SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-14204
ENERGY RESEARCH CORPORATION
_____________________________________________________
(Exact name of registrant as specified in its charter)
New York 06-0853042
________________________________ ____________________
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3 Great Pasture Road, Danbury, Connecticut 06813
_________________________________________ _________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (203) 792-1460
_____________________________________________________________________
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's Common Stock,
par value $.0001, as of June 6, 1997 was 3,974,206.
<PAGE>
ENERGY RESEARCH CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Unaudited Consolidated Condensed
Financial Statements:
Consolidated Condensed Balance Sheets as of
April 30, 1997 and October 31, 1996 2
Consolidated Condensed Statements of Operations
for the three months ended April 30, 1997
and April 30, 1996 3
Consolidated Condensed Statements of Operations
for the six months ended April 30, 1997
and April 30, 1996 4
Consolidated Condensed Statements of Cash Flows
for the six months ended April 30, 1997
and April 30, 1996 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security
Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
-1-
<PAGE>
Part 1 - Financial Information
Item 1. Financial Statements
<TABLE>
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
April 30, Oct 31,
1997 1996
------- --------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 6,700 $ 7,597
Marketable securities - 1,956
Accounts receivable 2,760 2,848
Inventories 114 72
Deferred income taxes 209 209
Other current assets 475 231
------ ------
Total current assets 10,258 12,913
====== ======
Property, plant and equipment, net 7,767 7,245
Other assets, net 3,190 3,382
------ ------
Total Assets $21,215 $23,540
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 1,733 $ 2,380
Accounts payable 742 1,232
Accrued liabilities 748 1,108
Income taxes payable 6 11
Current portion of deferred license
fee income 254 95
------ ------
Total current liabilities 3,483 4,826
Long Term Liabilities:
Long-term debt 3,192 4,363
Capital lease obligation - 8
Deferred license fee income - 17
Deferred income taxes 264 264
------ ------
Total liabilities 6,939 9,478
------ ------
Shareholders' Equity:
Convertible preferred stock, Series
C ($.01 par value); 30,000
shares issued and outstanding at
April 30, 1997 and October 31, 1996,
respectively 600 600
------ ------
Common Shareholders' Equity:
Common stock,($.0001 par value);
8,000,000 shares authorized:
3,961,736 and 3,911,787 shares issued
and outstanding at April 30, 1997
and October 31, 1996, respectively - -
Additional paid-in capital 11,241 11,178
Retained earnings 2,435 2,284
------ ------
Total common shareholders' equity 13,676 13,462
------ ------
Total shareholders' equity 14,276 14,062
------ ------
Total Liabilities and Shareholders'
Equity $21,215 $23,540
====== ======
</TABLE>
See notes to consolidated condensed financial statements.
