT)
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
THIS AGREEMENT is made and entered into this 20th day of
January, 1997, by and between CORNING INCORPORATED, a New York
corporation having a place of business at One Riverfront Plaza,
Corning, New York 14831 (hereinafter "Corning"), and ENERGY
RESEARCH CORPORATION, a New York corporation having a place of
business at 3 Great Pasture Road, Danbury, CT 06813
(hereinafter "ERC").
INTRODUCTION
ERC has developed certain technology and technical know-how
for a sealed NiZn battery including technology for a
fibrillated electrode and a light-weight nickel electrode that
uses graphite. ERC has represented to Corning that such
technology has been used to develop a NiZn cell as described in
Exhibit A, which cell can be used to develop a NiZn battery.
Corning wishes to develop and commercialize a NiZn battery
using the patents and know-how of ERC and for that purpose
wishes to enter into the license in such patents and know-how
set forth below.
ERC, in consideration of the payments and obligations
described below, wishes to enter into the license of its
patents and know-how to Corning as set forth below for the
purpose of
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allowing Corning to develop, make, have made and sell or
otherwise commercialize a NiZn battery.
In order to effectuate this license, ERC wishes to
provide, and Corning wishes to receive the technical assistance
set forth in the Technical Assistance Agreement of even date.
NOW, THEREFORE, in consideration of the foregoing and the
terms and conditions set forth below and intending to be
legally bound, the parties agree as follows:
I. DEFINITIONS AND SCOPE OF THE AGREEMENT
As used in this Agreement, the following terms shall have
the following respective meanings which are intended to define
the scope of the Agreement:
1.1 "Corning Affiliate" shall mean any entity in which
Corning directly or indirectly owns or controls 50% or more of
voting equity.
1.2 "Development Program" shall have the meaning set forth
in Section 3.1.
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1.3 " Effective Date" is the date set forth above, i.e.
January 20, 1997.
1.4 "ERC Facility" shall mean the ERC facility located at
3 Great Pasture Road, Danbury, CT 06813.
1.5 "ERC Know-How" shall mean all of the technical
information, know-how, inventions (whether patented or not),
trade secrets, and other technical, engineering and design
information and data, including without limitation, all
processes and techniques owned by ERC or in which ERC acquires
a licensable interest, during the term of this Agreement,
useful for the commercial manufacture of NiZn batteries within
the Field, such as designs, drawings, blueprints, flow sheets,
reports, manuals, specifications, process descriptions,
operating procedures, materials and parts lists and other
written or printed materials that are owned by ERC and which
may be useful or helpful to Corning in the development and
production of NiZn batteries within the Field.
1.6 "ERC Patents" shall mean the letters patents
identified in Exhibit B hereto, and any applications for
letters patent which have a Convention Date under the
international Convention for the Protection of Industrial
Property prior to the earlier of the expiration or termination
date of this Agreement and which are owned or acquired by ERC
or in which ERC has or acquires a licensable interest
(including without limitation any U.S. or non-
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U.S. patents and patent applications that are counterparts
thereof, and/or any divisions, continuations,
continuations-in-part or reissues thereof).
1.7 "Field of the Agreement" or "Field" means the
manufacture, use and sale, lease or other transfer of NiZn
batteries for all applications, except electric or hybrid
electric vehicles (i.e. vehicles powered solely by electricity
but which may rely part-time on other means of providing
electric power in addition to storage batteries); provided,
however, that for the purpose of this Agreement, electric or
hybrid electric vehicles do not include any two and three wheel
vehicles, motor bikes and trikes, rickshaw, industrial traction
equipment, lawn care equipment, and off-road recreational
vehicles, regardless of how they may be powered. Examples of
recreational vehicles are golf carts, boats and all terrain
vehicles (ATVs).
1.8 "Licensed Technology" shall mean the ERC Patents and
ERC Know-How.
1.9 "Net Sales" means the sum of all sales at the Net
Selling Price of the NiZn batteries in the Field.
