UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended 10/31/96
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 Number)
3 Great Pasture Road, Danbury, CT 06813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 792-1460
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
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. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant was approximately $36,509,392, which is based on the
closing price of $14.75 on December 31, 1996. On January 23, 1997
there were 3,920,624 shares of Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the registrant's definitive proxy
statement relating to its forthcoming 1997 Annual Meeting of
Stockholders to be filed not later than 120 days after the end of
registrant's fiscal year ended October 31, 1996 is incorporated by
reference in Part III of this Report on Form 10-K.
<PAGE>
FORM 10-K ANNUAL REPORT
INDEX
PAGE
PART I
Item 1. Business 3
Item 2. Properties 27
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote
of Security 27
Holders
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 28
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operation 30
Item 8. Financial Statements and Supplementary
Data 37
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial
Disclosure 37
PART III
Item 10. Directors and Executive Officers of
the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain
Beneficial Owners and Management 37
Item 13. Certain Relationships and Related
Transactions 37
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 38
Signatures 44
2
<PAGE>
PART 1.
ITEM 1. BUSINESS
INTRODUCTION
============
ENERGY RESEARCH CORPORATION (ERC or the Company) is a
leading developer of electrochemical technologies. At
present, the Company is focusing its efforts on the
development, demonstration and commercialization of the
carbonate fuel cell and the development of an advanced
nickel-zinc secondary battery.
Fuel Cell
- ---------
The carbonate fuel cell converts the chemical energy of a
fossil fuel into electricity in a one-step galvanic
process which is highly efficient, quiet, and causes
virtually no pollution from oxides of nitrogen or oxides
of sulfur. Unlike most fuel cell power plants, the ERC
system feeds a fuel such as natural gas directly into the
fuel cell. In most other systems, it is necessary to
first produce hydrogen from the fuel in an external device
and then feed the hydrogen to the fuel cell for conversion
into electricity in the fuel cell. The Company believes
its power plant simplification leads to a more efficient
and lower cost system than other fuel cell systems. ERC
calls its approach the Direct Fuel Cell (DFC). The DFC
operates at a temperature of about 1200 degress
Fahrenheit. At this temperature, precious metal
electrocatalysts are not required and a high quality waste
heat is available for cogeneration. To date, most of the
substantial research, development and demonstration costs
associated with the DFC have been provided by the Federal
Government and the electric utility industry, the latter
being potential customers for the final product. The
Company is also working together with Mitsubishi Electric
Corp. and Sanyo Electric Co., Ltd. in Japan and Daimler
Benz affiliate MTU-Friedrichshafen GmbH in Europe,
licensees of the Company, in the product development.
(See "License Agreements")
The Company believes that markets for the DFC will be the
investor owned electric and gas utilities (IOU), municipal
owned electric utilities (MOU) and rural electric
utilities, independent power producers, industrial and
commercial cogeneration, and special situations such as
landfill gas fueled units. The Company has focused
initially on developing power plants in the 2 to 3
megawatt size range.
For the IOU and large MOU customers, the units or
multiples thereof, could serve in a distributed generation
mode in their grid systems. For smaller rural electric
and MOU customers, the units could be used in an
intermediate or base load mode. Non-utility customers may
also be attracted by cogeneration applications.
3
<PAGE>
At this time, the Company has conducted the first
commercial scale demonstration of its DFC at a site in
Santa Clara, California. This project demonstrated a
nominal 2 megawatt (1.8 MWAC) DFC power plant. The plant
startup began in April 1996. This is the largest carbonate
fuel cell power plant in the world and the largest fuel
cell of any type operated in the United States.
The project was approximately 60% funded by a group of
electric utility companies: the City of Santa Clara, the
Los Angeles Department of Water and Power, Southern
California Edison Company, Sacramento Municipal Utility
District, the City of Vernon, California and the National
Rural Electric Cooperative Association, represented by
United Power Association, the Salt River Project, Northern
California Power Agency and approximately 40% by the U.S.
Department of Energy (DOE).
The power plant startup was smooth after some minor
adjustments to the DC to AC invertor unit. The power
plant surpassed its 1.8 MW AC design goal by reaching a
peak power of 1.93 MWAC. About 550 hours into the test,
peculiar electrical behavior was observed. Voltage spikes
were randomly observed and the Company chose to shut down
the power plant in order to check out the phenomena and
avoid any possible damage to the digital control system.
On examining the plant, it was determined that the
dielectrics in the piping system used to electrically
insulate the fuel cell stacks' high voltage had been
damaged. The cause of the problem was the use of a glue to
attach thermal insulation to the stacks, pipes and
dielectric insulators. This glue, applied during the
final stage of manufacturing, was converted to carbon
during plant startup. The carbon acted as a conductor,
negating the effectiveness of the electrical insulators.
The result was damage to dielectrics and other components.
The Company replaced the four highest voltage dielectrics
and certain piping, cleaned the carbon from the remaining
dielectrics and made repairs where there was visible
evidence of damage. A decision was made not to remove
certain parts for further inspections in the interest of
saving time and costs. To a certain extent, using the
glue has prevented making an unambiguous assessment of the
fuel cell performance in the power plant. The power plant
was restarted, achieved a level of 1.25 MW but was
prevented from higher levels by reduced performance of
certain stacks. On this basis, it was decided to
reconfigure the power plant into an 8 stack 1 MW unit.
The Company believes that the initial event relating to
the glue incident might have caused greater damage than
originally anticipated. The stacks' reconfiguration was
accomplished in the field in a 10 hour period and the
power plant was put back on line, after the addition of a
new AC to AC transformer. Through January 4, 1997, the
plant was at 750 kW or 75% of rated power for the 1
megawatt plant. One stack out of eight was at a slightly
lower performance than the others. As of January 27,
1997, the plant has already operated longer, with over
3,375 hours of grid connected time, than any other first-of-its-kind
megawatt size fuel cell demonstration power
plant. Total
4
<PAGE>
operating time is 6,900 hours with 4,900 hours of hot time
and it has delivered over 1,550 MWH to the Santa Clara
grid. In the second week of January 1997, the power plant
was placed in a hot standby condition to perform
maintenance on a balance of plant component. The
maintenance was completed in about ten hours and the power
plant was put back in a grid connected mode but could not
sustain a 725 kW load. As of January 9, 1997, the power
plant was placed on half load, 500 kW, where it is now
operating. Continued operation of the plant in 1997 could
be impacted by the availability of operating funds.
Decisions by the SCDP Steering Committee, the Company, and
other factors, including input from DOE will determine the
duration of testing. A decision to terminate operation of
this demonstration could be reached at any time. After the
termination of the demonstration, the fuel cells will be
returned to ERC for final analysis.
The design of this demonstration plant did not represent
the commercial offering. The design and development of
the commercial product are being conducted under a
cooperative agreement signed with the Department of
Energy's Morgantown Energy Technology Center in the first
fiscal quarter of 1995. Currently under this agreement,
DOE has agreed to provide $84 million over a five year
period to further design, develop and demonstrate a
commercial prototype power plant with improved, larger
fuel cells and a more compact design. Major development
emphasis under this agreement will focus on fuel cell and
total power plant cost reduction and improved operating
endurance, although there can be no assurance that
required cost reductions and improved endurance will be
attained. The design work in 1996 continued at a reduced
level as funding was limited by the delays in the
government's appropriation process, resolved in April
1996, and additional expenses associated with the
aforementioned and other issues at the Santa Clara
Demonstration Project.
In fiscal 1996 about $17.2 million was spent under this
agreement. This is less than the scheduled amount under
the agreement.
Fiscal 1997 is off to a reasonable start due to a timely
appropriations bill this year. However, the funding level
is below the funds required by the cooperative agreement.
The combination of Santa Clara project delays and expense
combined with the reduced level of activity in 1996 has
resulted in the Company extending its planned
commercialization into the 2001 time period. There can be
no assurance that the Company will not experience further
delays.
The Company is substantially dependent on government
appropriations for funding its development and
demonstration efforts. The latter has huge advantages for
the investor but also introduces an element of risk and
schedule uncertainty in the Company's plans.
5
<PAGE>
In addition to DOE agreements, the Company essentially
completed an Advanced Research Project Agency (ARPA)
contract in 1996 for a diesel fuel powered DFC. This
project successfully demonstrated the ability of the
Company's DFC to operate on a liquid fuel. This is
important as a potential emergency fuel for both
commercial and military installations in the event natural
gas supply is interrupted. In testing to date, the
Company has now demonstrated the ability to operate on
natural gas at sites in Germany, Denmark and California
and on coal gas in Louisiana and Germany and on JP-8 and
diesel fuels at its facilities in Danbury.
Additionally, the Company received 1996 ARPA funds for new
work under the Company's cooperative agreement with DOE.
These new funds, received in September 1996, the last
month of the Federal fiscal year, will be used to support
power plant simulations and certain logistical operations
in conjunction with a planned East Coast Demonstration.
New power plant demonstration work beyond the Santa Clara
project is planned to begin in 1997 at ERC's Danbury site.
DOE received National Environmental Protection Act
approval in October 1996. It is now planned that a higher
power, but significantly more compact power plant than
Santa Clara is expected to begin to operate in early 1999.
In 1997 ERC will focus on continuing to produce larger
area cells and larger stacks at its Fuel Cell
Manufacturing Corporation (FCMC), a subsidiary in
Torrington, CT and will initiate testing of these new
components and stacks in Danbury. In addition, FCMC is
installing new manufacturing equipment to produce larger
cells at higher production rates. Already in progress is
an upgrading of ERC's Danbury 125 kW test facility to 400
kW capability. Construction work was completed in 1996
and testing of the facility will begin in 1997.
The schedules presented here are forward looking
statements subject to uncertainties in funding
availability and technological development issues and are
subject to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995 (PSLRA 95).
Battery
- -------
In the battery area, the Company continues to focus its
efforts on the nickel-zinc rechargeable battery. In the
past year, the Company has succeeded in duplicating the
600 cycle, single cell, life of its nickel-zinc battery,
in multicell batteries. This substantial improvement
should make the nickel-zinc battery an attractive
competitor with existing nickel cadmium and nickel metal
hydride rechargeable batteries. Because zinc is lighter
in weight, less expensive and has about 30% higher voltage
output, the resulting nickel-zinc battery delivers more
energy per unit weight at a potentially lower cost than
either nickel cadmium or nickel metal hydride batteries.
Moreover, zinc is environmentally benign
6
<PAGE>
compared with cadmium. Also during the year, the Company
built and had tested a full size battery for hybrid
electric vehicle operation. Data is protected by a
secrecy agreement with the testing partner.
The Company believes that markets for the nickel-zinc
battery would be similar to the existing markets for
nickel metal hydride and nickel cadmium, i.e., computers,
power tools, high end portable lighting, and medical
electronics. In addition, the nickel-zinc battery has the
potential to compete in the upper cost segment of the lead
acid battery markets where it would enjoy a substantial
weight advantage. In the first quarter of 1997, the
Company entered into a license agreement with Corning,
Incorporated. to further develop and commercialize the
technology for a broader range of consumer product
applications. (See License Agreements)
The Company has tested a 4 Ahr size cell suitable for
electronic devices and has designed and began to test a 2
Ahr cell for use as a power source for a Left Ventricular
Assist Device under a National Institute of Health Small
Business Innovative Research Phase II award.
The Company is also holding discussions with potentially
interested partners for either licensing or joint venture
opportunities in the electric vehicle battery area but
there can be no assurance the Company will be successful
in this endeavor. While the battery activity at ERC
remains small relative to its fuel cell activities, the
Company believes that recent developments could result in
significant battery business opportunities in the future,
but this is contingent on many factors including the
success of partners and licensees in commercialization,
the continued availability of funds, presently provided by
internal research and development allowances under
existing contracts and agreements, continuation of which
cannot be guaranteed, successful technical results and the
ability to reach agreements with outside partners to help
in marketing and manufacturing. The Company intends to
expand its development activity beyond the nickel-zinc
technology into related battery areas.
LICENSING AGREEMENTS
====================
General
- -------
The Company has entered into international licensing
agreements with several major corporations. Generally, the
Company has reserved for itself the exclusive rights to
manufacture and sell carbonate fuel cells in North
America. The licensees pay annual license fees to the
Company. These agreements provide that upon termination,
the licensee must pay royalties to the Company in order to
continue to use the Company's technology and patents
during the life of those patents.
7
<PAGE>
ERC has benefited from its licenses and has received and
generally expects to continue to receive valuable
technical and manufacturing information from its
licensees. By coordinating its own development program
with the extensive effort of its partners, it has
leveraged its own efforts substantially.
The following table lists (i) the licensees of the
Company's fuel cell technology; (ii) the term of each
license agreement, (iii) the territory in which the
technology is licensed, (iv) the technology licensed and
(v) the type of license:
<TABLE>
<CAPTION>
Term of Technology Type of
License Agreement Territory Licensed License
_______ _________ _________ __________ ________
<C> <C> <C> <C> <C>
Sanyo 1998 Japan, Phosphoric Exclusive
Australia Acid Fuel
and certain Cells
Asian
countries
Sanyo 1998 Japan and Carbonate Non-exclusive
certain Fuel Cells
Asian
countries
Mitsubishi Automatically Japan and Carbonate Exclusive
Electric extends for certain Fuel Cells (subject to
Corporation one year Asian the rights
(MELCO) terms unless countries of Sanyo)
terminated
Daimler Benz 1999, with Europe, Carbonate Exclusive
affiliate MTU option to Middle Fuel Cells (subject to
Friedrichshafen extend East, Africa, the rights of
GmbH South America MELCO and ERC)
</TABLE>
Although all the above fuel cell licenses are currently in
effect, there can be no assurance that the licensees will
continue their agreements with the Company.
Sanyo Electric Co., Ltd. (Sanyo)
- --------------------------------
ERC is a party to two license agreements with Sanyo, a
large Japanese electronics manufacturer. The first
agreement entered into in June 1980 covers phosphoric acid
fuel cell technology and grants to Sanyo an exclusive
license to utilize ERC's phosphoric
8
<PAGE>
acid fuel cell patents and know-how in Japan, Australia
and certain other Asian countries (the "exclusive
territory") and a non-exclusive license for the same
purposes in all other countries of the world except for
the United States. Under this agreement, ERC is to be
paid royalties at a rate based on kilowatts of electrical
generating capacity of phosphoric acid fuel cell systems
made, used or sold by Sanyo. ERC also has been granted a
royalty free license to use improvements of Sanyo relating
to the phosphoric acid fuel cell subsystems.
The second Sanyo Agreement entered into in October, 1986,
relates to carbonate fuel cells. In this agreement, Sanyo
is granted a non-exclusive license to use ERC's carbonate
fuel cell technology and know-how in Japan, South Korea,
China and certain other Asian countries (the "non-exclusive territory").
Under this agreement, Sanyo is
obligated to pay royalties to ERC at a rate based on
kilowatts of electrical generating capacity sold for
carbonate fuel cell systems and ERC has been granted a
non-exclusive royalty free license to all of Sanyo's
carbonate fuel cell improvements. Pursuant to this
agreement, Sanyo has built external reforming fuel cell
stacks in varying sizes up to thirty kilowatts, and has
tested these stacks with liquid fuels such as propane and
kerosene. Sanyo is also testing direct fuel cells using
natural gas as fuel. Activity at Sanyo decreased in 1996
and the Company does not expect to receive significant new
technical information in the future.
Under each of the Sanyo licenses, Sanyo has agreed to pay
ERC specified yearly license fees for the right to receive
further know-how of ERC. In 1988, at ERC's request and to
assist ERC in its buy-out from its parent company, Sanyo
prepaid the annual fees due to be paid over the lives of
the agreements through 1998. This agreement expires in
February 1998, unless extended by Sanyo.
Mitsubishi Electric Corporation (MELCO)
- ---------------------------------------
In November 1981, ERC and MELCO, a Japanese electronics
and electric equipment manufacturer entered into a license
agreement relating to carbonate fuel cell technology.
This agreement is automatically extended yearly unless
canceled by either party in advance. Under this
agreement, MELCO is granted an exclusive license (subject
to the rights of Sanyo) to utilize ERC's patents and know-how for
carbonate fuel cells in Japan, South Korea, and
certain other Asian countries. It is also granted a non-exclusive
license in the other countries of the world,
except for certain countries including the United States.
ERC is granted a royalty-free license to the improvements
of MELCO for carbonate fuel cells in the United States,
Canada and Mexico. ERC also receives an annual license
fee from MELCO and is to be paid a royalty based on
kilowatts of electric generating capacity sold for
carbonate fuel cells made or sold by MELCO. Technical
collaboration with MELCO is good and they are pursuing the
design and construction of a 200 kW
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power plant incorporating Direct Fuel Cell technology.
Daimler Benz affiliate MTU-Friedrichshafen (MTU) GmbH
- -----------------------------------------------------
In 1989, the Company entered into a license agreement with
DASA, a German aerospace and aircraft equipment
manufacturer and a subsidiary of Daimler Benz Corporation,
one of the largest industrial companies in Europe. That
agreement was transferred to a subsidiary of DASA, MTU
Friedrichshafen in 1993 and in 1994, MTU became a
subsidiary of AEG Daimler Benz Industrie and now Daimler
Benz affiliate MTU-Friedrichshafen GmbH ("MTU Agreement").
Pursuant to the terms of the MTU Agreement, ERC granted to
MTU an exclusive license to use, develop and sell
carbonate fuel cells in Europe, subject to certain rights
of others, and a non-exclusive license in South America,
the Middle East and Africa, subject to certain rights of
ERC and others. MTU has agreed to conduct research,
development, manufacturing and marketing programs in the
area of carbonate fuel cell technology and to make
available the results to the Company. In addition, MTU
has agreed to pay to ERC an annual license fee through at
least 1999 and a royalty based on kilowatts of electrical
generating capacity using carbonate fuel cells sold by MTU
or its permitted licensees.
