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, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-14204
ENERGY RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
New York 06-0853042
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3 Great Pasture Road, Danbury, Connecticut 06813
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (203) 792-1460
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
documents and reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's Common Stock, par
value $.0001, as of June 8,1998 was 4,118,169.
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, 1998 and October 31, 1997 2
Consolidated Condensed Statements of Operations
for the three months ended April 30, 1998
and April 30, 1997 3
Consolidated Condensed Statements of Operations
for the six months ended April 30, 1998
and April 30, 1997 4
Consolidated Condensed Statements of Cash Flows
for the six months ended April 30, 1998
and April 30, 1997 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 11
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE> -1-
Part I - Financial Information
Item I. Financial Statements
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
April 30, October 31,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash & cash equivalents $ 7,728 $ 6,802
Accounts receivable 4,214 2,828
Inventories 149 47
Deferred income taxes 314 205
Other current assets 339 279
--------- ---------
Total current assets 12,744 10,161
Property , plant and equipment, net 7,929 8,254
Other assets, net 2,995 3,018
--------- ---------
Total Assets 23,668 21,433
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 884 $ 1,702
Accounts payable 317 865
Accrued liabilities 1,424 1,182
Customer advances 1,217 -
Income taxes payable 77 -
Current portion of deferred license fee income 1,504 46
--------- ---------
Total current liabilities 5,423 3,795
Long Term Liabilities:
Long-term debt 2,308 2,699
Deferred income taxes 155 170
--------- ---------
Total liabilities 7,886 6,664
--------- ---------
Shareholders' Equity:
Convertible preferred stock, Series C($.01 par value);
30,000 shares issued and outstanding at
April 30, 1998 and October 31, 1997, respectively 600 600
--------- ---------
Common Shareholders' Equity:
Common stock, ($.0001 par value); 8,000,000 shares
authorized: 4,101,669 and 4,000,650 shares issued and
outstanding at April 30, 1998 and October 31, 1997,
respectively - -
Additional paid-in capital 12,118 11,460
Retained earnings 3,064 2,709
--------- ---------
Total common shareholders' equity 15,182 14,169
--------- ---------
Total shareholders' equity 15,782 14,769
--------- ---------
Total Liabilities and Shareholders' Equity 23,668 21,433
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE> -2-
Part 1 - Financial Information
Item 1. Financial Statements
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended April 30,
---------------------------
1998 1997
<S> <C> <C>
Revenues $6,612 $6,059
Cost and Expenses:
Cost of Revenues 3,851 3,922
Administrative and selling expense 1,790 1,407
Depreciation 406 453
Research and development 564 264
--------- ---------
6,611 6,046
--------- ---------
Income/(loss) from operations 1 13
License fee income, net (includes income from
related parties of $67 and $79 for the three
months ended April 30, 1998 and 1997,
respectively) 385 145
Interest expense (70) (72)
Interest and other income, net 69 60
--------- ---------
Income before provision
for income taxes 385 146
Provision for income taxes 137 70
--------- ---------
Net Income $248 $76
========= =========
Earnings per share:
Basic earnings per share $.06 $.02
========= =========
Basic shares outstanding 4,071,067 3,931,067
========= =========
Diluted earnings per share $.06 $.02
========= =========
Diluted shares outstanding 4,196,802 4,157,748
========= =========
</TABLE>
See notes to consolidated condensed financial statements
<PAGE> -3-
Part 1 - Financial Information
Item 1. Financial Statements
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Six Months Ended April 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues $10,519 $11,755
Cost and Expenses:
Cost of Revenues 6,298 7,800
Administrative and selling expense 2,386 2,456
Depreciation 892 965
Research and development 993 477
--------- ---------
10,569 11,698
--------- ---------
Income/(loss) from operations (50) 57
License fee income, net (includes income from
related parties of $142 and $158 for the six
months ended April 30, 1998 and 1997,
respectively) 596 234
Interest expense (153) (173)
Interest and other income, net 120 159
--------- ---------
Income before provision
for income taxes 513 277
Provision for income taxes 158 126
--------- ---------
Net Income $355 $151
========= =========
Earnings per share:
Basic earnings per share $.09 $.04
========= =========
Basic shares outstanding 4,039,442 3,923,278
========= =========
Diluted earnings per share $.09 $.04
========= =========
Diluted shares outstanding 4,173,507 4,170,304
========= =========
</TABLE>
See notes to consolidated condensed financial statements
<PAGE> -4-
Part 1 - Financial Information
Item 1. Financial Statements
<TABLE>
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30,
<CAPTION>
1998 1997
---------- ---------
<C> <S> <S>
Cash flows from operating activities:
Net Income $355 $151
Adjustments to reconcile net income to
net cash provided by/(used in) operating activities:
Compensation for options granted 134 -
Depreciation and amortization 1,077 1,156
Deferred income taxes (124) -
Conversion of accrued interest to principal
on long-term debt - 20
Changes in operating assets and liabilities:
Accounts receivable (1,386) 88
Inventories (102) (42)
Other current assets (60) (244)
Accounts payable (548) (490)
Accrued liabilities 242 (360)
Customer advances 1,217 -
Income taxes payable 77 (5)
Deferred license fee income 1,458 142
--------- ---------
Net cash provided by/(used in)
Operating activities 2,340 416
--------- ---------
Cash flows from investing activities:
Capital expenditures (567) (1,488)
Proceeds from sale of marketable securities - 2,000
Payments on other assets (162) (42)
--------- ---------
Net cash provided by/(used in) investing
activities (729) 470
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt (1,209) (1,846)
Common stock issued 524 63
--------- ---------
Net cash provided by/(used in)
financing activities (685) (1,783)
--------- ---------
Net increase/(decrease) in cash and
cash equivalents 926 (897)
Cash and cash equivalents, beginning of period 6,802 7,597
--------- ---------
Cash and cash equivalents, end of period $ 7,728 $ 6,700
========= =========
Supplemental disclosure of cash paid during
the period for:
Interest $149 $178
Income taxes $316 $203
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
-5-
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, 1998 and the results of operations for the three and six
months ended April 30, 1998 and 1997 and cash flows for such six month periods
have been included.