1.10 "Net Selling Price" means the gross invoice price of
NiZn batteries manufactured by or for Corning or its
sublicensee hereunder and then sold by Corning or such
sublicensee in the Field in a normal, bona fide, commercial
transaction without any
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deduction other than the following items of expense to the
extent to which they are actually paid and expressly included
in the gross invoice price;
1. Sales returned;
2. Sales discounts;
3. Duties and taxes on sales;
4. Transportation insurance premiums;
5. Packing expenses on sales; and
6. Transport expenses on sales.
For purposes of computing the Net Selling Price for sales or
other transfers of the NiZn batteries to affiliates of Corning
that do not represent a normal, bona fide commercial
transaction, the Net Selling Price shall be determined as
follows: (a)if the battery is so transferred by Corning for use
in the affiliates own operations, the Net Selling Price for
that battery will be the average sales price of such batteries
to unaffiliated third parties for the same type, size and
quantities of batteries during the same year; or (b) if such a
battery is transferred to an affiliate of Corning for resale,
then the Net Selling Price shall be deemed to be the gross
invoice price charged by the affiliate to its third party
customers of the battery with the deductions described above.
1.11 "Party" means Corning or ERC, or when used in the
plural, Corning and ERC.
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1.12 "Technical Assistance" shall mean the assistance and
services that ERC provides to Corning pursuant to the Technical
Assistance Agreement.
1.13 "Technical Assistance Agreement" shall mean that
agreement of even date herewith between the parties pursuant to
which ERC shall provide certain services and assistance to
Corning as specified therein.
II. LICENSE GRANT
2.1 License. ERC hereby grants to Corning, an exclusive
(even against ERC), worldwide license, with the right to
sublicense, in the Licensed Technology for use in the Field;
provided, however, the foregoing license shall convert to a
nonexclusive worldwide license with the right to sublicense
Corning Affiliates: (a) upon Corning's election under Section
3.2; or (b) as provided in Section 4.4.
2.2 New Licensed Technology. During the period that the
license granted Corning under Section 2.1 remains exclusive, or
if Corning's license becomes non-exclusive and ERC grants a
third party a license in the Licensed Technology in the Field,
in addition to its obligations under Section 3.3, ERC shall
promptly from time to time, but at least once a year, disclose
to Corning any ERC Patents and/or ERC Know-How arising after
the Effective Date hereof and not previously disclosed to
Corning and if
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reasonably requested by Corning, provide Corning from time to
time with a list of all patent applications filed by ERC
relating in any way to the Field.
2.3 Other Agreements. During the period that the License
granted under Section 2.1 remains exclusive, ERC will not work
with any other entity in the Field except that ERC may seek
out, and if awarded, may perform contracts or grants for the
U.S. Government in the area of NiZn battery technology.
III. DEVELOPMENT PROGRAM AND TECHNICAL ASSISTANCE
3.1 Phased Objectives. In connection with its use of the
Licensed Technology, Corning intends to conduct a phased
development program to develop a commercially feasible NiZn
battery (the "Development Program"). The Development Program
will consist of four phases and each phase will have objective
goals or criteria to be reached in order to be successfully
concluded. The objective goals and criteria for phase one and
two are set forth on Exhibit C hereto. The goals and criteria
for each successive phase in the Development Program will be
defined and agreed to in a writing signed by the designated
representatives of the Party prior to the completion of the
preceding phase. However, in the event of a disagreement on the
goals and criteria between ERC and Corning, Corning may
establish the same unilaterally. Each phase of the Development
Program will be considered to be successfully concluded
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upon written notice from Corning to ERC that the objective
goals or criteria have been met.
3.2 Conclusion or Termination of the Development Program.
If Corning gives notice to ERC of the successful conclusion of
the Development Program, or at Corning's option, Corning, by
written notice to ERC declares the Development Program
terminated, then Corning may, in any such written notice, elect
to: (a) commence payments of the minimum royalties set forth in
Section 4.3; (b) convert the exclusive license granted under
Section 2.1 to a nonexclusive license provided Corning's
obligation to make the minimum royalty payments described in
Section 4.3 through calendar year 2004 shall continue; or (c)
surrender the license granted to it by ERC hereunder without
further obligation to ERC and terminate this Agreement
notwithstanding any provision herein to the contrary.