During 1996, MTU designed and constructed an innovative
balance of plant (BOP) system for cogeneration power
plants. ERC's wholly owned subsidiary, Fuel Cell
Manufacturing Corporation produced 300 cells for MTU in
1996 and the first quarter of 1997 and the Company expects
MTU to conduct a hot fuel cell test in 1997 using their
BOP.
Electric Power Research Institute (EPRI)
- ---------------------------------------
In 1988, ERC entered into a license agreement with EPRI,
granting ERC the right to use carbonate fuel cell
proprietary data developed under certain EPRI contracts
with ERC. ERC has agreed to pay EPRI a one-time fee of
approximately $50,000 upon ERC's first commercial sale of
a carbonate fuel cell stack of one Megawatt or larger in
size, and a royalty upon commercial sales of carbonate
fuel cell stacks. Under a recent development contract
between EPRI and a subsidiary of the Company dealing with
the engineering and design of the balance of plant for a
full scale carbonate fuel cell power plant, EPRI has
agreed to license to the subsidiary on a worldwide basis
the balance of plant equipment technology developed and to
provide the subsidiary with worldwide sublicensing rights.
The subsidiary has agreed to pay royalties to EPRI for
this license based on sales and licensing of carbonate
fuel cell power plants, with the total royalties capped at
twice the funding provided by EPRI under the contract.
EPRI also has been granted certain rights to balance of
plant equipment technology of the subsidiary.
10
<PAGE>
Pacific Gas & Electric Company (PG&E)
- ------------------------------------
In 1986, ERC entered into a carbonate fuel cell
development contract with PG&E. Under the agreement, in
return for PG&E monetary support for ERC research and
development in carbonate fuel cell technology, ERC agreed
to pay to PG&E a percentage of any income received from
license fees and royalties and from sales of ownership
rights in any invention, design or improvement of
carbonate fuel cells and a percentage of income received
from net sales of carbonate fuel cells. ERC also entered
into a second agreement with PG&E in 1990 which contained
certain licensing terms. In 1992-1996 ERC paid PG&E
$34,000 in each year under the first agreement.
Santa Clara
- -----------
In 1993, the Company obtained an exclusive license with
rights to sublicense through the year 2005 to use the
balance of plant design for the 2 MW demonstration power
plant built in Santa Clara, CA. (See "Principal
Development Contracts"). The license becomes non-exclusive after
2005 or earlier, at the option of Santa
Clara, if the Company does not meet certain due diligence
events. In addition, beginning three years after
commencement of production of fuel cells at a commercial
scale manufacturing plant, the Company is required to make
royalty payments of up to $15 per kilowatt (subject to
consumer price index and other adjustments) on sales of
fuel cell power plant stacks of capacities of 100
kilowatts or more. This royalty is capped at twice the
funding provided by the utility participants in the Santa
Clara Project.
U.S. Department of Energy (DOE)
- ------------------------------
In connection with certain contracts and grants from DOE,
ERC has agreed to pay DOE 10% of the annual license income
received from MTU, up to $500,000. Through 1996, ERC has
paid to DOE a total of $175,000 (See "Principal
Development Contracts").
Corning, Incorporated
- ---------------------
An exclusive worldwide license agreement with Corning,
Incorporated (Corning), was signed in the first quarter of
1997. The object of this agreement is to commercialize
the Company's nickel-zinc secondary battery technology for
a broad range of consumer product applications. The
agreement provides that Corning will take the lead in the
further development of manufacturing, marketing and sales.
The agreement provides estimated expenditures by Corning
over a period of time in the multi-phase development,
pilot manufacturing and full scale manufacturing program.
The agreement may be terminated by Corning any time prior
to the
11
<PAGE>
commercialization of the battery, in which case the
Company would receive benefits and rights to certain
Corning developments and activities. The agreement
requires Corning to pay the Company initial license fees
in 1997 and increased license fees in 1998. The agreement
also requires Corning to pay royalties on sales including
minimum royalties.
COMMERCIALIZATION
=================
Direct Fuel Cell
- ----------------
Markets
- -------
The Company believes there are five principal markets for
its fuel cell power plants: (i) small municipal electric
utilities and rural electric utilities, (ii) large
electric utilities, (iii) landfill sites where landfill
gases may be used to produce electricity, (iv) independent
power producers and cogenerators and (v) gas utilities.
Initially, the Company intends to target the needs of the
small municipal electric utilities and rural electric
cooperatives and the incremental needs of large municipal
and investor-owned electric utilities and cogeneration.
The vehicle for approaching these markets will be a
nominal 2.8 MW unit currently being designed or a multiple
thereof. The Company has also begun to consider a single
module version (1.4 MW) of its power plant in order to
capture additional market opportunities. In general, the
cost per kilowatt increases as the power plant becomes
smaller.
The Company anticipates that a shortage of generating
capacity will begin in the 1999-2000 time frame but this
view is not shared by many energy experts. The Company
believes due to the efficiencies which can be achieved at
fuel cell power plants as small as two megawatts, that
these plants could provide a cost effective means for
small municipal utilities to generate their own power.
There are approximately 2,000 municipally or cooperatively
owned public utilities in the United States representing
90,000 megawatts, or 13% of the United States electric
utility market.
Large utilities also are potential users of the fuel cell
power plant technology. According to the U.S. Department
of Energy's (DOE), Energy Information Administration (EIA)
Energy Outlook 1996 report, a projected 319 gigawatts of
new capacity will be needed by 2015 to meet the growing
demand for electricity and to offset retirements.
Approximately 81% of this new capacity will be fueled by
natural gas. The Company believes most of this nearly
$319 billion market, estimated by the Company at
approximately $1.0 billion per gigawatt, will develop in
the 2002 to 2015 time period. According to EIA
projections, the fastest growing segment of electric
generator capability will be the fuel cell with an annual
growth rate of 53.5% in the 1996-2015 time frame beginning
in 2005.
Large utilities may be interested in the fuel cell both as
an efficient, low pollution and cost effective generating
system as
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<PAGE>
well as a dispersed generator <F1>. Since fuel cells can
be located at, or in place of, distribution and
transformer stations, they may provide greater flexibility
in the transmission and distribution of electricity. The
modular aspects of fuel cells may also allow larger
utilities to introduce phased capacity construction into
their generation system. In this approach, the utilities
could expand electricity generation capacity to keep pace
with demand by adding blocks of fuel cells on a periodic
basis as required, thereby improving cash flow as compared
with building a single large plant. With larger fuel cell
systems, the utility could substitute coal-derived gas, if
available and economically attractive, for natural gas as
the operative fuel. This flexibility of the fuel cell
system, in terms of both its modularity and its
adaptability to different fuels, may allow utilities to
better control their fuel costs and avoid making a
commitment 10 to 12 years in advance to construct a large
power station. The Company is not active in the
development of coal gasification facilities and would be
dependent on this technology being commercialized in order
to use coal as a fuel.
The U.S. electric utility industry has been edging toward
change for several years triggered in part by the Energy
Policy Act of 1992. 1994 saw the beginning of a major
upheaval caused by major moves toward direct access and
deregulation by the State of California and elsewhere. As
a result, there were substantial layoffs in the industry,
a process which continued throughout 1995, a
reorganization of EPRI and a heightened atmosphere of
competition. In 1996, a number of significant mergers
took place within the electric IOU sector and between
electric and gas IOUs.
This competition, in an industry once secure by
territorial monopolies, should result in further major
reorganizations. Some utilities have already decided to
phase out of the generation side of the business leaving
it to independent power producers and non-utility
generators. Others have merged with either other electric
utilities or gas supply companies. Regardless of these
options, it is obvious that substantial generation
equipment will always be required but it is becoming more
difficult to identify who the purchaser will be and the
timing and magnitude of the purchases.
At present, capacity margins in the U.S. as a whole
average about 25%, but vary greatly from region to region.
Studies conducted for the Company by outside contractors
in 1996 identify the greatest market potential for its
fuel cells on the east and west coasts. The Company
believes the prospects of wholesale and retail wheeling
together with overall uncertainty as to the future will
discourage utilities from adding substantial new
generation between now and the end of the century. This
factor, together with tougher environmental laws already
in existence, the need to relicense
<F1> Olesen Douglas E., The Electricity Journal, Vol. 8,
No. 10, December 1995, p. 57. </F1>
13
<PAGE>
nuclear plants, which may not be economically feasible in
some cases, and the aging of U.S. plants, could result in
power shortages at about the time the Company plans to
bring its product to market. Even the wheeling of power
over long distances will result in additional energy
losses over the transmission lines, thus offsetting some
of the gains achieved by balancing power usage and keeping
pressure on capacity margins. The vulnerability of both
nuclear power plants and power line transmission capacity
was demonstrated by the short fall of power in certain
northeast states in 1996.
While the above scenario is favorable to the Company in
the long term, in the short term it has become more
difficult to coalesce utility groups into joint fuel cell
development and demonstration projects. It is also
possible that downward pressures on the cost of
electricity could develop on an interim basis although the
timing and duration of such pricing, if it occurs, is not
predictable. Any downward trend in electricity prices
would put pressure on all equipment suppliers. In 1996,
the Company focused on further defining specific
opportunities for its products in this changing utility
scenario. As a result of these efforts, the Company
identified some attractive IPP and cogeneration market
opportunities. These efforts will continue on a site
specific basis in 1997.
Activities
- ----------
ERC is continuing the transition from a development
company to a commercial manufacturer of fuel cell stacks
and a designer of commercial power plants utilizing fuel
cells. The Company believes there is still substantial
work to be done before it can commercially produce and
sell its carbonate fuel cell systems and power plants.
Among other things, the Company will need to significantly
lower the cost per kilowatt for its carbonate fuel cell
power plants to a level competitive with competing power
generation systems on a cost of electricity basis and
demonstrate the longevity, endurance and reliability of
the carbonate fuel cells. The Company believes its
commercialization program is dependent upon successful
testing and completion of one or more large-scale
demonstration projects in addition to the Santa Clara
project. While the Santa Clara project has met with
certain difficulties as discussed above, the project has
been able to achieve many of its goals and new milestones.
The following is a list of some of the accomplishments
achieved by this project.
14
<PAGE>
<TABLE>
<CAPTION>
TABLE 1: SOME OF SCDP PROJECT ACCOMPLISHMENTS
AS OF DECEMBER 19, 1996
<C> <C>
- - World's largest advanced fuel cell power - 3 percent/minute ramping capability
plant by an order of magnitude demonstrated so far
- - Largest carbonate fuel cell power plant - Over 2,500 hours of grid connect
operated in a grid connect utility mode power delivery
- - Achieved 44 percent efficiency level, a - Reached 1.93 MW AC, 7 percent
record for a fossil fuel power plant of higher than rated power
this size - Valuable information on power
- - SOx below detection limits and 2 PPM NOx allocation among fuel cell stacks in
emissions the event one stack is under-
- - Meets IEEE Specification 519 for less performing - the present situation
than five percent overall voltage - Virtually flawless balance-of-plant
harmonics operation has been proved over the
- - Meets Santa Clara 70 decibel noise first 4,000 hours of operation
specifications with no special sound - Insight gained into future power
proofing provisions plant electrical configuration
- - Instantaneous load shed capability
</TABLE>
During 1995 and 1996, the Company, using a consultant (ERI
Services, of Hartford, Connecticut), identified
cogeneration markets where credits for waste heat usage
could be used to reduce the cost of electricity produced.
Markets in 11 states were characterized as a function of
selling price from $1000 to $3000/kW for 2.8 MW size units
for applications of less than 20 MW. The study indicated
a potential market in these states of $28 billion at
$1,500/kW and about $4 billion at $3,000/kW.
The Company has been working since 1990 with a group of
utilities, the Fuel Cell Commercialization Group (FCCG).
The purpose of the FCCG is to form a collaborative effort
between the Company and a group of prospective buyers to
advance the commercialization of the 2-3 MW Direct Fuel
Cell power plants. The Company has been working with this
group to define power plant requirements, develop system
planning models, construct a model contract for power
plant purchases and to review power plant designs and
other activities. Most of the group's work in these
areas, as anticipated and planned in 1990, was essentially
finished in 1995. The group remained active in 1996 but
with reduced participation.
The initial goal of the Company and the FCCG is to obtain
orders for the first 35 power plants from utilities. Any
FCCG orders will be based on final negotiations with
individual utilities. At this point in time, there can be
no assurance that any of the FCCG utilities or others will
place any orders for the Company's fuel cell power plants.
Factors affecting the utility decision to buy power plants
will be based in part on the success of the SCDP, which
has been previously described, or other demonstrations,
final contract terms, the individual utility need for
additional generation capacity in the 1999-2000 time frame
and beyond, the
15
<PAGE>
cost of competitive options as well as other factors which
are not known to the Company at this time.
A number of studies involving the Company's fuel cell
power plant were conducted by FCCG members examining site
specific market opportunities. These studies were
generally quite positive. Studies conducted on behalf of
the Los Angeles Dept. of Water and Power, Central and
Southwest Services, and Oglethorpe Power Co., a municipal,
investor-owned utility and cooperative, are available from
EPRI. <F2> <F3> <F4>
Fuel Cell Manufacturing Corporation
- -----------------------------------
In 1989, ERC formed a wholly-owned subsidiary, Fuel Cell
Manufacturing Corporation (FCMC), for the purpose of
building a fuel cell manufacturing plant able to operate
at an annual rated capacity of two megawatts on a single
operating shift. On November 30, 1989, the manufacturing
subsidiary was financed with long term, low interest loans
in the amount of $1.98 million from MTU as well as with
ERC funds resulting from the sale of 360,000 shares of
Common Stock at $7.00 per share to MTU. This indebtedness
to MTU has been greatly reduced as a result of MTU's
conversion of $877,000 debt into 97,397 shares of common
stock at nine dollars per share during fiscal 1996 and
repayment of $1,296,000 in loans and interest by the
Company in December 1996.
The major activity at FCMC in 1996 was the completion of
components and stacks for the Santa Clara Demonstration
Project. Sixteen stacks incorporating 4,000 cells were
built in 1995 and early 1996. Additionally, FCMC began
producing larger size components for testing at ERC under
its DOE Cooperative Agreement (See "Principal Development
Contracts"). Also in 1996, FCMC installed certain new
manufacturing equipment capable of producing higher
quality components at much higher rates of production.
FCMC shipped 300 nine square foot cells to MTU in 1996
using a combination of old and new manufacturing
processes.
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
<F2> EPRI Report TR-100686, "Molten Carbonate Fuel Cells
as Distributed-Generation Resources, Case Studies for
the Los Angeles Department of Water and Power", May 1992.
</F2>
<F3> EPRI Report TR-102163, "Carbonate Fuel Cells and
Diesels as Distributed-Generation Resources, Economic
Assessment of Application Case Studies at Oglethorpe Power
Corporation", October 1993. </F3>
<F4> EPRI Report TR-102468, "Assessment of the Benefits of
Distributed Fuel Cell Generators in the Service Areas of
Central and South West Services, Inc.", October 1993.</F4>
16
<PAGE>
funding will be available or if available will result in
an output level which will result in a cost competitive
fuel cell stack cost. Meanwhile, the Company is using
existing funds to expand production capacity
incrementally.
Formation of a Worldwide Network
- --------------------------------
ERC, through its licenses and other agreements, is
involved with major industrial companies and utilities
throughout the world in its overall commercialization
plans.
In July 1992, ERC's licensee, MTU, formed a European
consortium (ARGE) including RWE AG, the largest electric
utility in Germany, Ruhrgas AG, the largest natural gas
supplier in Germany, Elkraft Power Co. Ltd. (Elkraft), a
large Danish utility, and Haldor Topsoe A/S, a Danish
industrial company. The stated intent of the consortium
is to spend approximately 130 million Deutsche Marks ($90
million), over a nine year period on further development,
demonstration and commercialization of the Company's
carbonate fuel cell technology. Certain individual
members of the consortium, including MTU, Elkraft and
Haldor Topsoe A/S, are currently conducting carbonate fuel
cell activities on their own utilizing the Company's
technology. The activities of this group will complement
ERC's efforts to design and manufacture natural gas and
coal gas fueled carbonate fuel cell systems based on ERC
designs. MTU is an active technical partner and licensee
in the European market. For the time being, MTU buys its
fuel cells from ERC but is designing its own 300 kW fuel
cell base module for the local market. Similarly in Japan,
MELCO is working to further develop carbonate fuel cells.
MELCO is developing a 200 kW power plant based on the
Direct Fuel Cell. Sanyo Electric Company has tested 10 kW
and 30 kW systems based on ERC technology but there was no
new activity by Sanyo in 1996.
Batteries
- --------
See LICENSE AGREEMENTS - Corning, Incorporated and
PRINCIPAL DEVELOPMENT CONTRACTS - Batteries.
PRINCIPAL DEVELOPMENT CONTRACTS
===============================
Fuel Cells
- ----------
General Sponsors
- ----------------
The Company has been working on the development of its
Direct Fuel Cell technology under contracts since 1977,
with various United States Government agencies including,
among others, the Department
17
<PAGE>
of Energy (DOE), the Department of Defense, the Defense
Advanced Research Projects Agency (DARPA), and the
National Aeronautics and Space Administration (NASA).
There can be no assurance, however, that government funded
research and development appropriations will continue or
that future contracts will be forthcoming. The Company
currently receives its government funding primarily under
a long-term Cooperative Agreement with the Department of
Energy. This agreement covers a 52 month project which
commenced in the first fiscal quarter of 1995 and had an
estimated value of $78 million (DOE share). In 1996, the
Company received additional funding thru DARPA raising
the contract value to $84 million. Additional funding is
being provided by the Company and its partners.