Information included in the Consolidated Condensed Balance Sheet as of October
31, 1997 has been derived from audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended October 31, 1997, but
does not include all disclosures required by generally accepted accounting
principles.
The results of operations for the six months ended April 30, 1998 and 1997 are
not necessarily indicative of the results to be expected for the full year.
The reader should supplement the information in this document with prior
disclosures in the form of previous 10-Q's and the 1997 10-K.
NOTE 2: LICENSE AGREEMENTS AND SIGNIFICANT CONTRACTS
- - ----------------------------------------------------
The Company recognizes from licensees income in each reporting period. The
Company is not obligated to return any of the license income payments. A
royalty is payable to the Company on commercial product sales. To date the
Company has not received any royalty payments. The Company is obligated to
share new technological developments with the licensee concerning the licensed
technology. Under the licenses the Company is not obligated to continue
development of the technology.
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.
<PAGE> -6-
Part I - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
CONTINUED
NOTE 3: EARNINGS PER SHARE
- - --------------------------
Basic and diluted earnings per share are calculated based upon the provisions of
SFAS 128, adopted in 1998, using the following data:
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
Ended April 30 Ended April 30
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<C> <S> <S> <S> <S>
Weighted average basic
Common shares 4,071,067 3,931,167 4,039,442 3,923,278
Effect of dilutive securities
Stock options 95,735 126,581 104,065 147,026
Preferred "C" convertible 30,000 30,000 30,000 30,000
Convertible debt 70,000 70,000
Weighted Average Basic
Common Shares Adjusted
--------- --------- --------- ---------
for diluted calculation 4,196,802 4,157,748 4,173,507 4,170,304
--------- --------- --------- ---------
</TABLE>
<PAGE> -7-
Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- - ---------------------
Comparison Three Months Ended April 30, 1998 and April 30, 1997
Revenues increased 9% to $6,612,000 in the 1998 period from $6,059,000
in the 1997 period. The increase was due to activity under the United
States Navy contract involving Direct the fuel Cell for shipboard
application. The increase was partially offset by a decrease in other
contract activity. The revenues in the 1997 period included the activity
under the Company's two-megawatt Direct Fuel Cell power plant
demonstration project in Santa Clara, California. The Santa Clara
project was completed during 1997. Revenues for the remainder of fiscal
year 1998 are expected to be lower than fiscal year 1997.
Cost of revenues were relatively unchanged at $3,851,000 and $3,922,000
in the 1998 and 1997 periods, respectively.
Administrative and selling expense increased 27% to $1,790,000 in the
1998 period from $1,407,000 in the 1997 period. The increase was due
primarily to the incurrence of costs in connection with shareholder
relations and in preparation for commercialization, including employment
and consulting costs. Depreciation decreased 10% to $406,000 in the 1998
period from $453,000 in the 1997 period. The decrease is due primarily
to the completion of the depreciation of the original machinery and
equipment installed in the fuel cell manufacturing facility. Research
and development expense increased 114% to $564,000 in the 1998 period
from $264,000 in the 1997 period. The increase was substantially due to
expanded battery development activities.
Income from operations decreased 92% to $1,000 in the 1998 period from
$13,000 in the 1997 period. The decrease was primarily due to the
incurrence of certain non-recoverable employment costs associated with
the hiring of the chief executive officer in the fourth fiscal quarter
of 1997. Income from operations in the remaining 1998 periods will be
reduced by certain non-recoverable employment costs.