3.3 Transfer of Technical Data. ERC shall, during the
period that the license granted Corning under Section 2.1
remains exclusive, or if Corning's license becomes a non-exclusive
license and ERC grants a third party a license in the
Licensed Technology in the Field, supply or cause to be
supplied to Corning, free of any charges other than the
royalties and charges specified in this Agreement, full up-to-date
information as to ERC Know-How and the ERC Patents in a
form (e.g. drawings, standard operating procedures, blueprints,
written memoranda, training of employees or personal
consultation) that will satisfactorily and expeditiously
accomplish the transfer of the ERC Know-How. ERC will supply
all
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information hereunder in a reasonably useable form and in the
English language. In the event that Corning requests, in
writing, that ERC supply such information in a form that
differs from the form in which ERC has previously supplied or
offered to supply it, then Corning will pay the actual costs
and expenses to be incurred by ERC to prepare the information
in the form requested by Corning; provided, however, that
Corning will not be required to pay the costs of obtaining any
such information if it is already available to ERC in the form
requested by Corning.
3.4 Payments During the Development Program. During the
Development Program and prior to its conclusion or termination
pursuant to Section 3.2, Corning shall make the following
payments to ERC:
(a) During Phase Three of the Development Program,
provided Phase Three is not longer than (confidential
treatment requested) months
(confidential treatment requested) per month payable
every three months
(b) Commencing on the earlier to occur of the
commencement of Phase Four of the Development
Program or (confidential treatment requested) months after
the date of this Agreement
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(confidential treatment requested) per month payable every
three months
The first such payment described above shall be due and payable
on April 1, 1997. All of the foregoing payments shall be
credited against the royalties payable under Article IV
(including without limitation the minimums under Section 4.3
below) at a rate not to exceed, however, (confidential treatment
requested) per year.
3.5 Ownership of Development Program Technology. All
inventions, know-how, trade secrets, data or information
arising out of work on the Development Program whether or not
developed by ERC employees or Corning employees shall be the
sole property of Corning. ERC will, upon request by Corning,
execute and require its employees to execute the appropriate
assignments or other documents necessary to evidence such
ownership by Corning.
IV. ROYALTIES
4.1 Royalty Payments. In consideration of the license
granted herein, and subject to the credit provided in Section
3.4 above, Corning shall pay to ERC the following royalties on
the worldwide Net Sales of NiZn batteries it manufactures or
has manufactured and sells in the Field:
(a) During the period in which the license granted
pursuant to Section 2.1 above is exclusive:
<PAGE>
- 11 -
(confidential treatment requested) of the annual (calendar
year) Net Sales up to two hundred fifty
million dollars ($250,000,000.00), and
(confidential treatment requested) of the annual (calendar
year) Net Sales over two hundred fifty million
dollars ($250,000,000.00)
(b) During the period in which the license granted
pursuant to Section 2.1 above is non-exclusive:
(confidential treatment requested) of annual (calendar year)
Net Sales.
The foregoing royalty payments will commence after the
termination of the Development Program and will terminate upon
the expiration of the last to expire of the ERC Patents, and
will be due and payable semi-annually forty-five (45) days
after each January 1 and June 30 of the calendar year in which
products subject to the royalty have been sold. No sublicense
by Corning of the Licensed Technology under this Agreement will
excuse Corning from paying the foregoing royalties indicated in
Sections (a) and (b) above as if Corning itself were making the
Net Sales of the products subject to the sublicense.
4.2 Royalty Report. When rendering payment of the foregoing
royalties, Corning shall provide ERC with a written report
showing the calculation of the royalty, the number of products
to which the
<PAGE>
- 12 -
royalty is applicable and their Net Selling Price. At its
expense, ERC may, by its designated independent public
accountants, audit once annually the royalty amounts reported
by Corning or its sublicensee to determine the procedure by
which the Net Selling Price was calculated; provided however,
that in the event such an audit discloses that the actual
royalty amount due under this Agreement for the applicable
period is more than five percent (5%) greater than the royalty
amount reported by Corning for such period, Corning shall pay
the reasonable costs of such audit incurred by ERC.