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. The balance of funding will be sought when
needed but there can be no assurance that the final 40% of
the private sector funding will be available. The
agreement covers the design, scaleup, construction and
testing of direct carbonate fuel cells operating on
natural gas in the 300 kilowatt size range as well as
providing funds for megawatt size demonstration of a
compact commercial prototype power plant. The award of
the above contract was almost one year later than
previously anticipated due to extended deliberations with
DOE. As a result of this delay and other factors (see
INTRODUCTION - Fuel Cells), the Company reassessed its
commercialization time table. It is likely that the
commercialization will be delayed until 2001 since it is
paced to a large extent by the timing and availability of
outside funding as well as technical achievements.
Santa Clara Demonstration Project
- ---------------------------------
An important step in the commercialization of new
technology for the electric utility industry and others is
a demonstration at a utility site. ERC's wholly-owned
engineering subsidiary, Fuel Cell Engineering Corporation
(FCE), entered into an agreement with the City of Santa
Clara and a group of California based and other utilities
to design, construct and operate a nominal two megawatt
demonstration (1.8 MW) of its direct carbonate fuel cell
power plant at a site owned by the City of Santa Clara,
California, under the auspices of its municipal electric
system (the Santa Clara Demonstration Project [SCDP]).
The SCDP consists of a group of utilities (see
INTRODUCTION - Fuel Cell), the Department of Energy and
EPRI. The Company is required to pay certain license fees
relating to the balance of the plant design for the
Project as described under "Santa Clara License
Agreement". Funding for the Santa Clara Project was
staged based upon achieving certain milestones all of
which were met. In addition, the Agreement contains
several termination provisions which allow the project
director to terminate the project upon authorization of a
participants Steering Committee.
18
<PAGE>
During 1996, the Company and the SCDP agreed to certain
contract modifications. ERC\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 FCE contract with the Santa Clara Demonstration
Project participants includes warranty obligations on
general performance and engineering work. Any project
rework costs that are identified as related to warranty
are reimbursed to FCE up to a total of $500,000. These
funds have been set aside as a "rework funding reserve".
If the total cost of warranty rework exceeds the $500,000
reserve amount, FCE is obligated to perform the additional
rework without reimbursement. FCE's liability for
unfunded rework is limited by the contract to $500,000.
The FCE subcontract to the major design and construction
contractor, Fluor Daniel, Inc., flows down this liability
to Fluor Daniel for a certain period of time. The Company
does not anticipate material expenditures under its
warranty obligation, but there can be no assurance that
major balance of plant equipment problems will not occur
at some point during testing after vendor and Fluor Daniel
warranties have expired.
Other Activities
- ----------------
During fiscal 1994, 1995 and 1996, 100% of the Company's
research and development was funded by customers,
including approximately $1.35, $0.94, and $1.26 million,
respectively, of discretionary independent research and
development expense. The Government funding provided
approximately 71%, 72% and 76% of revenues in fiscal 1994,
1995 and 1996, respectively. United States Government
funding largely was provided by DOE. Because the Company
receives a significant portion of its revenues from
contracts and subcontracts with the Department of Energy
and other government agencies, future revenues and income
of the Company could be materially affected by changes in
procurement or appropriation policies, a reduction in
expenditures for the services provided by the Company, and
other risks generally associated with government contracts
and cooperative agreements. The Company performs its
services under contracts or agreements that usually
require performance over a period of one to five years.
In general, the Company's contracts or agreements may be
terminated, in whole or in part, at the convenience of the
Government. If a termination for convenience occurs
involving a cost reimbursement type contract, the
Government is generally obligated to pay the cost incurred
by the Company under the contract up to the date of
termination and the limit of the contract funding plus a
pro rata fee based upon
19
<PAGE>
the work completed. Virtually all U.S. government
contracts are funded annually based on administrative
recommendations and congressional appropriations and there
can be no assurance that funding beyond the first year of
any contract will be available. Funding can also be
affected by delays in the passage of Appropriations Bills
by Congress, which happened in 1996. ERC has received
approximately $16.5 million in 1997 funding from DOE, of
which approximately $1.5 million is assigned to the SCDP
Cooperative Agreement. There can be no assurance that
some of this funding will not be subject to recision. The
Office of Management and Budget has indicated it wants a
14% cut in DOE Fossil Energy budget for 1998 putting
further pressure on future appropriations.
Most of the Company's contracts have been performed under
cost reimbursement contracts and, to a lesser extent,
time-and-materials contracts and fixed price contracts.
Cost reimbursement contracts provide for reimbursement of
costs (to the extent allowable under federal regulations
up to the funded limit set by the contract) and for
payment of a fee. The Company has also entered into cost
shared contracts with the Government pursuant to which it
receives no fees but does receive a cost of money
allowance. Since the Government does not allow interest
costs, most of these contracts produce a net loss. At
present, most DOE contracts involve cost sharing and no
fees are recovered. Substantially, all Government
contract revenues for the year ended October 31, 1996 were
from cost reimbursement contracts or cost-shared
agreements.
Since 1981, the Company has received approximately $21
million of funding directly or indirectly from EPRI, a
non-profit institute established in 1972 by the nation's
utilities to develop and manage technology programs, for
its carbonate fuel cell development. EPRI is a major
participant funding the SCDP. No new funds are
anticipated from EPRI at this time.
Another source of contract funding came from Elkraft Power
Co., Ltd., a member of the MTU European consortium.
During 1993, the Company negotiated a contract with
Elkraft to build and help start up a 10 kW carbonate fuel
cell stack for testing. The stack was shipped in November
1993 and was placed on test at Elkraft in early 1994 and
was operated through the first quarter of 1995. All test
data accumulated from this project was shared with the
Company and DOE. During 1996, the Company supplied
Elkraft with an advanced catalyst design fuel cell stack.
This stack was tested by Elkraft in Denmark with ERC
providing support services under a contract with Elkraft.
Since long term testing and the facilities required for
such tests are costly, the additional information derived
from such projects with utilities is very valuable to the
Company and represents no cost to either the Company or
the U.S. Government.
In addition to the activities listed above, the Company
was active
20
<PAGE>
in soliciting other business from industry and government
organizations. A $4.7 million Advanced Research Projects
Agency (ARPA) contract to demonstrate liquid fuels in the
Company's fuel cell was awarded to ERC in the first
quarter of 1994 and was completed in 1996. This contract
is administered by NASA. Additional ARPA funding for
fiscal 1994 and 1995 in the amount of $8.2 million was
appropriated and earmarked for direct fuel cell work.
This funding was directed through DOE and is part of the
new Cooperative Agreement with DOE. There can be no
assurance additional ARPA funding will be available for
this project although $2.4 million was allocated in the
1997 Department of Defense Appropriations bill. An
additional $1.9 million of DARPA (formerly ARPA) funds has
been provided in the 1997 budget for the study of
carbonate fuel cells for naval applications. There can be
no assurance however that the Company will be awarded a
contract for this work as any contracts if awarded, will
be done on a competitive basis.
During the FY 1996 and first quarter of 1997, the Company
produced and shipped approximately $1.5 million of DFC
parts to its licensee, MTU. Also, the Company was active
under several Phase I & Phase II Small Business Innovative
Research grants in the battery and fuel cell area which
are fee bearing contracts. The Company received 2 new
Phase I and 2 new Phase II SBIR's in 1996.
Batteries
- ---------
While the Company's battery division currently accounts
for only about one percent of the Company's total
revenues, the Company believes that its nickel batteries,
particularly nickel-zinc currently under development,
represent a potential source of future revenue for the
Company. ERC has developed a plastic-bonded electrode
process technology for use in its nickel-zinc and nickel-cadmium
batteries which permits the construction of
batteries that are lighter in weight and lower in cost
than conventional batteries currently available. Use of
the Company's proprietary process in this construction of
nickel-zinc batteries has the additional advantage of
having very low environmental impact compared to lead-acid
or conventional nickel-cadmium batteries. The prospect of
stricter environmental legislation relating to the
manufacture, disposal and recycling of batteries
containing large amounts of lead or cadmium, both of which
are hazardous and toxic, if enacted, could enhance the
attractiveness of the Company's nickel-zinc battery. The
Company's nickel-zinc batteries can now be recharged up to
600 times. In 1996, the Company successfully duplicated
the extended testing in multicell 15 ampere batteries.
Also in 1996, the Company began testing of a full size
hybrid electric vehicle battery at a potential users site.
Approximately 51% of the Company's discretionary internal
research and development funding, which it receives under
its government
21
<PAGE>
contracts, was used in further nickel-zinc battery
development during the current fiscal year.
The Company believes that its batteries represent
technological advances over certain existing commercial
batteries and is exploring potential worldwide market
opportunities for its battery technology. Due to its
limited resources and its decision to focus its
commercialization efforts in the area of carbonate fuel
cell technology, the Company does not presently intend to
build a manufacturing facility for the commercial
production and sale of its battery products. During 1996,
ERC held discussions with several corporations regarding
cooperating on nickel-zinc and related batteries. In the
first quarter of 1997, the Company reached an agreement to
license its nickel-zinc battery technology to Corning,
Inc. for a broad range of applications on an exclusive
worldwide basis (see License Agreements). The Company
intends to continue to seek nickel-zinc battery business
opportunities and partners in the field of electric and
hybrid electric vehicles as well as battery opportunities
using its technology for non-nickel zinc batteries, but
there can be no assurance that it will be successful in
these activities.
INTELLECTUAL PROPERTY MATTERS
===============================
The Company seeks to protect its technology through U.S.
patents and trade secrets and other agreements. Many of
these patents are also filed in South America, Canada,
Europe and Japan. The Company has received 2 new fuel
cell and 1 new battery patent in FY 1996. Also the
Company applied for 4 fuel cell and 2 battery patents in
FY 1996.
Many of the United States patents were the result of
government-funded research programs. The Government does
not impose significant restrictions on the Company's use
of government-sponsored patents, except that military and
national security applications of technology remain the
property of the United States Government. Patents of ERC
that were the result of government-funded research prior
to January, 1988 (the date the Company qualified as a
small business under applicable government regulations)
belong to the Government unless the Government waives its
rights to these patents. In most cases, the Company has
obtained ownership of these patents. One of the Company's
material patents is owned by the United States Government.
The Company has received a license to use this patent,
which is revocable only in the limited circumstances where
it has been demonstrated that the Company is not making an
effort to commercialize the invention. Patents resulting
from government-funded research after January 1988
automatically belong to ERC because of its small business
status. In both instances, however, the Government
retains a royalty free right to use the patents for
government purposes and "march-in" rights with respect to
the patents. March-in rights
22
<PAGE>
allow the Government to take title to the patents and to
license the patented technology to others if the
Government believes that the Company is not utilizing the
patents. A number of the Company's patents are subject to
march-in rights. The Company believes, however, that the
likelihood of the Government exercising these rights is
very small and would only occur if the Company ceased its
commercialization efforts.
The Company's patents will expire during the period from
1998 through 2015. The Company does not believe that the
expiration of any of its earlier patents will have a
material adverse effect on the Company's business.
There can be no assurance that the issued patents or the
licensing rights of the Company will fully, or even
partially, protect the Company's technology from
competitors' approaches, or that new patent applications
will be allowed. There can be no assurance that the
Company would be successful if any challenges are made by
the Company to the patents of other parties or that other
parties will not be successful in asserting infringement
claims against the Company. Further, because of the
intense competition in fuel cell and battery technology
and the large number of patents filed, or being filed, no
assurance can be given that the Company will not need
another Company's patent under a license agreement, if
such an agreement could be reached or what the terms of
that agreement might be. Any determination that the
Company's products or manufacturing processes have
infringed on the product or process rights held by others
could have a material adverse effect on the Company's
business and results of operation. Additionally, adverse
determinations could result in the Company's loss of
proprietary rights, subject the Company to liability to
third parties or prevent the Company from manufacturing or
selling its products, any of which could have a material
negative effect on the Company's business and hinder the
Company's commercialization initiatives.
The Company also relies on know-how and trade secrets to
establish its fuel cell and battery technologies for
commercial applications and there is no assurance it can
adequately protect this information in its dealings with
other entities. There can be no assurance that other
organizations will not develop similar or better
information through their own efforts.
EMPLOYEES
=========
As of December 31, 1996, the Company had 151 full-time
employees, of which approximately 67 were engineers,
scientists, and other degreed professionals and 84 were
professional, technical, administrative and manufacturing
support personnel. None of the Company's employees is
represented by a labor union, and the Company considers
relations with its employees to be good. The loss of key
employees could cause delays in completing contracted
23
<PAGE>
work and development and commercialization activities.
COMPETITION
===========
Fuel Cells
- ----------
Although a number of domestic and foreign companies are
engaged in the development of fuel cells, the Company
knows of no other company that has developed a direct
carbonate fuel cell, other than its licensees, although
others are probably working to do so. The Company
believes that its direct carbonate fuel cell could provide
it with a significant competitive advantage. This is a
forward looking statement contingent on completing
commercialization activities and could be impacted by
funding availability and the ability of the Company to
reduce fuel cell power plant costs, while increasing power
plant life and endurance. The Company knows of four major
companies in the United States which are involved in
significant fuel cell development and at least one, M-C
Power Corporation, of these companies competes directly
with ERC in the development of carbonate fuel cells but
uses a different technical approach.
In Japan there are at least six major companies developing
fuel cells (two of which are licensees of the Company) and
all are engaged in carbonate fuel cell development. In
1994, two major Japanese companies and potential
competitors of ERC demonstrated the extended operation of
100 kW size carbonate fuel cells of the indirect type and
continued their efforts in 1996 with the goal to have a 1
MW size plant on test in 1999. This plant is budgeted to
cost approximately six times per kilowatt the cost of the
Company's power plant in Santa Clara. Some of these
companies already produce other types of electric
generation equipment and have extensive marketing and
sales departments. All of the companies in Japan
operating in this field are very large compared to ERC.
In Europe, companies in Germany, Holland, Spain and Italy
are actively engaged in carbonate fuel cell development
and are potential competitors, although these efforts are
not as well advanced as the progress of the United States
and Japanese companies. The German activity through ERC's
licensee MTU and its partners is by far the largest
effort. Almost all of these companies are also
significantly larger than the Company, possess greater
financial resources and have established product lines in
electric generation equipment and in other fields.
ERC fuel cell products must also compete with more
established rotating machinery equipment, including
various engines and turbines, which are currently in use
and have established operating and cost features. The
greatest competition comes from the gas turbine industry
which recently has made good progress in improving fuel
efficiency and reducing pollution in large size combined
cycle natural gas fueled generators. Efforts are underway
to extend these advantages to small size machines. The
Company believes that
24
<PAGE>
in the small size units, under 5 MW, that gas turbines
will not be able to match its fuel cell efficiency or
environmental characteristics but there can be no
assurance that the Company will be able to compete with
small gas turbines even if these machines have less
desirable operating characteristics.
Once the Company has developed commercial products, it
expects to encounter competition from various sources,
including companies that may have substantially greater
technical, marketing and financial resources than the
Company.
Batteries
- ---------
The Company does not have much competition in the nickel-zinc area
as no competitor is known to have achieved the
equivalent cycle life results. In Japan, one major
battery company is pursuing nickel-zinc technology and
several smaller companies are pursuing the technology in
Europe. Severe competition comes from the entrenched
nickel cadmium and nickel metal hydride battery companies
who have large volume production capabilities and the
associated production cost advantages. Recently some
companies have begun marketing a rechargeable zinc
manganese oxide battery which is less expensive than the
projections for the Company's nickel-zinc battery. At
present, cycle life of this battery is limited to about 20
cycles with considerable degradation. There can be no
assurance however, that the cycle life of this battery
will not be further improved.
A barrier to market entry exists because OEM's are
reluctant to try new battery technologies in their
products that have not been extensively tested or that
have different voltage characteristics.
SOURCES AND AVAILABILITY OF RAW MATERIALS
=========================================
The Company believes that virtually all of the raw
materials used in its products are readily available from
a variety of vendors in the United States and Canada.
However, certain manufacturing processes which are
necessary to transform the raw materials into component
parts for fuel cells are presently available only through
a small number of foreign manufacturers.
The Company believes that these manufactured products are
currently obtainable and eventually will be obtainable
from the United States suppliers as demand for these items
increases.
GOVERNMENT REGULATIONS
======================
The Company presently is, and its fuel cell power plants
will be, subject to various federal, state and local laws
and regulations
25
<PAGE>
relating to, among other things, land use, safe working
conditions, handling and disposal of hazardous and
potentially hazardous substances and emissions of
pollutants into the atmosphere. To date, the Company
believes that it has obtained all necessary government
permits and has been in substantial compliance with all of
these applicable laws and regulations. There can be no
assurance, however, that the Company will continue to
obtain all required permits and will continue to be in
compliance with presently applicable regulations and/or
will be able to comply with any future regulations.
Pursuant to the National Environmental Protection Act
(NEPA), since 1991, each local Department of Energy
procurement office must file and have approved by the
Department of Energy in Washington, DC, appropriate
documentation for environmental, safety and health impacts
with respect to procurement contracts entered into by that
local office. The costs associated with compliance with
environmental regulations are generally recoverable under
the Company's cost reimbursable contracts. In certain
cases, contract work may be delayed until the approval is
received. In the first quarter of 1997, DOE's Federal
Energy Technology Center (formerly Morgantown Energy
Technology Center)received NEPA approval for ERC's east
coast demonstration at the Company's site in Danbury.
EXECUTIVE OFFICERS
==================
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Dr. Bernard S. Bake 60 President, Chief Executive Officer and
Director
Dr. Hansraj C. Maru 52 Executive Vice President, Chief
Operating Officer and Director
Christopher R. Bentley 54 Executive Vice President, Director and
President of Fuel Cell Manufacturing
Corp.
Louis P. Barth 52 Senior Vice President, Chief Financial
Officer, Treasurer & Corp. Secretary
Donald R. Glenn 57 Vice President-Corporate Development
President of Fuel Cell Engineering Corp.