- 2-
<PAGE>
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
April 30,
1997 1996
==== ====
<S> <C> <C>
Revenues $ 6,059 $ 7,840
Costs and Expenses:
Cost of revenues 3,922 5,779
Administrative and selling expenses 1,407 1,155
Depreciation 453 511
Research and development 264 258
--------- ---------
6,046 7,703
--------- ---------
Income from operations 13 137
License fee income, net
(includes income from related parties
of $79 and $79 for the three
months ended April 30, 1997
and 1996, respectively) 145 89
Interest expense (72) (150)
Interest and other income, net 60 120
--------- ---------
Income before provision
for income taxes 146 196
Provision for income taxes 70 72
--------- ---------
Net income $ 76 $ 124
========= =========
Primary and fully diluted income
per common share $ .02 $ .03
========= =========
Weighted average common and common
equivalent shares outstanding 4,211,225 4,079,558
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
-3-
<PAGE>
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Six Months Ended
April 30,
1997 1996
==== ====
<S> <C> <C>
Revenues $ 11,755 $ 14,782
Costs and Expenses:
Cost of revenues 7,800 10,899
Administrative and selling expenses 2,456 2,273
Depreciation 965 1,023
Research and development 477 424
--------- ---------
11,698 14,619
--------- ---------
Income from operations 57 163
License fee income, net
(includes income from related parties
of $158 and $158 for the six
months ended April 30, 1997
and 1996, respectively) 234 178
Interest expense (173) (276)
Interest and other income, net 159 225
--------- ---------
Income before provision
for income taxes 277 290
Provision for income taxes 126 105
--------- ---------
Net income $ 151 $ 185
========= =========
Primary and fully diluted income
per common share $ .04 $ .05
========= =========
Weighted average common and common
equivalent shares outstanding 4,207,159 4,034,540
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
-4-
<PAGE>
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30,
(Dollars in thousands)
(Unaudited)
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 151 $ 185
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 1,156 1,197
Deferred income taxes - (10)
Conversion of accrued interest
to principal on long-term debt 20 55
Changes in operating assets and
liabilities:
Accounts receivable 88 500
Inventories (42) (939)
Other current assets (244) (258)
Accounts payable (490) (124)
Accrued liabilities (360) 20
Income taxes payable (5) (71)
Deferred license fee income 142 142
------- -------
Net cash provided by
operating activities 416 697
------- -------
Cash flows from investing activities:
Capital expenditures (1,488) (463)
Proceeds from sale of marketable
securities 2,000 -
Payments on other assets (42) (32)
------- -------
Net cash provided by (used in)
investing activities 470 (495)
------- -------
Cash flows from financing activities:
Repayments of long-term debt (1,846) (388)
Proceeds from long-term financing - 776
Common stock issued 63 28
------- -------
Net cash provided by (used in)
financing activities (1,783) 416
------- -------
Net increase (decrease) in cash
and cash equivalents (897) 618
Cash and cash equivalents,
beginning of period 7,597 5,422
------- -------
Cash and cash equivalents,
end of period $ 6,700 $ 6,040
======= =======
Supplemental disclosure of cash paid
during the period for:
Interest $178 $215
Income taxes $203 $356
Non-cash preferred stock conversion to
common stock $-0- $600
</TABLE>
See notes to consolidated condensed financial statements.
-5-
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements for
Energy Research Corporation ("the Registrant"), have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position of the Company
as of April 30, 1997 and the results of operations for the three
and six months ended April 30, 1997 and 1996 and cash flows for
such six month periods have been included.
Information included in the Consolidated Condensed Balance Sheet as
of October 31, 1996 has been derived from audited financial
statements included in the Company's Annual Report on Form 10-K for
the year ended October 31, 1996, but does not include all
disclosures required by generally accepted accounting principles.
The results of operations for the six months ended April 30, 1997
and 1996 are not necessarily indicative of the results to be
expected for the full year.
The reader should supplement the information in this document with
prior disclosures in the form of previous 10-Q's and the 1996 10-K.
-6-
<PAGE>
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
COMPARISON THREE MONTHS ENDED APRIL 30, 1997 AND APRIL 30, 1996
Revenues decreased 23% to $6,059,000 in the 1997 period from
$7,840,000 in the 1996 period. The expected decrease in revenues
was due primarily to completion of the two-megawatt Direct Fuel
Cell power plant project in Santa Clara, California.
Cost of revenues decreased 32% to $3,922,000 in the 1997 period
from $5,779,000 in the 1996 period. The decrease was due primarily
to the decreased revenues mentioned above.
Administrative and selling expense increased 22% to $1,407,000 in
the 1997 period from $1,155,000 in the 1996 period. Approximately
37% of the increase was associated with bid and proposal activity.
Approximately 31% of the increase was associated with employment
costs. Depreciation decreased 12% to $453,000 in the 1997 period
from $511,000 in the 1996 period. The decrease was due
substantially to completion of the amortization of costs associated
with the manufacturing facility. Research and development expense
was relatively unchanged at $264,000 in the 1997 period and
$258,000 in the 1996 period.