4.3 Minimum Royalty Payment. Through 2004 and thereafter
for the period in which the license granted Corning under
Section 2.1 remains exclusive and subject to the credits
provided in Section 3.4 above and the provisions of Section
4.4, Corning shall pay to ERC minimum annual royalty payments
for the years set forth below according to the following
schedule:
<TABLE>
<CAPTION>
Year Minimum Royalty ($ Millions)
<C> <C>
2000 (confidential treatment requested)
2001 (confidential treatment requested)
2002 (confidential treatment requested)
2003 (confidential treatment requested)
2004 (confidential treatment requested)
2005 (confidential treatment requested)
2006 (confidential treatment requested)
2007 (confidential treatment requested)
<PAGE>
- 13 -
2008 (confidential treatment requested)
2009 (confidential treatment requested)
</TABLE>
Such minimum annual royalty will be payable semi-annually at
the end of each June and December of each calendar year. Unless
this Agreement is terminated and the license granted to Corning
hereunder surrendered or terminated as provided in Section 3.2
above or Section 4.4 below, Corning shall pay the minimum
royalty due under this Section through December 31, 2004.
Thereafter in order to preserve the exclusive nature of the
license hereunder, Corning will have the option of paying the
difference between the minimum royalties set forth above and
the royalties actually incurred by it during the calendar year
covered by such minimum.
4.4 Non-Exclusive Royalty Rate Reduction of Minimums. If
during the first (confidential treatment requested) years of this
Agreement Corning: (a) gives written notice to ERC that it does not
intend to pay the minimum royalty described above for any calendar year
subsequent to calendar year 2004, or (b) elects to convert the
exclusive license to a non-exclusive license as provided in
Section 3.2, then Corning's exclusive rights under Section 2.1
above, shall convert to a non-exclusive license at a royalty
rate of (confidential treatment requested) of Net Sales.
Notwithstanding the foregoing, Corning may, by giving ERC
written notice at least ninety (90) days in advance of the date
on which any of the above-described minimum royalty payments are due,
terminate this Agreement, including the license granted hereunder without
further obligation for the payment of such minimums.
<PAGE>
- 14 -
Corning shall not be required to pay any minimum royalty
payments otherwise due hereunder and payable in any calendar
year subsequent to calendar year 2004 after giving notice of
its election not to make such payment as provided under
subsection (a) above, and Corning shall have no obligation to
make a minimum royalty payments whether or not due before or
after December 31, 2004 after giving notice as provided in
Section 3.2(c) or upon termination of this Agreement and the
license by Corning pursuant to this Section 4.4.
4.5 Most Favored Nations. ERC agrees that it will not
offer to any third party a license in the Field in the Licensed
Technology at royalty rates more favorable than the rates for
the non-exclusive license granted to Corning under this Article
IV in the Field, without the consent of Corning, and reduction
in the remaining royalties payable hereunder to equal those of
such third party.
V. FILING AND MAINTENANCE OF ERC PATENTS
AND RIGHT OF FIRST REFUSAL
5.1 Foreign Filings. ERC will inform Corning of those
countries in which it has filed or intends to file patent
applications concerning ERC Patents it reasonably believes are
useful in the Field. ERC will pay all necessary fees to retain
in force the ERC Patents licensed to Corning under this
Agreement, unless Corning shall advise ERC that it no longer
wishes to retain license rights thereunder, in which case, ERC
may allow such ERC Patents to expire without being liable to
refund any of the royalty
<PAGE>
- 15 -
payments set forth in this Agreement. ERC will pay any fees
required to maintain any ERC Patent in any country and will not
allow such patent or patent application to lapse without giving
Corning at least two (2) months prior notice of such intended
lapse. If Corning in good faith desires to have ERC file,
maintain or prosecute any ERC Patent in any country in which
ERC has not filed, or does not intend to maintain or prosecute
the patents, then Corning will request ERC to file, maintain or
prosecute the patents in such countries and ERC will bear the
reasonable direct and other costs incurred by ERC in performing
the requested tasks so long as the license granted to Corning
hereunder remains exclusive and Corning shall bear such costs
if the license to Corning granted hereunder becomes non-exclusive.