</TABLE>
Dr. Bernard S. Baker has served as a director of ERC since
joining the Company in 1970. Dr. Baker has been President
and Chief Operating Officer of ERC since 1973 and Chief
Executive Officer since March, 1992. He received a Ph.D.
from the Illinois Institute of Technology in 1969, and was
a Fulbright Fellow at the Laboratory for Electrochemistry
at the University of Amsterdam subsequent to his receiving
his Master of Science in Chemical Engineering from the
University of Pennsylvania in 1959.
26
<PAGE>
Dr. Hansraj C. Maru has been Executive Vice President,
Chief Operating Officer and director since December, 1992.
Prior to that he was Senior Vice President-Research and
Development. Dr. Maru joined the Company in 1977. Dr.
Maru received a Ph.D. in Chemical Engineering from the
Illinois Institute of Technology in 1975.
Christopher R. Bentley has been a director since June,
1993. Mr. Bentley has been Executive Vice President of
ERC and President of the Company's manufacturing
subsidiary since September, 1990. From 1985 through 1989
he was Director of Manufacturing (1985), Vice President
and General Manager (1985-1988) and President (1988-1989)
of the Turbine Airfoils Division of Chromalloy Gas Turbine
Corporation, a major manufacturer of gas turbine hardware.
Louis P. Barth has been the Senior Vice President since
December, 1993, the Chief Financial Officer of ERC since
1981 and the Treasurer and Corporate Secretary since 1988.
From 1985 to 1993, Mr. Barth was the Vice President-Finance.
He joined ERC in 1976 as Controller.
Donald R. Glenn has been the Vice President of Corporate
Development of ERC since 1985, the Executive Vice
President of the Company's engineering and marketing
subsidiary from March, 1992 to October, 1993 when he was
elected President. Mr. Glenn joined the Company in 1983.
ITEM 2. PROPERTIES
The Company currently owns and occupies approximately
72,000 square feet in two interconnected single story
buildings on 10.8 acres, of which approximately 5.4 acres
are currently used, in Danbury, Connecticut. For specific
information with respect to the mortgage on the Danbury,
CT facility, see footnote #6 Long-Term-Debt, page F-12.
Additionally, ERC has leased a 63,000 square foot facility
in Torrington, Connecticut for its manufacturing
operations. The lease expires February 1, 1998. The
annual lease cost of the Torrington facility is
approximately $300,108. The Company believes that its
facilities are adequate for its current operations, with
approximately 85-90% utilization of the Danbury and
Torrington facilities.
ITEM 3. LEGAL PROCEEDINGS
With respect to legal proceedings, please see footnote #7,
Commitments and Contingencies, to Consolidated Financial
Statements, page F-14.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matter was submitted to a vote of securities holders
during the fourth quarter of the fiscal year covered in
this report.
27
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock (Common Stock), par value
$.0001, has been publicly traded since June 25, 1992.
Since September 21, 1994, the Common Stock has been traded
on The Nasdaq Stock Market.
The following table sets forth the range of high and low
prices of the Common Stock on the Nasdaq for the fiscal
quarters indicated, as reported by Nasdaq.
<TABLE>
<CAPTION>
Year Ended 10/31/96 HIGH LOW
- ------------------- ---- ---
<S> <C> <C>
COMMON STOCK
First Quarter 12.250 10.250
Second Quarter 14.375 9.500
Third Quarter 22.250 11.500
Fourth Quarter 15.750 11.250
Year Ended 10/31/95 HIGH LOW
- ------------------- ---- ---
First Quarter 10.500 8.500
Second Quarter 11.000 8.500
Third Quarter 10.500 7.500
Fourth Quarter 11.750 8.000
</TABLE>
The Company has never paid any dividends on its Common
Stock and does not anticipate paying any cash dividends in
the foreseeable future. The Company currently
anticipates retaining all available earnings for the
growth and expansion of the Company's business.
Under the terms of the Company's Loan Agreement with First
Union Bank of Connecticut, the Company may not without the
written consent of Fleet Bank declare or pay any dividend.
On January 15, 1997 there were approximately 1,579 common
stockholders of record.
Recent Sales of Unregistered Securities
- ---------------------------------------
On May 3, 1996, the Company issued 22,667 shares of its
Common Stock to James Gerson, a Director of the Company,
upon the exercise by Mr. Gerson of Warrants issued by the
Company to him on July 2, 1992 in connection with the
Company's initial public offering. The shares were
acquired for an aggregate purchase price of $244,803.60.
On December 14, 1995 and on October 31, 1996, the Company
issued 24,000 and 73,397 shares, respectively, of its
Common Stock to MTU upon the conversion by MTU of certain
Promissory Notes of the
28
<PAGE>
Company. The principal amount of $216,000 and $450,000
plus $210,573 in accrued interest, were converted in the
transactions.
With regard to the foregoing transactions, 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 any of the foregoing transactions.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of the end
of each of the years in the five-year period ended October
31, 1996 have been derived from the consolidated financial
statements of Energy Research Corporation.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
(in thousands, except share and per share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $29,446 $33,955 $30,084 $22,211 $17,014
Gross Profit 8,551 7,696 8,020 7,948 6,589
Operating Expenses:
Administrative & Selling 4,858 4,513 4,730 4,657 3,756
Depreciation 1,919 1,801 1,663 1,645 1,206
Research & Development 1,260 944 1,348 1,148 1,470
Operating income 514 438 279 498 157
Interest & other income,
net 442 317 148 174 107
Interest expense (503) (459) (435) (490) (570)
Income before income taxes 810 653 356 538 148
Income tax expense 301 211 136 197 65
Net Income $ 509 $ 442 $ 220 $ 341 $ 83
Net income per share
(primary & fully diluted) .13 .11 .06 .09 .02
Number of shares used
in per share
calculation 4,063,061 3,972,281 3,939,925 3,895,667 3,356,851
Balance Sheet data:
Working capital 8,087 8,216 7,619 8,545 8,382
Total assets 23,540 23,847 22,515 20,930 21,548
Long-term debt 4,363 6,487 5,839 6,237 6,662
Total shareholders' equity 14,062 12,238 11,685 10,206 9,862
</TABLE>
29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
OVERVIEW
- --------
The Company obtains nearly all of its revenues from
government and commercially-funded research, development
and demonstration contracts or cooperative agreements.
United States Government contracts, which represent the
bulk of these contracts, are generally multi-year, cost
reimbursement type contracts. Their continuation is
dependent upon the government's continued allocation of
funds. Under a cost-reimbursement contract, the Company
is reimbursed for reasonable and allocable costs of the
materials, subcontracts, direct labor, overhead, general
and administrative expenses, independent research and
development costs and bid and proposal preparation costs,
provided the total of such costs do not exceed the
reimbursement limits set by the contract. In addition,
some of these contracts bear a fixed fee or profit. The
profitability of these contracts to the Company depends
upon limiting nonreimbursable expenses, charging direct
costs to contracts, maintaining adequate control of
overhead costs and general and administrative expenses so
they do not exceed the approved billing rates, and
limiting the aggregate reimbursable costs to the allowable
amounts set by the contract.
In addition to cost reimbursement contracts, the Company
enters into firm fixed price contracts and cost sharing
type contracts. In performance of a firm fixed price
contract, the Company is paid the price that is set in
advance without regard to the costs actually incurred in
performance, subject to certain excess profit limitations.
In a cost sharing type contract, the Company agrees in
advance to contribute or cause to be contributed an agreed
upon amount of effort or costs toward fulfilling the
objective of the contract. Except for the Company's cost
contributions, the contract operates in substantially the
same manner as a cost reimbursement type contract. At
present, most of ERC's contracts and cooperative
agreements are cost shared and no fee or profit is
allowed. The contracts and agreements do provide for a
cost-of-money recovery tied to U.S. Treasury rates.
Since 1983, when the Company began to shift its emphasis
from fuel cells for military use to commercial
applications, the Company's primary development focus has
been on carbonate fuel cells and the funding it has
received in every year for the fuel cells has represented
a substantial portion of the Company's revenues.
In 1989, the Company took the first step toward
commercialization of the carbonate fuel cell technology by
selling Common Stock to, and obtaining financing from MTU.
The equity and loan proceeds, together with funds obtained
from a commercial loan, were used to
30
<PAGE>
establish the carbonate fuel cell stack manufacturing
operation, Fuel Cell Manufacturing Corporation, a wholly-owned subsidiary.
In 1991, the Company established a
wholly-owned engineering and marketing subsidiary, Fuel
Cell Engineering Corporation to design, market and build
fuel cell power plants. In 1993, the Company entered into
the first two-megawatt carbonate fuel cell power plant
demonstration contract, which began operating in April
1996.
The Company will continue to seek research and development
contracts for all its product lines. To continue to
obtain funding for these contracts, the Company must
continue to prove the benefits of its technologies and be
successful in its competitive bidding. Failure to obtain
these contracts could have an adverse effect upon the
Company. Because the Company receives a significant
portion of its revenues from contracts and subcontracts
with the Department of Energy and other government
agencies, future revenues and income of the Company could
be materially affected by changes in procurement policies,
a reduction in expenditures for the services provided by
the Company, and other risks generally associated with
government contracts. In general, the Company's government
contracts may be terminated, in whole or in part, at the
convenience of the government. Recent proposals for U.S.
deficit reductions have included proposals to eliminate
the Department of Energy as a separate agency along with
other general spending reduction measures. The Company
cannot predict whether any of these measures will be
enacted, or if enacted, whether funding of any of the
Company's existing contracts will be affected. Deficit
reduction measures could adversely affect the Company's
ability to obtain future government contracts and grants.
A reduction or delay in the Company's government funding
could have a material adverse effect on the Company's
ability to commercialize its fuel cell technology. During
1996, the difficulties experienced by the Government in
resolving the Federal budget resulted in delayed funding.
The Company adjusted its expenditures to the lower funding
rates. This caused delays in the work being done under
existing contracts which inevitably cause delays in the
Company's activities and commercialization schedule. In
1997, the Company has been allocated approximately
$16,500,000, of which $15,000,000 is for the main Product
Improvement Cooperative Agreement and $1,500,000 for the
Santa Clara Demonstration Project Cooperative Agreement.
There can be no assurance that some of this funding will
not be subject to recision. The Company was allocated
approximately $6,000,000 from the Defense Advanced
Research Projects Agency (DARPA) in September 1996 which
was added to the U.S. Department of Energy (DOE)
Cooperative Agreement, raising its value to $84 million.
The 1998 budget is under pressure with the Office of
Management and Budget suggesting a 14% cut in DOE's Fossil
Energy budget.
31
<PAGE>
RESULTS OF OPERATIONS
- --------------------
1996 COMPARED TO 1995. Revenues decreased 13% to
$29,446,000 in the 1996 period from $33,955,000 in the
1995 period. The decrease in revenues was due primarily to
the completion of the manufacture of the fuel cell
modules, the completion of construction of the commercial
scale two-megawatt direct fuel cell power plant in Santa
Clara, California and reduced activity due to the
uncertainty of Government funding due to delays in passage
of the 1996 Federal budget. The expected decrease in
revenues was partially offset by an increase in billing
under the Company's other contracts.
Cost of revenues decreased 20% to $20,895,000 in the 1996
period from $26,259,000 in the 1995 period. The decrease
was due primarily to the completion of the manufacture of
the fuel cell modules and the completion of construction
of the direct fuel cell power plant mentioned above.
Administrative and selling expense increased 8% to
$4,858,000 in the 1996 period from $4,513,000 in the 1995
period. The 1996 period reflects an increase in various
expenses. Depreciation increased 7% to $1,919,000 in the
1996 period from $1,801,000 in the 1995 period. The
increase was due primarily to assets placed in service at
the Company's manufacturing facility. Research and
development expenses increased 33% to $1,260,000 in the
1996 period from $944,000 in the 1995 period. The
increase was due primarily to carbonate fuel cell and
battery development activities.
Income from operations increased 17% to $514,000 in the
1996 period from $438,000 in the 1995 period. The
increase was primarily due to the non-recurring recovery
of costs associated with certain foreign patents.
License fee income, net, was unchanged at $357,000 in the
1996 period compared to the 1995 period. License fee
income is expected to increase moderately in 1997 due to
the Corning License Agreement.
Interest expense increased 10% to $503,000 in the 1996
period from $459,000 in the 1995 period. The increase was
due to the full utilization of the MetLife Capital credit
facility. The increase was partially offset by the
capitalization of interest for assets under construction
and a reduction in the interest rate on existing debt.
Interest and other income, net, increased 39% to $442,000
in the 1996 period from $317,000 in the 1995 period. The
increase was due primarily to increased interest income.
The interest income increased due to the availability of
additional cash from working capital resulting from a more
favorable payment procedure under the Company's
cooperative agreements.
32
<PAGE>
1995 COMPARED TO 1994. Revenues increased 13% to
$33,955,000 in 1995 period from $30,084,000 in the 1994
period. Approximately 65% of the increase was associated
with the Santa Clara Demonstration Project (SCDP). The
Company completed construction and commenced the testing
of the balance-of-plant of the commercial scale two-megawatt
demonstration power plant in Santa Clara,
California. In addition, the Company's power plant
engineering subsidiary continued work on the contract from
the United States Department of Energy to provide four
fuel cell modules containing sixteen fuel cell stacks to
the SCDP. The Company's engineering subsidiary
contributed $19,107,000 in revenue during 1995. The total
carbonate fuel cell revenues rose 13% to $33,658,000 in
the 1995 period from $29,846,000 in the 1994 period.
Cost of revenues increased 19% to $26,259,000 in the 1995
period from $22,064,000 in the 1994 period. The increase
was due substantially to the costs associated with the
Santa Clara Demonstration Project mentioned above.
Administrative and selling expenses decreased 5% to
$4,513,000 in the 1995 period from $4,730,000 in the 1994
period. The decrease was due substantially to improved
operating efficiency. Depreciation increased 8% to
$1,801,000 in the 1995 period from $1,663,000 in the 1994
period. The increase was due primarily to assets placed
in service at the Company's manufacturing facility.
Research and development costs decreased 30% to $944,000
in the 1995 period from $1,348,000 in the 1994 period.
The decrease was due primarily to the utilization of
personnel and subcontract effort on carbonate fuel cell
and battery contract activities.
Income from operations increased 57% to $438,000 in the
1995 period from $279,000 in the 1994 period. The
increase was due substantially to increased profitability
and efficiency under certain contracts.
License fee income, net, was relatively unchanged at
$357,000 in the 1995 period from $364,000 in the 1994
period.
Interest expense increased 6% to $459,000 in the 1995
period from $435,000 in the 1994 period. The increase was
due primarily to the partial utilization of a credit
facility obtained during 1995 to purchase equipment. A
portion of the increase was offset by a reduction in the
interest rate applied to existing debt during the second
half of 1994. The reduced interest rate was in effect
throughout 1995. (See Notes to Consolidated Financial
Statements, Note 6).
Other income, net, increased 114% to $317,000 in the 1995
period from $148,000 in the 1994 period. The increase was
due substantially to increased interest income. The
interest income has increased due to the availability of
additional cash from working capital (See Liquidity and
Capital Resources).
33
<PAGE>
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 securities.
At October 31, 1996, the Company had working capital of
$8,087,000 including $7,597,000 of cash and cash
equivalents and $1,956,000 of marketable securities,
compared to working capital of $8,216,000 including
$5,422,000 of cash and cash equivalents and $3,900,000 of
marketable securities at October 31, 1995. The Company
decreased by $1,944,000 its investment in marketable
securities in anticipation of repayment of the current
portion of maturing long-term debt. The Company
discontinued its $1,000,000 line of credit during 1996
because it was unnecessary with the favorable payment
procedures associated with the cooperative agreements.
During fiscal 1996, $1,448,000 of cash was provided by
the Company's operating activities. During the 1996
period, accounts receivable decreased by $355,000. Net
cash from operating activities also included the Company's
net income of $509,000. During the 1996 period, accounts
payable decreased $1,151,000 primarily due to decreased
revenues associated with the completion of the
manufacturing of the fuel cell modules for the Santa Clara
power plant and accrued liabilities decreased $416,000.
The Company's capital expenditures are incurred primarily
to support ongoing contracts and to replace existing
equipment. Capital expenditures for the fiscal 1996
period were $1,904,000. A portion of these expenditures
was financed from the recovery of depreciation expense
under cost-reimbursement contracts and cooperative
agreements. During the 1995 period, the Company entered
into a $2,500,000 credit facility with MetLife Capital
Corporation, an affiliate of Metropolitan Life Insurance
Company. The credit facility bears interest at the 30-day
commercial paper rate plus 2.5 percent. The Company used
$1,245,000 of the proceeds of the credit facility during
1995 and the balance of the credit facility during 1996 to
acquire machinery and equipment for the Company's
manufacturing facility in Torrington, Connecticut.
Repayment of the credit facility commenced during the 1996
period and provides for repayment over 36-50 months.
During the 1996 period, the Company entered into more
favorable lending arrangements with First Union Bank of
Connecticut, a subsidiary of First Union Corporation,
which provide for (i) 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 (ii) 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.
34
<PAGE>
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 is secured by the
pledge of FCMC stock and certain machinery, equipment and
leasehold improvements at the Torrington, CT, facility.
The accrued interest on the loan is payable at the
Company's option. The principal amount of the loan may 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 converting to
common stock at $9 per share. During December 1996, the
Company paid to MTU $1,296,000 of principal and interest.
In December 1994, the Company entered into a $136,000,000
Cooperative Agreement with the U.S. Department of Energy
(DOE) that provided that the DOE would provide $78,000,000
to the Company over the next five years to support the
continued development and improvement of the Company's
commercial product. The balance of the funding is
expected to be provided by the Company, the Company's
partners or licensees, other private agencies and
utilities. Approximately 60% of the non-DOE portion has
been committed or credited to the project in the form of
in-kind or direct cost share from non-U.S. government
sources. There can be no assurance that the final 40% of
the private sector funding will be available on favorable
terms, if at all. Failure of the Company to obtain the
required funding could result in a delay or reduction of
DOE funding.