Income from operations decreased 91% to $13,000 in the 1997 period
from $137,000 in the 1996 period. The decrease was due primarily
to the decrease in the revenues mentioned above.
License fee income, net, increased 63% to $145,000 in the 1997
period from $89,000 in the 1996 period. The increase was primarily
due to recognition of the first month of license income under the
Company's battery license with Corning, Inc.
Interest expense decreased 52% to $72,000 in the 1997 period from
$150,000 in the 1996 period. The decrease was due primarily to the
reduction of debt to MTU Friedrichshafen GmbH (MTU) as a result of
conversion of $666,000 of principal at $9 per share into common
stock of the Company in fiscal 1996 and the repayment of $684,000
of principal during the first quarter of fiscal 1997. The decrease
was also due to the Company refinancing its bank debt at more
favorable terms during the third quarter of fiscal 1996.
Interest and other income, net, decreased 50% to $60,000 in the
1997 period from $120,000 in the 1996 period. The decrease was due
-7-
<PAGE>
primarily to the use of cash for debt repayment during the first
quarter of fiscal 1997.
Results of Operations
- --------------------
COMPARISON SIX MONTHS ENDED APRIL 30, 1997 AND APRIL 30, 1996
Revenues decreased 20% to $11,755,000 in the 1997 period from
$14,782,000 in the 1996 period. The expected decrease was due
primarily to the completion of the two-megawatt Direct Fuel Cell
power plant project in Santa Clara, California. During the 1996
period, manufacturing of the fuel cell modules had been completed
for the above mentioned power plant. The decrease in revenues was
partially offset by an increase in billings under the Company's
other contracts.
Cost of revenues decreased 28% to $7,800,000 in the 1997 period
from $10,899,000 in the 1996 period. The decrease was due
primarily to the decreased revenues mentioned above.
Administrative and selling expenses increased 8% to $2,456,000 in
the 1997 period from $2,273,000 in the 1996 period. During the
1997 period, approximately $427,000 of recoverable administrative
and selling expenses were incurred. These costs will be recognized
with the associated revenues during the remainder of the fiscal
year. Depreciation decreased 6% to $965,000 in the 1997 period
from $1,023,000 in the 1996 period. The decrease was due
substantially to the completion of the amortization of costs
associated with the manufacturing facility. Research and
development expense increased 13% to $477,000 in the 1997 period
from $424,000 in the 1996 period. The increase was due to expanded
battery development activities.
Income from operations decreased 65% to $57,000 in the 1997 period
from $163,000 in the 1996 period. The decrease was due primarily
to the decrease in the revenues mentioned above.
License fee income, net, increased 31% to $234,000 in the 1997
period from $178,000 in the 1996 period. The increase was primarily
due to recognition of the first month of license income under the
Company's battery license with Corning, Inc.
Interest expense decreased 37% to $173,000 in the 1997 period from
$276,000 in the 1996 period. The decrease was due primarily to the
reduction of debt to MTU as a result of conversion of $666,000 of
principal at $9 per share into common stock of the Company in
fiscal 1996 and the repayment of $684,000 of principal during the
-8-
<PAGE>
first quarter of fiscal 1997. The decrease was also due to the
Company refinancing its bank debt at more favorable terms during
the third quarter of fiscal 1996.
Interest and other income, net, decreased 29% to $159,000 in the
1997 period from $225,000 in the 1996 period. The decrease was due
primarily to the use of cash for debt repayment during the first
quarter of fiscal 1997.
Liquidity and Capital Resources
- -------------------------------
Working capital at April 30, 1997 was $6,775,000, including
$6,700,000 of cash and cash equivalents, compared to working
capital of $8,087,000 at October 31, 1996, including $7,597,000 of
cash and cash equivalents and $1,956,000 of short term investments.