5.2 Third Party Infringement. In the event of an
infringement by a third party of any claim of any ERC Patent in
the Field, Corning shall have the right to undertake legal
action at its own expense against any such third party in its
own name or if so required by law in the name of ERC and ERC
shall fully cooperate in such action and shall, for example,
allow its employees to testify when called on to do so and
shall make available to Corning all relevant documents and
records. Any damages, awards and other remuneration recovered
from such action shall be retained by and be the sole property
of Corning; provided however: (a) that during the period in
which the license granted pursuant to Section 2.1 of this
Agreement is exclusive, if Corning brings such an action of
infringement and
<PAGE>
- 16 -
ERC elects to participate at its own cost for the purpose of
recovering any royalties under this Agreement whichch it has
not received from Corning as a result of such infringement, ERC
shall be entitled to that portion of the recovery which is
granted for such omitted royalties; and (b) in the event that
the license granted pursuant to Section 2.1 hereof becomes non-exclusive
and ERC elects to pursue any such action and Corning
agrees to share the costs of such action, then ERC and Corning
shall agree upon an equitable distribution of the recovery of
any amounts between them as a result of such infringement
action, taking due consideration of each party's share of the
costs in the litigation and the respective interests of the Parties in the
Licensed Technology. In the event either Party learns that
there is or may be an infringement of the ERC Patents, either
party shall notify the other thereof as soon as practicable.
5.3 Expansion of the Field. Upon written request of
Corning, ERC and Corning will negotiate further licenses of the
Licensed Technology outside the Field at terms and conditions,
including reasonable royalties, to be agreed upon by the
parties; provided nothing herein will require ERC to grant
Corning a license in the Licensed Technology for the purposes
of making or supplying NiZn batteries for electric or hybrid
vehicles (i.e. vehicles powered solely by electric but which
may rely part time on other means of providing electric power
in addition to batteries).
<PAGE>
- 17 -
VI. TERM
The term of this Agreement shall be the period beginning
on the Effective Date and continuing until the expiration of
the last to expire of the ERC Patents listed on Exhibit B or
any subsequent valid ERC Patent which is practiced by Corning
under the licenses granted it pursuant to Section 2.1, provided
that Corning's right to the non-exclusive worldwide right to
use the ERC Know-How whether or not covered by ERC Patents
shall survive any such termination, unless this Agreement is
sooner terminated by agreement of the Parties or by Corning as
provided in Section 3.2 or Section 4.4 or by either party as
provided in Section 7.1.
VII. DEFAULT AND TERMINATION
7.1 Default. In the event that a Party (the "defaulting
Party") shall (a) fail to make any payment hereunder when and
as due, or (b) otherwise materially default in its obligations
hereunder and fail to remedy such default within thirty (30)
days after such default shall have been called to its attention
by written notice from the other Party, (c) file a petition in
bankruptcy or make a general assignment for the benefit of
creditors or otherwise acknowledge insolvency, or be adjudged
bankrupt, (d) go or be placed into a process of complete
liquidation other than for an amalgamation or reconstruction,
or (e) suffer the appointment of a receiver for its business
who shall not be discharged within sixty (60) days after his
appointment,
<PAGE>
- 18 -
then, and in any such event, the other Party, at its option,
may terminate, upon thirty (30) days written notice, this
Agreement and all its obligations and any licenses to the
Parties hereunder.
7.2 Non-Waiver. No failure or delay on the part of a Party
to exercise any of its rights under this Article for any one or
more defaults shall be construed to prejudice its rights in
connection with such or any subsequent default.