The Company will need to raise additional funds to expand
the capacity of FCMC. The first stage in this process is
to raise the output capability to 50 MW per year.
Approximately $16 million has been estimated for this
step. There can be no assurance that this funding will be
available or if available will result in an output level
which will result in a cost competitive fuel cell stack.
Meanwhile, the Company is using existing funds to expand
production capacity incrementally.
During 1996, the Company and the SCDP agreed to certain
contract modifications. ERC\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.
35
<PAGE>
The FCE contract with the Santa Clara Demonstration
Participants includes warranty obligations on general
performance and engineering work. Any project rework
costs that are identified as related to warranty are
reimbursed to FCE up to a total of $500,000. These funds
have been set aside as a "rework funding reserve". If the
total cost of warranty rework exceeds the $500,000 reserve
amount, FCE is obligated to perform the additional rework
without reimbursement. FCE's liability for unfunded
rework is limited by the contract to $1 million. The FCE
subcontract to the major design and construction
contractor, Fluor Daniel, Inc., flows down this liability
to Fluor Daniel for a certain period of time. The Company
does not anticipate material expenditures under its
warranty obligation, but there can be no assurance that
major balance of plant equipment problems will not occur
at some point during testing after vendor warranties have
expired.
The Company anticipates that its existing capital
resources together with anticipated revenues will be
adequate to satisfy its existing financial requirements
and agreements through 1997. However, the Company may
require additional capital beginning in 1997 if the
Company is required to fund cost contingencies associated
with the Santa Clara Demonstration Project or if the
aforementioned plan to expand manufacturing capability in
its Torrington, CT facility is implemented.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements and Supplementary
Data of the Company are listed under Part IV, Item 14, in
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The information required with respect to directors and
executive officers is incorporated by reference from the
text appearing under Part I, Item 1 - Business under the
caption "Executive Officers" in this Report, and by
reference from the Section captioned "Election of
Directors" to be contained in the Company's definitive
Proxy Statement for its 1997 Annual Meeting of
Stockholders.
The information with respect to the compliance of officers
and directors with Section 16(a) of the Exchange Act is
incorporated by reference from the Section captioned
"Compliance with Section 16(a) of the Exchange Act" to be
contained in the Company's definitive Proxy Statement for
its 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the
Sections captioned "Executive Compensation", and
"Compensation Pursuant to Plans" to be contained in the
Company's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
This information is incorporated by reference from the
Sections captioned "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management"
to be contained in the Company's definitive Proxy
Statement for its 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from the
Section captioned "Certain Relationships and Related
Transactions" to be contained in the Company's definitive
Proxy Statement for its 1997 Annual Meeting of
Stockholders.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(A) (1) Financial Statements
1) Reports of Independent Accountants
KPMG Peat Marwick LLP (See page F-2, hereof.)
Blum, Shapiro and Company, P.C.(See page F-3, hereof.)
2) Consolidated Balance Sheets as of October 31, 1996 and 1995
(See page F-4 hereof.)
3) Consolidated Statements of Income for Years Ended
October 31, 1996, 1995 and 1994 (See page F-5, hereof.)
4) Consolidated Statements of Changes in Common
Shareholders' Equity for the Years Ended October 31,
1996, 1995 and 1994 (See page F-6, hereof.)
5) Consolidated Statements of Cash Flows for the Years
Ended October 31, 1996, 1995 and 1994 (See page F-7, hereof.)
6) Notes to Financial Statements (See pages F-8 thru F-19, hereof.)
(A) (2) Financial Statement Schedules
Supplement schedules are not provided because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
(A) (3) Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of the Company,
as amended, March 3, 1994
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for fiscal
year ended October 31, 1994 dated January 18, 1995)
3.2 Restated By-Laws of the Company, dated December, 1992
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for fiscal
year ended October 31, 1992 dated January 20, 1993)
4 Specimen of Common Share Certificate (Incorporated
by reference to exhibit of the same number contained
in the Company's Form 8-A, dated September 20, 1994)
38
<PAGE>
(A) (3) EXHIBITS TO THE 10-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2 License Agreement, dated October 24, 1986, between
Sanyo Electric and the Company, as amended by Agreement
dated February 15, 1988 (confidential treatment
requested) (Incorporated by reference to exhibit of
the same number contained in the Company's Amendment
No. 1 to its Registration Statement on Form S-1
(File No. 33-47233) dated June 1, 1992)
10.3 License Agreement, dated June 18, 1980 between
Sanyo Electric and the Company, as amended by
Agreements dated October 7, 1980, June 1, 1981,
July 28, 1982 and February 15, 1988 (confidential
treatment requested) (Incorporated by reference to exhibit
of the same number contained in the Company's Amendment
No. 1 to its Registration Statement on Form S-1
(File No. 33-47233) dated June 1, 1992)
10.4 License Agreement, dated November 24, 1981, between
Mitsubishi Electric and the Company, as amended by
Agreements dated December 4, 1981, June 3, 1983,
January 11, 1984, November 20, 1986, November 23,
1988 and November 23, 1991 (confidential treatment
requested) (Incorporated by reference to exhibit
of the same number contained in the Company's Amendment
No. 1 to its Registration Statement on Form S-1
(File No. 33-47233) dated June 1, 1992)
10.6 License Agreement, dated February 11, 1988, between
EPRI and the Company (confidential treatment
requested) (Incorporated by reference
to exhibit of the same number contained in the
Company's Registration Statement on Form S-1
(File No. 33-47233) dated April 14, 1992)
10.9 License Agreement, dated November 30, 1989, between
Messerschmitt-Daimler Benz and the Company
(confidential treatment requested) (Incorporated by
reference to exhibit of the same number contained
in the Company's Registration Statement on Form
S-1 (File No. 33-47233) dated April 14, 1992)
10.10 Note Purchase Agreement, dated November 30, 1989,
between Messerschmitt-Daimler Benz and Fuel Cell
Manufacturing Corporation (Incorporated by
reference to exhibit of the same number contained
in the Company's Registration Statement on Form
S-1 (File No. 33-47233) dated April 14, 1992)
39
<PAGE>
(A) (3) EXHIBITS TO THE 10-K
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.11 Subscription Agreement, dated November 30, 1989,
between Messerschmitt-Daimler Benz and the Company
(Incorporated by reference to exhibit of the same
number contained in the Company's Registration
Statement on Form S-1 (File No. 33-47233)
dated April 14, 1992)
10.19 Loan Agreement, dated June 15, 1992, between
the Company, Fuel Cell Manufacturing Corporation
and Fleet Bank, N.A.
(Incorporated by reference to exhibit of the same
number contained in the Company's Registration
Statement on Form S-1, (File 33-47233) dated
April 14, 1992)
10.21 *Energy Research Corporation 1988 Stock Option Plan
(Incorporated by reference to exhibit of the same
number contained in the Company's Amendment No. 1
to its Registration Statement on Form S-1
(File No. 33-47233) dated June 1, 1992)
10.26 Addendum to License Agreement, dated as of
September 29, 1989, between Messerschmitt-
Daimler Benz and the Company
(Incorporated by reference to exhibit of the
same number contained in the Company's Amendment
No. 3 to its Registration Statement on Form S-1
(File No. 33-47233) dated June 24, 1992)
10.27 Agreement, dated September 30, 1992 between
the Company and the United States Department
of Energy, Contract #DE-FC21-92MC29237
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for
fiscal year ended October 31, 1992 dated January
20, 1993)
10.29 Agreement dated December 2, 1993 between the Company
and NASA-Lewis Research Center, Contract #NAS3-27021
(Incorporated by reference to exhibit of the
same number contained in the Company's 10-KSB for fiscal
year ended October 31, 1993, dated January 19, 1994)
10.30 Supply Agreement dated September 16, 1993, between
the Company and the City of Santa Clara, California,
for the Design, Construction and Demonstration of
a Carbonate Fuel Cell Power Plant
(Incorporated by reference to exhibit of the
same number contained in the Company's 10-KSB for fiscal
year ended October 31, 1993, dated January 18, 1994)
40
<PAGE>
(A) (3) EXHIBITS TO THE 10-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.31 License Agreement For The Santa Clara Demonstration Project
between the Company and the Participants in the Santa Clara
Demonstration Project, dated September 16, 1993
(Incorporated by reference to exhibit of the
same number contained in the Company's 10-KSB
for fiscal year ended October 31, 1993,
dated January 18, 1994)
10.32 Security Agreement for the Santa Clara Demonstration Project,
dated September 16, 1993
(Incorporated by reference to exhibit of the
same number contained in the Company's 10-KSB
for fiscal year ended October 31, 1993,
dated January 18, 1994)
10.33 Guaranty By Energy Research Corporation, dated September 16,
1993 for the Santa Clara Demonstration Project
(Incorporated by reference to exhibit of the
same number contained in the Company's 10-KSB
for fiscal year ended October 31, 1993,
dated January 18, 1994)
10.34 Guaranty by Fuel Cell Manufacturing Corporation, dated
September 16, 1993 for the Santa Clara Demonstration Project
(Incorporated by reference to exhibit of the
same number contained in the Company's 10-KSB
for fiscal year ended October 31, 1993,
dated January 18, 1994)
10.35 Intercreditor and Subordination Agreement, dated September
16, 1993, for the Santa Clara Demonstration Project
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for fiscal year
ended October 31, 1993, dated January 18, 1994)
10.36 *The Energy Research Corporation Section 423 Stock
Purchase Plan
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for fiscal
year ended October 31, 1994 dated January 18, 1995)
10.39 Cooperative Agreement, dated December 20, 1994, between
the Company and the United States Department of Energy,
Cooperative Agreement #DE-FC21-95MC31184 (confidential
treatment requested)
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for fiscal
year ended October 31, 1994 dated January 18, 1995)
41
<PAGE>
(A) (3) EXHIBITS TO THE 10-K
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.40 Loan and Security Agreement between the Company and
MetLife Capital Corporation.
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-KSB for fiscal
year ended October 31, 1995 dated January 17, 1996)
10.41 Amendment No. 2 to the Energy Research Corporation
Section 423 Stock Purchase Plan
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-Q for the period
ended April 30, 1996 dated June 13, 1996)
10.42 *Amendments to the Energy Research Corporation 1988
Stock Option Plan
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-Q for the period
ended April 30, 1996 dated June 13, 1996)
10.43 Loan Agreements with First Union Bank of Connecticut,
dated June 28, 1996
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-Q for the period
ended July 31, 1996 dated September 12, 1996)
10.44 Notes in favor of First Union Bank of Connecticut,
dated June 28, 1996
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-Q for the period
ended July 31, 1996 dated September 12, 1996)
10.45 Security Agreements with First Union Bank of Connecticut,
dated June 28, 1996
(Incorporated by reference to exhibit of the same
number contained in the Company's 10-Q for the period
ended July 31, 1996 dated September 12, 1996)
10.46 *Employment Agreement between Energy Research Corporation
and Dr. Bernard S. Baker, dated January 1, 1997.
10.47 Amendment of Cooperative Agreement dated September 5, 1996
between the Company and the United States Department of
Energy, Cooperative Agreement #DE-FC21-95MC31184
11 Computations of Income/(Loss) Per Common Share
21 Subsidiaries of the Company
(Incorporated by reference to exhibit of the
same number contained in the Company's Registration
Statement on Form S-1, (File No. 33-47233)
dated April 14, 1992)
42
<PAGE>
(A) (3) EXHIBITS TO THE 10-K
EXHIBIT NO. DESCRIPTION
- ---------- -----------
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Blum, Shapiro and Company, P.C.
27 Financial data schedule
* Management Contract or Compensatory Plan or Arrangement
(b) REPORTS ON FORM 8-K.
None
43
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 and 1994
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Accountants
KPMG Peat Marwick LLP F-2
Blum, Shapiro and Company, P.C. F-3
Consolidated Balance Sheets - October 31, 1996 and 1995 F-4
Consolidated Statements of Income for Years Ended
October 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Changes in Common
Shareholders' Equity for the Years Ended October 31,
1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the Years
Ended October 31, 1996, 1995 and 1994 F-7
Notes to Financial Statements F-8 - F-19
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Energy Research Corporation:
We have audited the accompanying consolidated balance
sheets of Energy Research Corporation and Subsidiaries as
of October 31, 1996 and 1995, and the related consolidated
statements of income, changes in common shareholders'
equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to
express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of Energy Research
Corporation and Subsidiaries as of October 31, 1996 and
1995, and the results of their operations and their cash
flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
__________________________
December 17, 1996
Stamford, CT
F-2
<PAGE>
To the Shareholders
Energy Research Corporation
Report of Independent Accountants
We have audited the accompanying consolidated statements
of income, changes in common shareholders' equity and cash
flows of Energy Research Corporation and Subsidiaries for
the year ended October 31, 1994. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion
on these financials based on our audit.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
results of operations and cash flows of Energy Research
Corporation and Subsidiaries for the year ended October
31, 1994, in conformity with generally accepted accounting
principles.
/s/ Blum Shapiro & Co.
__________________________
December 16, 1994
F-3
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 7,597 $ 5,422
Marketable securities 1,956 3,900
Accounts receivable 2,848 3,203
Inventories 72 179
Deferred income taxes 209 215
Other current assets 231 87
------ ------
Total current assets 12,913 13,006
Property, plant and equipment, net 7,245 7,263
Other assets, net 3,382 3,578
------ ------
Total Assets $23,540 $23,847
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 2,380 $ 717
Accounts payable 1,232 2,383
Accrued liabilities 1,108 1,524
Income taxes payable 11 71
Current portion of deferred license fee income 95 95
------ ------
Total current liabilities 4,826 4,790
Long-Term Liabilities:
Long-term debt 4,363 6,487
Capital lease obligation 8 25
Deferred license fee income 17 83
Deferred income taxes 264 224
------ ------
Total liabilities 9,478 11,609
------ ------
Shareholders' Equity:
Convertible preferred stock, Series C ($.01 par
value); 30,000 and 60,000 outstanding in 1996
and 1995, respectively 600 1,200
------ ------
Common Shareholders' Equity:
Common stock, ($.0001 par value);
8,000,000 shares authorized: 3,911,787
and 3,728,914 shares issued and outstanding
in 1996 and 1995, respectively -- --
Additional paid-in capital 11,178 9,263
Retained earnings 2,284 1,775
------ ------
Total common shareholders' equity 13,462 11,038
------ ------
Total shareholders' equity 14,062 12,238
------ ------
Total Liabilities and Shareholders' Equity $23,540 $23,847
======= ======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-4
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues $29,446 $33,955 $30,084
Costs and expenses:
Cost of revenues 20,895 26,259 22,064
Administrative and selling 4,858 4,513 4,730
Depreciation 1,919 1,801 1,663
Research and development 1,260 944 1,348
------ ------ ------
Total costs and expenses 28,932 33,517 29,805
------ ------ ------
Income from operations 514 438 279
License fee income, net 357 357 364
Interest expense (503) (459) (435)
Interest and other income, net 442 317 148
------ ------ ------
Income before provision for
income taxes 810 653 356
Provision for income taxes 301 211 136
------ ------ ------
Net income $ 509 $ 442 $ 220
====== ====== ======
Primary and fully diluted income
per common share $ .13 $ .11 $ .06
====== ====== ======
Weighted average common and
common equivalent shares
outstanding 4,063,061 3,972,281 3,939,925
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Shares Unrealized Total
Of Additional Loss on Common
Common Paid-in Retained Marketable Shareholders'
Stock Capital Earnings Securities Equity
----- ------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1993 3,679,996 $9,093 $1,113 -- $10,206
Issuance of Common Stock
under Benefit Plans 19,687 100 -- -- 100
Value for Allowance for
Temporary Decline in Market
Value of Marketable
Securities, Net of Deferred
Taxes -- -- -- (41) (41)
Net Income -- -- 220 -- 220
--------- ----- ------ ---- -------
Balance at October 31, 1994 3,699,683 9,193 1,333 (41) 10,485
Issuance of Common Stock
under Benefit Plans 29,231 70 -- -- 70
Value for Allowance for
Temporary Decline in Market
Value of Marketable
Securities, Net of Deferred
Taxes -- -- -- 41 41
Net Income -- -- 442 -- 442
--------- ----- ------ ---- -------
Balance at October 31, 1995 3,728,914 9,263 1,775 -- 11,038
Issuance of Common Stock
under Benefit Plans 32,809 193 -- -- 193
Conversion of Preferred Stock
to Common Stock 30,000 600 -- -- 600
Conversion of Notes Payable
to Common Stock 97,397 877 -- -- 877
Warrants Exercised 22,667 245 -- -- 245
Net Income -- -- 509 -- 509
--------- ----- ------ ---- -------
Balance at October 31, 1996 3,911,787 $11,178 $2,284 -- $13,462
========= ====== ====== ==== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 509 $ 442 $ 220
Adjustments to reconcile net income to
net cash provided by operating activities:
Bad debt (recovery) -- (27) (19)
Depreciation and amortization 2,156 2,148 1,987
Deferred income taxes 46 (15) (50)
Conversion of accrued interest to
principal on long-term debt 109 120 120
(Gain)loss on disposal of property 3 4 (8)
Unrealized loss on the valuation of marketable
securities -- -- 70
Realized loss on sale of marketable securities -- 64 --
(Increase) decrease in operating assets:
Accounts receivable 355 4,251 (3,200)
Inventories 107 (101) (46)
Other current assets (144) 45 (36)
Increase (decrease) in operating liabilities:
Accounts payable (1,151) (634) 1,889
Accrued liabilities (416) 589 3
Income taxes payable (60) 55 34
Deferred license fee income (66) (65) (65)
----- ----- -----
Net cash provided by operating activities: 1,448 6,876 899
----- ----- -----
Cash Flows from Investing Activities:
Capital expenditures (1,904) (1,520) (1,299)
Proceeds from sale of marketable securities 2,000 2,341 8
Payments on other assets (97) (1,161) (1,318)
Purchase of marketable securities -- (3,929) (441)
----- ----- -----
Net cash used in investing activities: (1) (4,269) (3,050)
----- ----- -----
Cash Flows from Financing Activities:
Repayment on long-term debt (3,823) (538) (564)
Proceeds from long-term financing 4,113 1,245 --
Common stock issued 438 70 100
----- ----- -----
Net cash provided by (used in)
financing activities: 728 777 (464)
----- ----- -----
Net Increase (Decrease) in Cash and Cash Equivalents 2,175 3,384 (2,615)
Cash and Cash Equivalents-Beginning of Year 5,422 2,038 4,653
----- ----- -----
Cash and Cash Equivalents-End of Year $7,597 $5,422 $2,038
===== ===== =====
Cash paid during the period for:
Interest $ 404 $ 459 $ 314
Income taxes 508 251 230
Noncash Items:
Unrealized loss on the valuation of marketable
securities, net of deferred taxes of $-0-, $-0-
and $29, respectively -- -- 41
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
Note 1. Summary of Significant Accounting Policies
------------------------------------------
Nature of Business:
-------------------
Energy Research Corporation and its Subsidiaries (the Company
or ERC) are engaged in the development of alternate methods of
energy generation and storage, primarily through
electrochemical processes, the manufacture of fuel cell and
battery products, and construction of fuel cell power plants,
generally on a contract basis.