During the 1997 period, $416,000 of cash was provided by operating
activities of the Company. During that period, accounts receivable
decreased $88,000, other current assets increased $244,000 and
accounts payable decreased $490,000. Accounts receivable includes
the incurrence of $640,000 of unbilled but recoverable costs that
will be recognized with the associated revenues during the
remainder of the fiscal year. Accounts payable decreased $490,000
primarily due to the lower revenues during the period. Net cash
from operating activities also included the Company's net income of
$151,000 and a decrease in accrued liabilities of $360,000.
The Company's capital expenditures are incurred primarily to
support ongoing contracts and to replace existing equipment.
Capital expenditures for the 1997 period were $1,488,000. A portion
of these expenditures were financed from the recovery of
depreciation expense under cost-reimbursement contracts and
cooperative agreements.
In fiscal year 1990, the Company borrowed $1,980,000 from MTU at a
rate of 6% per annum. During fiscal 1996, $877,000 of principal and
interest was converted into 97,397 shares of common stock of the
Company. The indebtedness, including deferred interest, as of
October 31, 1996 was $1,926,000. During December 1996, the Company
repaid to MTU $1,296,000 of principal and interest. MTU extended
the maturity of $630,000 of the original loan to November 30, 1997
-9-
<PAGE>
with the right to convert to common stock at $9 per share including
interest. The indebtedness, including deferred interest, as of
April 30, 1997 was $649,000. This loan is secured by the pledge of
Fuel Cell Manufacturing Corporation (FCMC) stock and certain
machinery, equipment and leasehold improvements at the Torrington,
Connecticut facility.
In December 1994, the Company entered into a $136,000,000
Cooperative Agreement with the U.S. Department of Energy (DOE) that
provided that the DOE would furnish $78,000,000 to the Company over
the next five years to support the continued development and
improvement of the Company's commercial product. In the fourth
quarter 1996, an additional $6,000,000 was added to the contract,
raising the DOE funding level to $84,000,000. The balance of the
funding is expected to be provided by the Company, the Company's
partners or licensees, other private agencies and utilities.
Approximately 60% of the non-DOE portion has been committed or
credited to the project in the form of in-kind or direct cost share
from non-U.S. government sources. There can be no assurance that
the final 40% of the private sector funding will be available on
favorable terms, if at all. Failure of the Company to obtain the
required funding could result in a delay or reduction of DOE
funding.
The Company will need to raise additional funds to expand the
capacity of FCMC. The first stage in this process is to raise the
output capability to 50 MW per year. Approximately $16 million has
been estimated for this step. There can be no assurance that this
funding will be available or if available will result in an output
level which will result in a cost competitive fuel cell stack.
Meanwhile, the Company is using existing funds to expand production
capacity incrementally.
During 1996, the Company (ERC) and the Santa Clara Demonstration
Project (SCDP) agreed to certain contract modifications. ERC\Fuel
Cell Engineering Corporation (FCE) agreed that at the option of
SCDP, ERC would be responsible for providing up to $300,000 in
funding from non-SCDP sources for use for certain corrections,
reconfigurations or additional test time for the project. In
consideration for the above, SCDP agreed to reduce FCE's liability
for unfunded rework from $1,000,000 to $500,000 and to eliminate
certain provisions relating to supplying spare stacks for the
project. During 1996, FCE provided certain services under this
agreement. The balance of this obligation was completed in the
-10-
<PAGE>
second quarter of 1997 as a result of extending the power plant
test period beyond that provided for by project funds. This did
not impact earnings in the quarter and is not expected to impact
earnings in 1997. The Company could experience some costs
associated with various options relating to maintaining and/or
restoration of the site. It is not expected that these costs will
have a material impact on 1997 operations.
The Company anticipates that its existing capital resources
together with anticipated revenues will be adequate to satisfy its
existing financial requirements and agreements through fiscal 1997.
Part II Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
Energy Research Corporation's Annual shareholders' Meeting was held
on April 15, 1997.