7.3 License Upon Termination. In the event that Corning
terminates its rights and obligations under this License
Agreement pursuant to Section 3.2 or 4.4 above, it will provide
ERC with copies of any technical information it has received
from ERC or derived from ERC and grant ERC a worldwide right to
use in the Field non-exclusively the patents or know-how owned
by Corning and developed as a result of its use of the Licensed
Technology pursuant to the terms of this license and prior to
the date of such termination, royalty-free for the first five
(5) years and thereafter bearing a royalty of (confidential
treatment requested) payable to Corning of the Net Selling
Price of any product manufactured or
sold thereunder using such patents or know-how for a period of
(confidential treatment requested) years from the date of such
termination. If all of the applicable patents expire,
before the end of such (confidential treatment requested) year period,
the royalties will be attributable to the know-how.
7.4 Non-Competition. If Corning terminates the Agreement,
Corning shall not unilaterally, during a (confidential treatment
requested) year period from
<PAGE>
- 19 -
such termination, sell any NiZn batteries for use in the Field
or license any third parties for such purposes; provided
however, Corning shall not be precluded from developing or
selling any products whether or not in the Field using NiZn
battery technology conceived or developed by a third party. In
the event that Corning develops a NiZn battery for use in the
Field with a third party using such third party technology
prior to the end of the foregoing period, Corning grants to ERC
the right to inspect Corning's NiZn battery manufacturing
facility to the extent necessary to verify that Corning is not
utilizing technology which is proprietary to ERC (as of the
date of termination of this Agreement). Said inspection shall
be pursuant to a separate nondisclosure agreement to be entered
into by ERC.
7.5 Continuing Obligations. Notwithstanding the earlier
termination of this Agreement, the parties obligations under
Sections 3.5, 5.3 and for payment of royalties on the Net Sales
of NiZn batteries, in the Field and subject to the license,
sold before such termination under Article VIII, shall survive
such termination.
VIII. CONFIDENTIAL INFORMATION
Subject to the exercise by Corning of its rights in the
Licensed Technology under Article II, all written information
marked "proprietary" or "confidential" (or if oral,
subsequently reduced to a writing so marked and delivered to
the receiving party
<PAGE>
- 20 -
within thirty (30) days of its oral disclosure) which any Party
discloses to the other as a result of the provisions of this
Agreement, whether contained in blueprints, drawings, written
reports, letters or memoranda, process descriptions, operating
procedures and other written data, shall be treated as
confidential unless (a) such information shall have been in the
possession of the receiving Party prior to its receipt from the
disclosing Party, (b) such information is or becomes part of
the public knowledge or literature through no fault of the
receiving Party, or (c) such information shall otherwise become
available to the receiving Party from a source other than the
disclosing Party, said source not being violative of any
obligation of secrecy with respect to such information.
Information which is so considered to be confidential shall be
held by the receiving Party for its sole benefit and used only
in accordance with this Agreement. The receiving Party shall
use all reasonable efforts to prevent the use of all or any
part of such confidential information belonging to the
disclosing Party in any other connection or the transmission
thereof to third Parties unless and until it has first obtained
the written consent of the disclosing Party specifically
authorizing such use or transmission. The Parties understand
that information may be provided which is subject to a
confidentiality agreement with a third Party. The Parties agree
that such information shall be held in confidence in accordance
with the terms of the third Party confidentiality agreement. No
Party shall be obligated to divulge third Party confidential
information to the other Party.
<PAGE>
- 21 -
IX. NOTICES
All notices required to be given hereunder shall be in
writing and shall be given by first class mail, postage
prepaid, addressed to the Parties as follows:
To Corning: Corning Incorporated
MP-HQ-E1-6
Corning, NY 14831
Attn: Paul Marx, Corporate Manager
New Business Development
cc: Senior Vice President
& General Patent Counsel
Corning Incorporated
SP-FR-02-12
Corning, NY 14831
To ERC: Energy Research Corporation
3 Great Pasture Road
Danbury, CT 06813
Attn: Dr. Bernard S. Baker, President
cc: Ross M. Levine, Contract Manager
& Assistant Secretary
or such other address as a Party shall by notice request.