The Company's revenues are generated from customers located
throughout the United States, Europe and Asia and the Company
generally does not require collateral in providing credit
except for international sales where a deposit may be required
with the purchase orders.
Principles of Consolidation:
----------------------------
The accompanying financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Fuel Cell
Manufacturing Corporation (FCMC)and Fuel Cell Engineering
Corporation (FCEC). All intercompany transactions have been
eliminated in the accompanying financial statements.
Cash and Cash Equivalents:
--------------------------
Cash equivalents consist primarily of United States Treasury
instruments issued directly by the agency with original
maturities of three months or less at date of acquisition. The
Company places its temporary cash investments with high credit
quality financial institutions.
Marketable Securities:
----------------------
In fiscal 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires that
investments in debt securities and marketable equity securities
be designated as trading, held-to-maturity or available-for-
sale. Securities classified as held-to-maturity are reported at
amortized cost and securities classified as available-for-sale
are reported at fair value. The unrealized gains or losses on
available-for-sale securities are included as a separate
component of shareholders' equity. Unrealized losses that are
other than temporary are recognized in earnings.
F-8
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
Inventories:
------------
Inventories consist principally of raw materials and are stated
at the lower of cost or market.
Property, Plant and Equipment:
------------------------------
Property, plant and equipment are stated at cost, less
accumulated depreciation provided on the straight-line method
over the estimated useful lives of the respective assets.
Leasehold improvements are amortized on the straight-line
method over the shorter of the estimated useful lives of the
assets or the term of the lease.
When property is sold or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in operations for
the period.
Intellectual Property:
----------------------
Intellectual property including patents and know-how is carried
at no value.
Revenue Recognition:
--------------------
Revenues and fees on long-term contracts, including government
and commercial cost reimbursement contracts, are recognized on
the percentage-of-completion method. Percentage-of-completion
is measured by costs (including applicable general and
administrative) incurred and accrued to date as compared with
the estimated total costs for each contract. Contracts
typically extend over a period of one or more years. In
accordance with industry practice, receivables include amounts
relating to contracts and programs having production cycles
longer than one year and a portion thereof will not be realized
within one year. Provisions for estimated losses, if any, are
made in the period in which such losses are determined. The
Company recognized approximately $1,131, $221 and $46 of long-term
contract revenues from corporate shareholders of the
Company during fiscal years ended October 31, 1996, 1995 and
1994, respectively.
License fee income arises from license agreements whereby the
Company grants the right to use Company patents and know-how.
Amounts are deferred and recognized ratably over the respective
terms of the agreements. The Company recognized approximately
$316 of license fee income during each of the fiscal years
ended October 31, 1996, 1995 and 1994, under license agreements
with corporate shareholders of the Company.
F-9
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
Revenues from the U.S. Government and its agencies directly and
through primary contractors were $22,410, $24,303 and $21,404
for the years ended October 31, 1996, 1995 and 1994,
respectively.
Income Taxes:
-------------
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Net Income Per Common Share:
----------------------------
Primary net income per common share is based upon net income
divided by the weighted average number of outstanding common
and common share equivalents.
Fully diluted net income per common share assumes that dilutive
securities had been converted or exercised at the beginning of
each period or on the date of issuance. Fully diluted net
income per common share is not shown as it is antidilutive for
all periods.
Use of Estimates:
-----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ
from those estimates.
Impairment of Long-Lived Assets:
--------------------------------
In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of." This statement,
effective commencing in 1997, establishes accounting standards
for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The initial adoption of this
standard will not have a material
F-10
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
impact on the Company's financial position and its operating
results.
Accounting for Stock-Based Compensation:
----------------------------------------
Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," effective for years
beginning after December 15, 1995, permits companies either to
adopt a new method of accounting for employee stock options and
similar equity instruments or to continue following the
historical accounting method with supplemental pro forma
disclosures. The Company will continue its historical
practice, and provide the necessary pro forma information when
it adopts the standard in 1997.
Note 2. Marketable Securities:
----------------------
At October 31, 1996 and 1995, the Company's marketable
securities were classified as held-to-maturity. A summary of
the Company's marketable securities at amortized cost as of
October 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. Treasury Bills $ 1,956 $ 3,900
===== =====
</TABLE>
Note 3. Accounts Receivable
-------------------
Accounts receivable at October 31, 1996, and 1995 consisted
of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. Government:
Amount billed $ 114 $ 241
Unbilled recoverable costs 1,057 1,495
Retainage 338 282
----- -----
1,509 2,018
----- -----
Commercial Customers:
Amount billed 397 561
Unbilled recoverable costs 929 610
Retainage 8 8
Other 5 6
----- -----
1,339 1,185
----- -----
$ 2,848 $ 3,203
===== =====
</TABLE>
Unbilled receivables represent amounts of revenue recognized on
costs incurred on contracts in progress which will be billed
within the next 30 days. The balances billed but not paid by
customers pursuant to retainage provisions in the contracts
will be due upon completion of the contracts and
F-11
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
acceptance by the customer.
Note 4. Property, Plant and Equipment
-----------------------------
Property, plant and equipment at October 31, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
Estimated
1996 1995 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Land $ 524 $ 524 -
Building and improvements 3,115 3,115 30 years
Machinery and equipment 11,147 10,644 3-8 years
Furniture and fixtures 984 984 6-10 years
Construction in progress 1,331 36
------ ------
17,101 15,303
Less, accumulated
depreciation and
amortization 9,856 8,040
------ ------
$ 7,245 $ 7,263
====== ======
</TABLE>
Note 5. Other Assets
------------
Other assets at October 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Power Plant Contract $ 41 $ 203
Power Plant License 2,788 2,835
Other 553 540
----- -----
Total $ 3,382 $ 3,578
===== =====
</TABLE>
The Power Plant Contract and License are being amortized over 4
and 10 years, respectively. Accumulated amortization was $767,
$558 and $292 at October 31, 1996, 1995 and 1994, respectively.
F-12
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
Note 6. Long-Term Debt
--------------
Long-term debt at October 31, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mortgage note payable (a) $ -- $ 2,504
Note payable (b) -- 762
Notes payable (c) 1,926 2,693
Note payable (d) 2,042 1,245
Note payable (e) 550 --
Note payable (f) 2,225 --
----- -----
6,743 7,204
Less, Current portion (2,380) (717)
----- -----
Total long-term debt $ 4,363 $ 6,487
===== =====
</TABLE>
The mortgage note payable in (a) above and the note payable in
(b) above were refinanced during 1996. The interest rate on
each was 9 1/4%.[See Note (e) and (f)].
(c) On November 30, 1989, Daimler Benz affiliate MTU-
Friedrichshafen GmbH (MTU), which was originally Messerschmitt-
Bolkow-Blohm GmbH, loaned $500 and $1,480 to FCMC, evidenced
by two 6% promissory notes. The notes include $611 and $713 of
accrued interest as of October 31, 1996 and 1995, respectively,
and are collateralized by a pledge of FCMC stock and a first
priority lien on all current and future assets of FCMC,
acquired with the proceeds of this loan, until the notes are
satisfied in full. Principal and interest are due November 30,
1996. However, pursuant to a separate subscription agreement
between the Company and MTU, MTU may convert the promissory
notes and the outstanding accrued interest thereon into the
Company's common stock at a conversion rate of $9 per share
prior to November 1997. During 1996, $877 of principal and
deferred interest was converted into 97,397 shares of common
stock of the Company. MTU requested the Company extend for one
year the repayment of a portion of the loan. Subsequent to the
date of the Consolidated Balance Sheet, the Company executed a
note for $630 and repaid the $1,296 of principal and accrued
interest.
(d) During 1995, the Company entered into a $2,500 credit
facility with MetLife Capital Corporation, an affiliate of
Metropolitan Life Insurance Company. Repayment of this note
commenced during 1996 and expires February 2000. The note is
payable in monthly installments of $53 plus interest. The
interest on this note is payable at the thirty-day commercial
paper rate plus 2-1/2%. At October 31, 1996,
F-13
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
the commercial paper rate was 5.38%. All borrowings under this
credit facility are collateralized by certain assets acquired
with the proceeds of this loan.
(e) Note (b) above was refinanced during 1996 with First Union
Bank of Connecticut. The note is payable in monthly
installments of $25 plus interest. Interest on this note is
payable at the London Interbank Offered Rates (LIBOR) plus
1.75%. At October 31, 1996, the LIBOR was 5.375%.
(f) Note (a) above was refinanced during 1996 with First Union
Bank of Connecticut. The note is payable in monthly
installments of $13 plus interest. Interest on this note is
payable at the LIBOR plus 1.75%. At October 31, 1996, the
LIBOR was 5.375%
The borrowings under the First Union Bank agreement are
collateralized by a substantial portion of the Company's
equipment and other assets, and a mortgage note in (f) above is
collateralized by a first mortgage on the Company's Danbury,
Connecticut location. The credit agreement associated with
Notes (e) and (f) above require the Company to maintain certain
financial covenants, including tangible net worth, debt service
coverage and liabilities to tangible net worth.
As of October 31, 1996, the above notes payable mature as
follows: fiscal 1997, $2,380; fiscal 1998, $1,664; fiscal 1999,
$755; fiscal 2000, $319; and fiscal year 2001 and beyond,
$1,625.
Note 7. Commitments and Contingencies
-----------------------------
The Company has been notified by the United States
Environmental Protection Agency (EPA) that it is a potentially
responsible party associated with Gallup's Quarry in
Plainfield, Connecticut, which is a National Priorities List
site under the Superfund. The alleged disposal at this site
took place in 1977. An agreement between the potentially
responsible parties (PRP's) and the EPA has been achieved. The
PRP's have agreed among themselves as to how to distribute the
cost. The Company has been assessed $87 and has paid $56 as
its share. The Company does not believe its share of the
remediation costs will have a significant impact on the
Company's results of operations or financial position.
The Company leases certain EDP and office equipment
F-14
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
and the Torrington, Connecticut manufacturing facility, and
office space in Washington, D.C. under operating leases
expiring on various dates through 2000. Rent expense was $460,
$429 and $298 for the fiscal years ended October 31, 1996, 1995
and 1994, respectively. Aggregate minimum annual payments
under the lease agreements for the five years subsequent to
October 31, 1996 are: 1997, $375; 1998, $126; 1999, $19; 2000,
$15; and 2001, $-0-.
The Company has an agreement with Electric Power Research
Institute (EPRI) pursuant to which ERC has agreed to pay EPRI
royalties based upon commercial sales of carbonate fuel cells.
The Company has an agreement with Pacific Gas and Electric
(PG&E) pursuant to which ERC has agreed to pay PG&E royalties
based upon commercial sales of carbonate fuel cells and certain
foreign license income.
In connection with certain contracts and grants from the United
States Department of Energy (DOE), ERC has agreed to pay DOE
10% of the annual license income received from MTU, up to $500.
Through 1996, ERC has paid to DOE a total of $175.
Note 8. Shareholders' Equity
--------------------
The Company's common shares are currently traded on The Nasdaq
Stock Market. In connection with the Company's public offering
of its common stock in 1992, the Company sold to the
underwriters, at a nominal price, warrants to purchase from the
Company 80,000 shares of common stock at $10.80 per share which
are exercisable for a period of four years commencing June 25,
1993. During 1996, 22,667 warrants were exercised. The total
warrants outstanding are 57,333.
The Company is authorized to issue a total of 250,000 shares of
preferred stock, the character of which is determined by the
Board of Directors (the Board). During the year ended October
31, 1994, the Company agreed to exchange 120,000 shares of
redeemable, nonconvertible Preferred "B" Shares for 60,000
shares of convertible, nonredeemable Preferred "C". The
redemption value of the Preferred "B" was $1,200. The Preferred
"C" Shares have a liquidation preference of $1,200 and are
convertible into shares of common stock on a one-for-one basis.
During 1996, 30,000 shares of Preferred "C" were converted to
30,000 shares of the Company's common stock.
The Board has adopted a Stock Option Plan (the Plan). Under
the terms of the Plan, options to purchase up to 600,000
F-15
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
shares of common stock may be granted to officers, key
employees and directors of the Company. Pursuant to the Plan,
the Board is authorized to grant incentive stock options or
nonqualified options and stock appreciation rights to officers
and key employees of the Company and may grant nonqualified
options and stock appreciation rights to directors of the
Company. Stock options and stock appreciation rights have
restrictions as to transferability. The option exercise price
shall be fixed by the Board but, in the case of incentive
stock options, shall not be granted at an exercise price less
than 100% of the fair market value of the shares subject to the
option on the date the option is granted. Stock appreciation
rights may be granted in conjunction with options granted under
the Plan. Stock appreciation rights shall be exercisable
during the period and to the extent related stock options are
exercisable. Upon exercise, the holder of a stock appreciation
right is entitled to receive in cash or stock, the excess fair
market value of one share of common stock over the related
option price per share multiplied by the number of shares
subject to the right. Stock options that have been granted are
exercisable commencing one year after grant at the rate of 25%
of such shares in each succeeding year. There are no stock
appreciation rights outstanding at October 31, 1996.
At October 31, 1996, 219,000 options were available for grant
and 242,650 options were exercisable. Option activity for the
years ended October 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Number of Shares
Under Option
------------
<C> <C>
Balance at October 31, 1993 324,000
Exercised @$9.75 (1,000)
Exercised @$1.67 (9,000)
Forfeited @$9.75 (3,000)
-------
Balance at October 31, 1994 311,000
Exercised @$1.67 (25,800)
Forfeited @$9.75 (4,000)
-------
Balance at October 31, 1995 281,200
Granted @$12.25 30,000
Exercised @$1.67 (14,300)
Exercised @$9.75 (7,000)
-------
Balance at October 31, 1996 289,900
=======
</TABLE>
F-16
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
The shareholders of the Company adopted a Section 423 Stock
Purchase Plan at the April 30, 1993 Annual Meeting. The total
shares allocated to the Plan are 150,000. The shares are
offered to employees over a eight-year period commencing
January 1, 1993. It allows an employee with one year of
service to purchase 300 shares per year at 85% of the lower of
the average price on the day of grant or issue. An employee
may not sell the stock for six months after the date of issue.
Plan activity for the years ended October 31, 1996, 1995 and
1994, was as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------
<C> <C>
Balance at October 31, 1993 150,000
Issued @$7.12 (7,298)
Issued @$9.46 (2,389)
-------
Balance at October 31, 1994 140,313
Issued @$8.08 (3,431)
-------
Balance at October 31, 1995 136,882
Issued @$8.50 (1,659)
Issued @$8.82 (9,850)
-------
Balance at October 31, 1996 125,373
=======
</TABLE>
At October 31, 1996, 791,606 shares of common stock have been
reserved for issuance pursuant to the Company's stock option
plan, FCMC's $630 convertible notes payable, underwriter
warrants, the convertible Preferred "C" Stock and Section 423
Stock Purchase Plan.
Note 9. Employee Benefits
-----------------
The Capital Accumulation Plan for Employees of Energy Research
Corporation is administered by a three-member pension
committee. The plan is a 401(k) plan covering full-time
employees of the Company who have completed one year of
service. The Company contributes an amount equal to 5% of each
participant's W-2 compensation to the plan on a monthly basis.
Participants are required to contribute 3% and may make
voluntary contributions up to an additional 7% of W-2
compensation out of pretax earnings. The Company charged
F-17
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
$395, $371 and $340 to expense during the years ended October
31, 1996, 1995 and 1994, respectively.
The Energy Research Corporation Pension Plan, a defined
contribution plan, covers full-time employees of the Company
who have completed one year of service. The Company
contributes an amount equal to 4% effective April 1, 1993
(previously 5%) of each participant's W-2 compensation to the
plan on a monthly basis. Participants are not required to
contribute to the plan, but may make voluntary contributions up
to an additional 6% of W-2 compensation out of after-tax
earnings. The Company charged $320, $296 and $271 to expense
during the years ended October 31, 1996, 1995 and 1994,
respectively.