The meeting involved an election of the following directors to hold
office until the next annual meeting of shareholders and until a
successor is elected and qualified. All of the directors on the
slate were elected.
Bernard S. Baker Thomas L. Kempner Richard M.H.Thompson
Hansraj C. Maru William A. Lawson Michael Bode
Christopher R. Bentley Warren D. Bagatelle James D. Gerson
The results of the voting were as follows:
<TABLE>
ELECTION OF DIRECTORS
- ---------------------
<CAPTION>
VOTES VOTES
NAME OF DIRECTOR FOR WITHHELD
- --------------- ------ -------
<S> <C> <C>
Bernard S. Baker 3,777,521 1,600
Hansraj C. Maru 3,778,371 750
Christopher R. Bentley 3,778,371 750
Thomas L. Kempner 3,778,321 800
William A. Lawson 3,778,821 300
Warren D. Bagatelle 3,778,021 1,100
Richard M.H. Thompson 3,778,821 300
Michael Bode 3,686,719 92,402
James D. Gerson 3,778,321 800
</TABLE>
-11-
<PAGE>
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
-------------
(a) EXHIBIT DESCRIPTION
EXHIBIT NO.
- -----------
11 Computation of Earnings (Loss) Per
Share for the Three Months Ended
April 30, 1997 and April 30, 1996
and for the Six Months Ended
April 30, 1997 and April 30, 1996
27 Financial Data Schedule
(b) Reports On Form 8-K
NONE
-12-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ENERGY RESEARCH CORPORATION
/s/ Louis P. Barth
------------------
Louis P. Barth
Senior Vice President, CFO
Treasurer/Corporate Secretary
Dated: June 12, 1997
-13-
<PAGE>
<TABLE>
ENERGY RESEARCH CORPORATION
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<CAPTION>
Three Months Six Months
Ended April 30, Ended April 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Shares outstanding,
beginning of period 3,921,124 3,758,573 3,911,787 3,728,914
Weighted average number of
shares issued, retired and
issuable share equivalents 290,101 320,985 295,372 305,626
--------- --------- --------- ---------
Weighted average number of
common and common equivalent
shares outstanding 4,211,225 4,079,558 4,207,159 4,034,540
========= ========= ========= =========
Net income $ 76,000 $ 124,000 $ 151,000 $ 185,000
========= ========= ========= =========
Net income per common share $ .02 $ .03 $ .04 $ .05
========= ========= ========= =========
FULLY DILUTED
Weighted average number of
common and common equivalent
sharesoutstanding as
adjusted for full dilution 4,281,225 4,275,558 4,277,159 4,230,540
Adjustment for interest,
net of tax, on convertible
long-term debt $ 6,000 $ 19,000 $ 12,000 $ 38,000
========= ========= ========= =========
Adjusted net income $ 82,000 $ 143,000 $ 163,000 $ 223,000
========= ========= ========= =========
Net income per
common share <F1> $ .02 $ .03 $ .04 $ .05
========= ========= ========= =========
<FN>
<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.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ENERGY
RESEARCH CORPORATION'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<CASH> 6,700
<SECURITIES> 0
<RECEIVABLES> 2,760
<ALLOWANCES> 0
<INVENTORY> 114
<CURRENT-ASSETS> 10,258
<PP&E> 18,538
<DEPRECIATION> 10,771
<TOTAL-ASSETS> 21,215
<CURRENT-LIABILITIES> 3,483
<BONDS> 0
0
0
<COMMON> 13,676
<OTHER-SE> 600
<TOTAL-LIABILITY-AND-EQUITY> 21,215
<SALES> 11,755
<TOTAL-REVENUES> 11,755
<CGS> 7,800
<TOTAL-COSTS> 11,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (173)
<INCOME-PRETAX> 277
<INCOME-TAX> 126
<INCOME-CONTINUING> 151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