X. ENTIRE AGREEMENT
The terms and provisions herein contained constitute the
entire Agreement between the Parties and shall supersede all
previous communications, representations, agreements or
understandings, either oral or written, between the Parties
hereto with respect to the subject matter hereof; and no
agreement or
<PAGE>
- 22 -
understanding varying or extending the same will be binding
upon either Party hereto unless in writing, and signed by duly
authorized officers or representatives of the respective
Parties.
XI. MISCELLANEOUS
11.1 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of New York
notwithstanding any choice of law principles to the contrary.
11.2 Legality. The Parties each declare that, to the best
of their respective knowledge, as of the date first written
above, there are no laws or regulations in effect that
materially limit or restrict their ability to fully perform
their obligations under this Agreement.
11.3 Amendment. This Agreement may not be modified or
amended except by a writing duly signed by the authorized
representatives of both Parties.
11.4 Effect of Unenforceable Provisions. In the event any
one or more of the provisions contained in this Agreement shall
be invalid, illegal or unenforceable in any respect, said
provision(s) shall be deemed severed and deleted herefrom and
the validity, legality and/or enforceability of the remaining
provisions contained herein shall not in any way be affected or
impaired thereby.
<PAGE>
- 23 -
11.5 Government Information. Nothing in this Agreement
shall authorize the disclosure of, or access to, classified or
restricted information, material or know-how of the Government
of the United States of America to persons not authorized or
licensed to disclose or receive such classified or restricted
information.
11.6 Relationship. The relationship of the Parties herein
shall be that of independent contractors and nothing herein
contained shall be deemed to create any relationship of agency.
11.7 Assignment. Subject to Corning's rights pursuant to
Article II, neither Party may assign this Agreement without the
written consent of the other Party, except to a wholly-owned or
majority-owned subsidiary of the assigning Party.
IN WITNESS WHEREOF, the Parties have caused this Agreement
to be executed in a manner binding upon them by their duly
authorized officers as of the date first above written.
CORNING INCORPORATED
By: /s/ Robert L. Ecklin
Title: Senior Vice President
ENERGY RESEARCH CORPORATION
By: /s/ Bernard S. Baker
Title: President
<PAGE>
<TABLE>
EXHIBIT NO. 11
ENERGY RESEARCH CORPORATION
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<CAPTION>
Three Months
Ended January 31,
1997 1996
____ ____
<S> <C> <C>
PRIMARY
Shares outstanding, beginning of
period 3,911,787 3,728,914
Weighted average number of shares
issued, retired and issuable
share equivalents 292,826 289,798
_________ _________
Weighted average number of common
and common equivalent shares
outstanding 4,204,613 4,018,712
========= =========
Net income $ 75,000 $ 61,000
========= =========
Net income per common share $ .02 $ .02
========= =========
FULLY DILUTED
Weighted average number of common
and common equivalent shares
outstanding as adjusted for
full dilution 4,274,613 4,214,712
Adjustment for interest, net of
tax, on convertible long-term $ 6,000 $ 19,000
debt ========= =========
Adjusted net income $ 81,000 $ 80,000
========= =========
Net income per common share <F1> $ .02 $ .02
========= =========
<FN>
<FN1> These calculations are submitted in accordance with SEC requirements,
although they are not in accordance with APB Opinion No. 15 because they are
anti-dilutive. </FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ENERGY
RESEARCH CORPORATION'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 4,734
<SECURITIES> 1,980
<RECEIVABLES> 3,353
<ALLOWANCES> 0
<INVENTORY> 65
<CURRENT-ASSETS> 10,865
<PP&E> 18,004
<DEPRECIATION> 10,368
<TOTAL-ASSETS> 21,780
<CURRENT-LIABILITIES> 3,878
<BONDS> 0
0
0
<COMMON> 13,575
<OTHER-SE> 600
<TOTAL-LIABILITY-AND-EQUITY> 21,780
<SALES> 5,696
<TOTAL-REVENUES> 5,696
<CGS> 3,878
<TOTAL-COSTS> 5,652
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (101)
<INCOME-PRETAX> 131
<INCOME-TAX> 56
<INCOME-CONTINUING> 75
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