Note 10. Income Taxes
------------
The Company's deferred tax assets and liabilities consisted of
the following at October 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory reserve $ 8 $ --
Capital loss carryforward 55 55
Vacation accrual 135 146
Self-insurance 46 33
Royalty income 46 74
AMT credit 2 88
---- ----
Gross deferred tax assets 292 396
Valuation allowance 55 55
---- ----
Deferred tax assets after
valuation allowance 237 341
Deferred liabilities:
Accumulated depreciation (292) (350)
---- ----
Gross deferred tax
liabilities (292) (350)
Net Deferred Tax Liability $ (55) $ (9)
==== ====
</TABLE>
F-18
<PAGE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands
except share and per share amounts)
The components of Federal income tax expense (benefit) were as
follows for the years ended October 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 236 $ 181 $ 172
Foreign 10 10 10
---- ---- ----
246 191 182
---- ---- ----
Deferred:
Federal 55 20 (52)
Foreign -- -- 6
---- ---- ----
55 20 (46)
---- ---- ----
Total Income
Tax Expense $ 301 $ 211 $ 136
==== ==== ====
</TABLE>
The components of state income tax expense which are included
in administrative and selling expenses were as follows for the
years ended October 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ 148 $ 91 $ 107
Deferred (9) (7) (4)
---- ---- ----
Total State Income
Tax Expense $ 139 $ 84 $ 103
==== ==== ====
</TABLE>
The reconciliation of the federal statutory income tax rate to
the Company's effective income tax rate for the years ended
October 31, 1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Federal
income tax rate 34.0% 34.0% 34.0%
Tax-exempt interest -- (5.4) (13.8)
Valuation allowance of
deferred tax assets -- -- 11.7
Other, net 3.2 3.7 6.3
---- ---- ----
Effective Income Tax Rate 37.2% 32.3% 38.2%
==== ==== ====
</TABLE>
F-19
<PAGE>
PART IV
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ENERGY RESEARCH CORPORATION
REGISTRANT
/s/ Bernard S. Baker
- --------------------
BY: BERNARD S. BAKER, PRESIDENT
JANUARY 17, 1997
- ---------------
DATE
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons, on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ Bernard S. Baker /s/ Louis P. Barth
- ----------------------------- -------------------------------
BY: BERNARD S. BAKER, PRESIDENT, BY: LOUIS P. BARTH, SENIOR VICE
CHIEF EXECUTIVE OFFICER, DIRECTOR PRESIDENT, CHIEF FINANCIAL OFFICER
(PRINCIPAL EXECUTIVE OFFICER) CORP. SECRETARY, TREASURER (PRINCIPAL
DATE: JANUARY 17, 1997 ACCOUNTING AND FINANCIAL OFFICER)
DATE: JANUARY 17, 1997
/s/ Warren D. Bagatelle /s/ Christopher R. Bentley
- -------------------------------- ---------------------------------
BY: WARREN D. BAGATELLE, DIRECTOR BY: CHRISTOPHER R. BENTLEY, DIRECTOR
DATE: JANUARY 17, 1997 DATE: JANUARY 17, 1997
/s/ Michael Bode /s/ James D. Gerson
- ----------------------------- ----------------------------
BY: MICHAEL BODE, DIRECTOR BY: JAMES D. GERSON, DIRECTOR
DATE: JANUARY 17, 1997 DATE: JANUARY 17, 1997
/s/ Thomas L. Kempner /s/ William A. Lawson
- ------------------------------ ------------------------------
BY: THOMAS L. KEMPNER, DIRECTOR BY: WILLIAM A. LAWSON, DIRECTOR
DATE: JANUARY 17, 1997 DATE: JANUARY 17, 1997
/s/ Hansraj C. Maru /s/ Richard M.H. Thompson
- ----------------------------- ----------------------------------
BY: HANSRAJ C. MARU, DIRECTOR BY: RICHARD M.H. THOMPSON, DIRECTOR
DATE: JANUARY 17, 1997 DATE: JANUARY 17, 1997
44
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the 1st day
of January, 1997 between ENERGY RESEARCH CORPORATION, a New
York corporation ("Employer"), and DR. BERNARD S. BAKER, an
individual with a mailing address at P.O. Box 166,
Hawleyville, Connecticut, 06440 ("Employee").
W I T N E S E T H
WHEREAS, Employee is currently employed by Employer
as its President; and
WHEREAS, Employer and Employee desire to enter into
an agreement to provide for the continued employment of
Employee pursuant to the terms and conditions of this
Agreement;
NOW, THEREFORE, in consideration of the covenants,
conditions, undertakings and promises contained herein, the
sufficiency which is fully acknowledged, Employer and Employee
agrees follows:
ARTICLE 1
EMPLOYMENT AND DUTIES
---------------------
1.1. Employment; Duties
For the term of this Agreement, Employer hereby employs
Employee, at the discretion of the Board of Directors, as
President and CEO, and/or Chairman of the Board of Employer.
In such position, Employee shall perform such duties as are or
may be assigned to Employee by the Board of Directors from
time to time consistent with Employee's position as a senior
executive of Employer. Employee shall devote his full working
time, attention, energies, skills and best efforts exclusively
to the performance of his duties and to the research and
development efforts, business and affairs of Employer, except
as otherwise assigned by the Board of Directors. Employee
shall not during the term of this agreement engage in any
other business activity whether or not such activity is
pursued for gain, profit or other pecuniary advantage, except
that Employee, on his own time, may manage his own
investments, and those of his immediate family so long as such
activity does not, in the reasonable judgment of Employer's
Board of Directors, adversely affect the performance of his
duties hereunder.
-1-
<PAGE>
1.2. Board Membership
During the term of this Agreement, Employer will use
its best efforts to cause its Board of Directors to nominate
Employee for re-election as a management nominee of Employer's
Board of Directors.
1.3. Emoluments of Office
During the term of this Agreement, Employee shall be
provided the use of a secretary, a private office and the use
of other facilities sufficient to enable Employee to perform
the duties assigned to him pursuant to Section 1.1.
ARTICLE 2
2.1 Term
The term of Employee's employment by employer hereunder
shall commence on January 1, 1997 and, except as otherwise
provided in this Agreement with respect to earlier
termination, shall continue in effect through December 31,
1997.
ARTICLE 3
COMPENSATION
-----------
3.1. Base Salary
For all service to be rendered by Employee under this
Agreement, including services as a officer, director and
member of any committee, and such other duties as the board of
Directors may assign to him in accordance with Section 1.1
hereof, Employer agrees to pay Employee a base salary of
$320,000 per annum for his full time employment under this
Agreement. The base salary shall be payable at such times as
is customary for employees for Employer and in accordance with
the normal payroll practices of Employer.
3.2. Incentive Compensation
A bonus of $75,000 will be paid to Employee for
services in the 1996 year. This bonus will be paid on the
quarterly schedule set forth in Paragraph 6 of the ERC
Incentive Compensation Plan, with the first payment to be made
on the last payday of January 1997.
3.3. Expenses
In addition to base salary, Employer shall reimburse
Employee for all reasonable and necessary business expenses
actually incurred by him in the performance of his duties,
including, without limitation, expenses for travel, meals,
entertainment and other
-2-
<PAGE>
miscellaneous business expenses. Employee shall submit to
employer written, itemized expense accounts and such
additional substantiation and justification as Employer may
reasonably request.
ARTICLE 4
EMPLOYER BENEFITS
------------------
4.1. Vacation
Employee shall be entitled to receive six weeks of paid
vacation during 1997 (pro rated for any partial year), which
shall be taken at such time or times as will not unreasonably
hinder or interfere with Employer's business or operations.
Vacation time may be accrued from year to year in accordance
with Employer's general vacation policy.
4.2. Death Benefit and Life Insurance
A. Employee is entitled to participate in any
life insurance, accidental death and
dismemberment and travel accident plans
maintained by Employer for its employees, on
terms no less favorable than those extended to
any other senior executive of Employer.
B. Employer may, if it so chooses, apply for and
procure in its own name, and for its own
benefit, additional life insurance and
disability insurance on Employee, and Employee
shall have no right, title or interest
therein.
C. Employee agrees to submit to any reasonable
medical or other examination, and to execute
any application or other instrument reasonably
necessary to obtain any policy of insurance
under this Article.
D. Employer shall maintain a $2 million life
insurance policy for Employee, the proceeds of
which shall be used, based upon the pricing
formula set forth below, to buy back his stock
to that amount in the event of his death. The
proceeds will go to his wife or his estate in
the event that Employee's wife is not living.
Any amounts then remaining shall be retained
by Employer. The price paid is to be based on
the market price based, if the stock is traded
on an exchange or the Nasdaq National Market,
on the average of the closing price for the
common stock for the five day period preceding
the date on which the death occurred, and the
five day period following the date on which
the death occurred, or, if the stock is traded
over-the-counter (other than on the Nasdaq
national market), on the average closing high
bid prices for the above
-3-
<PAGE>
-described time periods. In the event a death
announcement results in a trading halt, the
calculation will be based on the average price
5 days prior to death and 5 days after trading
is resumed.
4.3. Liability Insurance
Employer will obtain and maintain at all times directors'
and officers' liability insurance for Employee, so long as
such insurance can be obtained on terms acceptable to
Employer's Board of Directors.
4.4. Indemnification
Employer agrees to defend and shall indemnify and hold
Employee harmless to the fullest extent permitted by law from
any and all liability, costs, and expenses which may be
assessed against Employee by reason of the performance of his
responsibilities and duties under the terms of this Agreement,
provided such liability does not result from willful
misconduct or gross negligence of Employee.
4.5. Retirement Plan
Employee is entitled to participate in any retirement
plan maintained by Employer for its employees (including,
without limitation, pension, annuity, profit-sharing and
deferred compensation plans).
4.6. Other Benefit Plans
Nothing herein is intended to reduce the benefits that
Employee would otherwise be entitled to receive under any
Employer plans (exclusive of the ERC Incentive Compensation
Plan) currently in existence. Without limiting the foregoing,
Employee is entitled to participate in and receive benefits
under any accident, disability, health and dental insurance,
profit sharing, bonus, stock option and stock purchase plan
maintained by Employer or its affiliates for its employees.
In connection therewith, Employer shall grant Employee options
to purchase 50,000 shares, effective as of the date of this
Agreement, with exercise prices as follows:
-4-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Per Share Exercise Price
---------------- -----------------------
<C> <C>
16,667 The greater of $12.00 or the fair market
value as measured by the closing price of
the Common Stock as of December 31,
1996 (the "Fair Market Value")
16,667 The greater of $15.00 or the Fair Market
Value
16,66 The greater of $18.00 or the Fair Market
Value
</TABLE>
The options shall have terms and conditions consistent
with Employer's standard form of option agreement, except that
the options shall become fully vested one year from the date
of grant provided that Employee continues to be employed by
Employer through such date, and that, as set forth in Section
422(d) of the Internal Revenue Code, to the extent that the
aggregate fair market value of stock (valued as of the date of
grant) with respect to which the options vest in any calendar
year exceeds $100,000, such options shall be treated as
options which are not incentive stock options.
ARTICLE 5
RESTRICTIONS
------------
5.1. Non-Competition
So long as Employee is employed under this Agreement, and
for one year thereafter, Employee will not directly or
indirectly, in any capacity, engage in or render services
(including, without limitation, research development,
marketing or sales) to, or have a financial interest in, any
person, firm, corporation or other entity engaged in any line
of business activity in competition with Employer.
A. For purposes of this section, an entity is "in
competition with Employer" if in such territory
it produces or distributes any product, or
performs any service, which is directly
competitive with the products of Employer, or
services performed by Employer, or any
subsidiary or Employer, as of the date
Employee's employment under this Agreement is
terminated.
-5-
<PAGE>
B. Nothing contained in this Section shall
preclude Employee from purchasing or owning an
equity interest not in excess of 2% in any
entity which is in competition with Employer
if the securities so purchased or owned are
listed on any national stock exchange or are
traded or quoted on the National Association
of Securities Dealers Quotation System.
5.2. Confidentiality
Except as may be required by law, Employee will not,
while employed under this Agreement and for a period of seven
years thereafter, use directly or indirectly, for his own
account or for the account of any person, firm, corporation or
other entity or disclose to any person, firm, corporation or
other entity, Employer's proprietary information disclosed or
entrusted to him or developed or generated by him in the
performance of his duties hereunder, including, but not
limited to, information relating to Employer's organizational
structure, operations, business plans, technical projects,
pricing data, production costs, research data or results,
inventions, trade secrets, customer lists or other work
product developed by or for Employer, whether on the premises
of Employer or elsewhere.
The provisions of this Section shall not apply to any
proprietary, confidential or secret information which is, at
the commencement of the term of this Agreement, or at some
later date, publicly known under circumstances involving no
breach of this Agreement or is lawfully and in good faith made
available to Employee without restrictions as to disclosure by
a third party.
Any idea, concept device, program, plan, data, invention,
discovery, improvement, writing design or business method
conceived or made by Employee, individually or jointly, during
any past or future period of employment with Employer or any
affiliate thereof relating to the business of Employer or such
affiliate, whether patentable or unpatentable, or registrable
or copyrighted material or trademarks, shall be promptly and
fully disclosed to Employer or such affiliate and, whether or
not so disclosed, shall be and become the absolute property of
Employer or such affiliate. In confirmation thereof, Employee
will, upon reasonable request, execute and deliver to Employer
assignments of any such idea, concept, device, program, plan,
data, invention, discovery, writing, improvement, design or
business method.
Employee will reasonably assist Employer in every way, at
Employer's sole expense, both during the course of and after
termination of his employment, in the procurement, maintenance
and enforcement, for employer's benefit, of patents on such
inventions or discoveries and registrations on such
copyrighted material, trademarks or business methods in any
and all countries.
So long as Employee is employed by Employer, Employee
shall maintain proper files and records relating to work
performed by him in accordance with past practices or
-6-
<PAGE>
as otherwise reasonably specified by Employer from time to
time. All such files and records are to be kept in Employer's
custody and subject to its control and to be the exclusive
property of Employer. Upon termination of Employee's
employment with Employer or any affiliate thereof, Employee
shall deliver to Employer all files and records of any nature
which are in Employee's possession or control and which relate
in any manner to his employment or to the activities of
Employer or any affiliate thereof.
5.3. Injunctive Relief
Employee acknowledges that the restrictions contained in
this Article are reasonable in view of the nature of the
business in which Employer is engaged and his knowledge of the
business.
Employer and Employee mutually agree that Employee's
obligations under this Article are of a special and unique
character which gives them a peculiar value, and Employer
cannot be reasonably or adequately be compensated in damages
in an action at law in the event Employee breaches such
obligations. Employee therefore expressly agrees that, in
addition to any other rights or remedies which Employer may
possess, Employer shall be entitled to injunctive and other
equitable relief to prevent a breach of this Article by
Employee, including a temporary restraining order or temporary
injunction from any court of competent jurisdiction
restraining any threatened or actual violation, and each party
hereby consents to the entry of such order and injunctive
relief and waives the making of a bond as a condition for
obtaining such relief. Such rights shall be cumulative and in
addition to any other legal or equitable rights and remedies
Employer may have.
5.4 Survival Enforceability
It is expressly agreed by the parties hereto that the
provisions of this Article shall survive the termination of
this Agreement.
If any one or more of the provisions contained in this
Article shall for any reason in any jurisdiction be held to be
excessively broad as to the time, duration, geographical
scope, activity or subject, it shall be construed with respect
to such jurisdiction, by limiting or reducing it, so as to be
enforceable to the extent compatible with the applicable law
of such jurisdiction as it shall then appear.
-7-
<PAGE>
ARTICLE 6
DEATH; DISABILITY
-----------------
6.1. Death
If Employee dies while employed under this Agreement,
this Agreement shall terminate immediately. Employer will pay
to Employee's estate his base salary under Section 3.1 through
the last day of the calendar month in which he dies, plus any
incentive compensation awarded to Employee under the ERC
Incentive Compensation Plan, but not yet paid, and such death
benefits as may be provided pursuant to Section 4.2.
6.2. Disability
If Employee fails to perform his duties under this
Agreement due to "Disability", as defined in Section 6.2 B(i)
or (ii), Employer may terminate this Agreement upon 30 days
written notice to him. In that event, Employer shall pay
Employee his base salary under Section 3.1 through the date of
termination. If Employee fails to perform his duties under
this Agreement due to "Disability," as defined in Section 6.2
B(iii), then Employer may immediately terminate this Agreement
upon the payment to Employee of his base salary for a period
of seven (7) months, less such payments previously made by
Employer to Employee on account of such Disability. In
addition, upon any termination based upon Disability, Employer
shall pay to Employee any incentive compensation awarded to
Employee under the ERC Incentive Compensation Plan but not yet
paid; provided, however, that to the extent Employee is
receiving disability benefits pursuant to Employer's
disability insurance policy, the amount of such benefits shall
be credited against Employee's base salary during the period
prior to the date of termination.
A. If Employer gives notice of termination
under this Section and, before the
termination date stated in the notice,
Employee's Disability ceases and he takes
up and resumes performance of his duties
under this Agreement, the notice of
termination shall be void and of no
effect, and this Agreement shall continue
in effect as though such notice had not
been given.
B. The term "Disability" shall mean the
inability of Employee to perform for
Employer the duties specified in Section
1.1 by reason of any medically
determinable physical or mental
impairment for (i) a period of six
consecutive months, (ii) for shorter
periods aggregating six months in any 12-month
period or (iii) if the Board of
Directors determines that it is probable
that the Disability will continue for a
length of time so as to constitute a
Disability under clauses (i) or (ii)
above. The determination of whether
Employee
-8-
<PAGE>
is Disabled shall be made by the Board of
Directors on the basis of written medical
evidence reasonably satisfactory to it.
ARTICLE 7
TERMINATION
----------
7.1 Termination by Employee
Employee may terminate this Agreement upon 30 days
written notice to Employer setting forth with specificity the
grounds for termination upon the occurrence of any of the
following: (i) the failure of Employer to observe or comply
with Article 1 of this Agreement, if such failure has not been
cured within 30 days after written notice thereof has been
given by Employee to Employer, (ii) the dissolution of
Employer, or (iii) any merger in which Employer is not the
surviving corporation and in which the stockholders of
Employer own less than 50% of the voting securities of the
merged entity upon the effectiveness of the merger, or any
consolidation, sale of substantially all of the assets of
Employer or change of control of Employer, provided Employee
has not approved the transaction by voting for it either as a
director or shareholder. For purposes of clause (iii) above,
a "change of control" shall be presumed to have occurred if
within any 12-month period a single person or entity, or
related group of persons or entities, acquires 50% or more of
the outstanding voting stock of Employer. In the event of a
termination under this Section, Employer shall pay Employee
(i) his base salary as then in effect under Section 3.1
through the date of termination, (ii) any incentive
compensation awarded to Employee under the ERC Incentive
Compensation Plan, but not yet paid, and (iii) a supplemental
payment equal to 12 weeks' base salary, and shall continue to
pay to Employee his base salary as then in effect under
Section 3.1 for a period of one year following the date of
termination. Following termination of this Agreement,
pursuant to this Section, Employee shall have no obligation to
mitigate his damages by finding alternative employment or
otherwise. In the event that Employee terminates this
Agreement for reasons other than as set forth above in this
Section 7.1 and which are not otherwise within Article 6,
Employer shall pay Employee his base salary under Section 3.1
through the date of termination, plus accrued vacation time,
plus any incentive compensation awarded to Employee under the
ERC Incentive Compensation Plan but not yet paid.
-9-
<PAGE>
7.2 Termination by Employer for Cause
Employer may terminate this Agreement for cause in the
manner set forth below. For purposes of this Section, "cause"
shall mean a material breach by Employee of the terms of this
Agreement with results that are materially and demonstrably
injurious to the business of Employer. The term "cause" as
used in the preceding sentence does not include Employee's
erroneous judgment or judgments of a technical, scientific,
financial, legal and/or environmental nature which were,
although erroneous, nevertheless reasonable at the time and
under the circumstances in which they were made. In the event
of termination under this Section, Employer shall pay to
Employee his base salary under Section 3.1 through the date of
termination stated in the notice plus any incentive
compensation awarded to Employee under the ERC Incentive
Compensation Plan but not yet paid, and Employee shall, if so
requested by the Board of Directors, perform his duties under
Article 1 through the date of termination stated in the
notice.
7.3. Termination by Employer for Cause-Procedure
Notwithstanding anything to the contrary set forth
herein, Employee shall not be deemed to be have been
terminated for cause without (A) delivery to Employee of
reasonable written notice setting forth with specificity the
reasons for Employer's intention to terminate for cause, (B)
an opportunity for Employee, together with his counsel, to be
heard before the Board of Directors and (C) delivery to
Employee of a notice of termination from the Board of
Directors stating that a majority of the members of the Board
have determined in good faith that Employee was guilty of
injurious conduct as set forth above and specifying the
particulars thereof in detail. If Employee disputes the
findings of the Board pursuant hereto, the parties shall, at
the election of Employee, refer such matter to arbitration.
7.4 Termination by Employer or Employee Without Cause
Either Employer or Employee may terminate this Agreement
without cause prior to the expiration of the term hereof upon
30 days written notice. Upon such termination, Employer shall
pay Employee his base salary under Section 3.1 through the
date of termination (provided, however, that Employee
continues to be available to perform the services required
under Section 1.1 through the date of termination), plus any
incentive compensation awarded to Employee under the ERC
Incentive Compensation Plan, but not yet paid, and any accrued
vacation. Nothing herein shall prohibit Employer from
relieving Employee of any or all of his duties hereunder
pending the expiration of the 30-day notice period.
-10-
<PAGE>
ARTICLE 8
ARBITRATION
-----------
8.1 Arbitration
All controversies, claims, disputes and other matters
in question between the parties arising out of, or relating
to, this Agreement, or the breach thereof, shall be decided by
arbitration before one arbitrator to be held in New York, New
York, in accordance with the commercial rules of the American
Arbitration Association then in effect, and judgment upon the
award shall be binding upon the parties hereto and may be
entered in any court having jurisdiction thereof.
ARTICLE 9
MISCELLANEOUS
-------------
9.1. Entire Agreement
This Agreement contains the entire understanding and
agreement between Employer and Employee and cannot be amended,
modified, or supplemented in any respect except by subsequent
written agreement entered into by both parties.
9.2. Successors of Employer
This Agreement shall inure to the benefit of and be
binding upon Employer, its successors and assigns, including,
without limitation, any person, firm, corporation or other
entity which may acquire all or substantially all of
Employer's assets and business, or with or into which Employer
may be consolidated or merged, and this provision shall apply
in the event of any subsequent merger, consolidation or
transfer. Employer agrees that it will not merge or
consolidate with any other entity or permit its business
activities to be taken over by any other entity unless and
until the succeeding or continuing entity shall expressly
assume the rights and obligations of Employer set forth in
this Agreement. In every respect, this Agreement shall inure
to the benefit of and be binding upon Employee, his heirs,
executors and personal representatives and, being personal in
nature, shall not be assignable by Employee.
9.3. Effect of Waiver
The waiver by either party of a breach of any
provision of this Agreement shall not operate as or be
construed as a waiver of any subsequent breach.
-11
<PAGE>
9.4 Notices
Any notice, request, demand or other communication in
connection with this Agreement must be in writing and shall be
deemed to have been given and received three days after a
certified or registered letter containing such notice,
properly addressed, with postage prepaid, is deposited in the
United States mail; and, if given otherwise than by registered
or certified mail, it shall not be deemed to have been given
until actually delivered to and received by the party to whom
it is addressed.
A. Notice to Employer shall be given at its principal
mailing address, which at the time of execution of
this Agreement is 3 Great Pasture Road, Danbury,
Connecticut, 06813, Attention: Corporate
Secretary, or at such other address as it may
designate, with a copy to Mr. Richard M. H.
Thompson, 116 East 64th Street, New York, New York,
10021, and Mr. William Lawson, 312 West Main
Street, Owosso, Michigan, 48867.
B. Notice to Employee shall be given at his home
address, which at the time of execution of this
Agreement is the address set forth in the heading
of this Agreement, or at such other address as he
may designate.
9.5. Counterparts
This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.6. Severability
If, in any jurisdiction, any provision of this Agreement
or its application to any party or circumstances is
restricted, prohibited or unenforceable, such provision shall,
as to such jurisdiction, be ineffective only to the extent of
such restriction, prohibition or unenforceability without
invalidating the remaining provisions hereof and without
affecting the validity or enforceability of such provision in
any other jurisdiction or its application to other parties or
circumstances.
9.7. Survival
Each of the terms and provision of this Agreement which
are expressly or impliedly so intended shall survive the
termination of this Agreement.
-12-
<PAGE>
9.8. Applicable Law
This Agreement shall be governed by and construed
according to the laws of the State of New York..
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year first stated above.
ENERGY RESEARCH CORPORATION
By: /s/ Thomas Kempner
-------------------
Thomas Kempner, Chairman
/s/ Dr. Bernard S. Baker
------------------------
Dr. Bernard S. Baker
-13-
<PAGE>
EXHIBIT 10.47
U.S. DEPARTMENT OF ENERGY
NOTICE OF FINANCIAL ASSISTANCE AWARD
- (See Instructions)
Under the authority of Public Law 95-91 and 97-258 DOE
Organization Act and the Federal Grant and Cooperative
Agreement Act and subject to legislation, regulations and
policies applicable to (cite legislative program title):
1. PROJECT TITLE
Molten Carbonate Fuel Cell (MCFC)
Product Design Improvement
2. INSTRUMENT TYPE
GRANT x COOPERATIVE AGREEMENT
==== ====
3. RECIPIENT (Name, address, zip code, area code and
telephone no.)
Energy Research Corporation
3 Great Pasture Road
Danbury, CT 06813
203/825-6057 203/792-2945 fax
4. INSTRUMENT NO. 5. AMENDMENT NO.
DE-FC21-95MC31184 A013
6. BUDGET PERIOD 7. PROJECT PERIOD
From: 11/01/95 To: 10/31/96 From: 12/20/94 To:
3/31/99
8. RECIPIENT PROJECT DIRECTOR (Name and telephone No.)
Hans Maru
203/825-6006
9. RECIPIENT BUSINESS OFFICER (Name and telephone No.)
Hans Maru
203/825-6006
10. TYPE OF AWARD
NEW CONTINUATION RENEWAL
=== === ===
X REVISION SUPPLEMENT
=== ====
11. DOE PROJECT OFFICER (Name, address, zip code,
telephone No.)
Tom George
USDOE/METC, P.O. Box 880
Morgantown, WV 26507-0880 304/285-4524
12. ADMINISTERED FOR DOE BY (Name, address, zip code,
telephone No.)
U.S. Department of Energy
Morgantown Energy Technology Center
ATTN: R. Diane Manilla
P.O. Box 880
Morgantown, WV 26507-0880
13. RECIPIENT TYPE
STATE GOV'T INDIAN TRIBAL GOV'T HOSPITAL
==== ==== ====
X FOR PROFIT INDIVIDUAL LOCAL GOV'T
==== ORGANIZATION ==== ====
INSTITUTION OF OTHER NONPROFIT X C P
==== HIGHER EDUCATION ==== ORGANIZATION === ===
SP OTHER (Specify)
==== ====
14. ACCOUNTING AND APPROPRIATIONS DATA
a. Appropriation Symbol b. B&R Number
89X0240.93 4050AB450
c. FT/AFP/OC d. CFA Number
ME6093 H1/255 HHS/PMS
15. EMPLOYER I.D. NUMBER/SSN
06-0853042
16. BUDGET AND FUNDING INFORMATION
a. CURRENT BUDGET PERIOD INFORMATION
(1) DOE Funds Obligated This Action $ 6,514,000
(2) DOE Funds Authorized for Carry Over $ 0
(3) DOE Funds Previously Obligated in
this Budget Period $15,545,153
(4) DOE Share of Total Approved Budget $22,423,500
(5) Recipient Share of Total Approved
Budget $12,425,584
(6) Total Approved Budget $34,849,084
b. CUMULATIVE DOE OBLIGATIONS
(1) This Budget Period $22,059,153
[Total of lines a.(l) and a.(3)]
(2) Prior Budget Periods $12,379,342
(3) Project Period to Date $34,438,495
[Total of lines b.(l) and b.(2)]
17. TOTAL ESTIMATED COST OF PROJECT $123,764,991
(This is the current estimated cost of the project. It
is not a promise to award nor an authorization to expend
funds in this amount.)
18. AWARDS/AGREEMENT TERMS AND CONDITIONS
This award/agreement consists of this form plus the
following:
a. Special terms and conditions (if grant) or
schedule, general provisions, special provisions (if
cooperative agreement).
b. Applicable program regulations (specify)
(Date).
c. DOE Assistance Regulations, 10 CFR Part-600, as
amended, Subparts A and B (Grants) or
===
X C (Cooperative Agreements).
===
d. Application/proposal dated 8/23/96,
X as submitted
===
with changes as negotiated
===
19. REMARKS
20. EVIDENCE OF RECIPIENT ACCEPTANCE
/s/ Ross Levine 09/05/96
_______________________ ________
(Signature of Authorized (Date)
Recipient Official
ROSS M. LEVINE
(Name)
CONTRACT MANAGER AND ASSISTANT SECRETARY
(Title)
21. AWARDED BY
/s/ G. William Bolyard 9/5/96
_______________________ _______
(Signature) (Date)
G. WILLIAM BOLYARD
(Name)
Contracting Officer
(Title)
<PAGE>
Cooperative Agreement No. DE-FC21-9SMC31184
Energy Research Corporation
Amendment No. A013
The purpose of this amendment is to revise the second budget period
Government and Participant share of costs, provide additional funding,
and otherwise amend the agreement as follows:
1. Part II, paragraph 4. Financial Administration, subparagraph (a)
Total Estimated Project Cost the text is deleted in its entirety and
the following is substituted in lieu thereof:
" (a) Total Estimated Project Cost. The total estimated cost for
performing the work under this cooperative agreement is $123,764,991.
If the Participant believes that the estimated cost requires revision,
the Participant shall notify the DOE Contracting Officer in writing and
provide its proposal for revising estimated costs (see 10 CFR 600.32
and 600.114)."
2. Part II, paragraph 4. Financial Administration, subparagraph (b) (1)
and (2) Participant and Government Funding the text is deleted in its
entirety and the following is substituted in lieu thereof:
(1) Cost sharing will be provided by the Participant as follows:
Third Party and Subcontracts $37,888,865
Participant 1,754,351
Total Cost Share $39,643,216
In-Kind Contributions $18,390,548
(2) Participant and Government Funding: The Participant's and the
Government's estimated cost sharing is shown in the (attached) Part IV,
Attachment B, Budget Information Form (EIA-459C). Funding for the 2nd
Budget Period in the amount of $6,514,000 is obligated and made
available for payment of allowable costs. The Government will obligate
additional funds as funds become available but not to exceed the
Government share of the 2nd Budget Period stated on the Federal
Assistance Budget Information Form in Part IV of the Cooperative
Agreement."
The Government share of costs is increased by $6,514,000 from
$15,909,500 to $22,423,500. The Participants share of costs is
increased by $113,062 from $12,312,522 to $12,425,584.
3. Part II, paragraph 4. Financial Administration, subparagraph (h)
Indirect Costs the text is deleted in its entirety and the following is
substituted in lieu thereof:
" (1) Pending establishment of final indirect cost rates for any
period, billing and reimbursement of indirect costs shall be made on
the basis of provisional rates approved by the Contracting Officer.
(2) If, during the project period the Participant's provisional rates
change, the Participant shall notify the Contracting Officer in
writing. The Participant shall also submit this notification to the
cognizant Government audit agency and the cognizant Government agency
for administration if this agreement has been assigned. After
notification from the cognizant administration agency and/or audit
agency, the Contracting Officer shall amend the agreement incorporating
the DOE-approved provisional rates for the current period.
(3) If, during the project period of this agreement, provisional
rates have not been established for a particular fiscal year via an
agreement amendment, then the Participant shall continue to bill those
rates most
<PAGE>
recently approved by the Contracting Officer, until such time
as the agreement is amended to reflect the most current
approved rates."
4. Part IV, Attachment B, Federal Assistance Budget
Information Form is deleted in its entirety and the attached
Federal Assistance Budget Information Form is substituted in
lieu thereof.
5. Part IV, Attachment C, Financial Assistance Reporting
Requirements Checklist is deleted in its entirety and the
attached Financial Assistance Reporting Requirements
Checklist is substituted in lieu thereof.
6. Part IV, Attachment D, List of Government Property --
Participant Acquired is deleted in its entirety and the
attached List of Government Property -- Participant Acquired
is substituted in lieu thereof.
[END OF AMENDMENT NO. A013]
<PAGE>
<TABLE>
EXHIBIT NO. 11
ENERGY RESEARCH CORPORATION
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<CAPTION>
Twelve Months
Ended October 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY
- -------
Shares outstanding, beginning of
period 3,728,914 3,699,683 3,679,996
Weighted average number of shares
issued, retired and issuable
share equivalents 334,147 272,598 259,929
--------- --------- ---------
Weighted average number of common
and common equivalent shares
outstanding 4,063,061 3,972,281 3,939,925
========= ========= =========
Net income $ 509,000 $ 442,000 $ 220,000
========= ========= =========
Net income per common share $ .13 $ .11 $ .06
========= ========= =========
FULLY DILUTED
- -------------
Weighted average number of common
and common equivalent shares
outstanding as adjusted for
full dilution 4,063,061 4,252,281 4,159,925
Adjustment for interest, net of
tax, on convertible long-term debt $ 25,000 $ 80,000 $ 80,000
========= ========= =========
Adjusted net income $ 534,000 $ 522,000 $ 300,000
========= ========= =========
Net income per common share <F1> $ .13 $ .12 $ .07
========= ========= =========
<F1> 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. </F1>
</TABLE>
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
__________________________________
The Board of Directors
Energy Research Corporation:
We consent to incorporation by reference in the registration
statements (No. 33-68866 and No. 33-77008) on Form S-8 of Energy
Research Corporation and Subsidiaries of our report dated
December 17, 1996, relating to the consolidated balance sheets of
Energy Research Corporation and Subsidiaries as of October 31,
1996 and 1995, and the related consolidated statements of income,
changes in common shareholders'equity and cash flows for the
years then ended, which report appears in the October 31, 1996,
annual report on Form 10-K of Energy Research Corporation.
/s/ KPMG PEAT MARWICK LLP
_________________________
Stamford, CT
January 24, 1997
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
__________________________________
The Board of Directors
Energy Research Corporation:
We consent to incorporation by reference in the registration
statements on Forms S-8 (File No. 33-68866, effective September
15, 1993 and File No. 33-77008, effective March 29, 1994) of our
report dated December 16, 1994, relating to the consolidated
statements of income, changes in common shareholders' equity and
cash flows for the year ended October 31, 1994 of Energy Research
Corporation and Subsidiaries, which report is included in the
Annual Report of Energy Research Corporation on Form 10-K for the
year ended October 31, 1996.
/s/ BLUM, SHAPIRO & CO., P.C.
_________________________
West Hartford, Connecticut
January 22, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLDIATED INCOME STATEMENT, CONSOLIDATED BALANCE SHEET AND CONSOLIDATED CASH
FLOW STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 7,597
<SECURITIES> 1,956
<RECEIVABLES> 2,848
<ALLOWANCES> 0
<INVENTORY> 72
<CURRENT-ASSETS> 12,913
<PP&E> 17,101
<DEPRECIATION> 9,856
<TOTAL-ASSETS> 23,540
<CURRENT-LIABILITIES> 4,826
<BONDS> 0
0
0
<COMMON> 13,462
<OTHER-SE> 600
<TOTAL-LIABILITY-AND-EQUITY> 23,540
<SALES> 29,446
<TOTAL-REVENUES> 29,446
<CGS> 20,895
<TOTAL-COSTS> 28,932
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (503)
<INCOME-PRETAX> 810
<INCOME-TAX> 301
<INCOME-CONTINUING> 509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 509
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