License fee income, net, increased 166% to $385,000 in the 1998 period
from $145,000 in the 1997 period. The increase was due substantially to
the battery license agreement with Nan Ya Plastics Corporation of Taiwan
and Xiamen Daily-Used Chemicals Co., Ltd of Xiamen, People's Republic
of China (the "Xiamen License"). The increase was also due to the
battery license agreement with Corning, Inc. During the 1998
period Corning, Inc. terminated its license with the Company,
therefore, license fee income, net, in future periods is not
expected to include payments from Corning, Inc. The amortization
of the ten-year paid-up fuel cell license, which was pre-paid in 1988
with Sanyo Electric Co., Ltd(Sanyo) in Japan, (the "Sanyo License")
ended during the 1998 period. As anticipated, Sanyo did not renew its
license with the Company. License fee income, net, is expected to
<PAGE> -8-
increase substantially during the future periods as a result of the
Xiamen License agreement mentioned above and the Chinese license
agreement for nickel-zinc batteries for electric bicycles announced
subsequent to the 1998 reporting period.
Interest expense was relatively unchanged at $70,000 and $72,000 in
the 1998 and 1997 periods, respectively.
Interest and other income, net, increased 15% to $69,000 in the 1998
period from $60,000 in the 1997 period. The increase is due
substantially to the higher amount of cash on hand as a result of the
China battery license payment.
Results of Operations
- - ---------------------
Comparison Six Months Ended April 30, 1998 and April 30, 1997
Revenues decreased 11% to $10,519,000 in the 1998 period from $11,755,000
in the 1997 period. The expected decrease was due primarily to the
completion of the two-megawatt Direct Fuel Cell power plant demonstration
project in Santa Clara, California in the 1997 period. The decrease in
revenues was partially offset by an increase in billings under the
Company's other contracts. Revenues for the remainder of fiscal year 1998
are expected to be lower than fiscal year 1997.
Cost of revenues decreased 19% to $6,298,000 in the 1998 period from
$7,800,000 in the 1997 period. The decrease was due primarily to the
decreased revenues mentioned above.
Administrative and selling expense decreased 3% to $2,386,000 in the 1998
period from $2,456,000 in the 1997 period. During the 1998 period,
approximately $1,056,000 of unbilled, but recoverable administrative and
selling expenses were incurred. These costs will be recognized with the
associated revenues during the remainder of the fiscal year. Depreciation
decreased 8% to $892,000 in the 1998 period from $965,000 in the 1997
period. The decrease is due primarily to the completion of the
depreciation of the original machinery and equipment installed in the
fuel cell manufacturing facility. Research and development expense
increased 108% to $993,000 in the 1998 period from $477,000 in the 1997
period. The increase was substantially due to expanded battery
development activities including the manufacture and successful testing
of a nickel-zinc electric vehicle battery.
Income from operations resulted in a loss of $50,000 in the 1998 period
compared to $57,000 of income in the 1997 period. The loss was primarily
due to the incurrence of certain non-recoverable employment costs
associated with the hiring of the chief executive officer during the
fourth fiscal quarter of l997. The remainder of the decrease was due
to the decrease in revenues mentioned above. Income from
operations in the remaining 1998 periods will be reduced by certain
non-recoverable employment costs.
License fee income, net, increased 155% to $596,000 in the 1998 period
from $234,000 in the 1997 period. The increase was primarily due to the
Xiamen License. The remainder of the increase was due to the battery
<PAGE> -9-
license agreement with Corning, Inc. License fee income, net, during
the remainder of fiscal 1998 is not expected to include payments from
Corning, Inc. due to the termination of the battery license by Corning,
Inc. The amortization of the Sanyo License ended during the 1998 period.
Sanyo did not renew the license with the Company. License fee income,
net, is expected to increase substantially during the future periods as
a result of the Xiamen License agreement mentioned above and the Chinese
license agreement for nickel-zinc batteries for electric bicycles
announced subsequent to the 1998 reporting period.
Interest expense decreased 12% to $153,000 in the 1998 period from
$173,000 in the 1997. The decrease was due primarily to the repayment
of debt in full to MTU-Friedrichshafen GmbH during the 1998 period.
Interest and other income, net, decreased 25% to $120,000 in the 1998
period from $159,000 in the 1997 period. The decrease was due primarily
to the use of cash for the repayment of debt and the use of cash for
unbilled, but recoverable administrative and selling expenses mentioned
above.
Liquidity and Capital Resources
- - -------------------------------
Working capital at April 30,1998 was $7,321,000, including $7,728,000 of
cash and cash equivalents, compared to working capital of $6,366,000 at
October 31, 1997, including $6,802,000 of cash and cash equivalents.
During the 1998 period, $2,340,000 of cash was provided by operating
activities of the Company. During that period, accounts receivable
increased $1,386,000, and accounts payable decreased $548,000. Accounts
receivable includes the incurrence of $1,494,000 of unbilled but
recoverable costs that will be recognized with the associated revenues
during the remainder of the fiscal year. Accounts payable decreased
$548,000 primarily due to the lower revenues during the period. Net cash
from operating activities also included the Company's net income of
$355,000 and an increase in accrued liabilities of $242,000. During the
period the Company received customer advances of $1,217,000.
The Company's capital expenditures are incurred primarily to support
ongoing contracts and to replace existing equipment. Capital
expenditures for the 1998 period were $567,000. The capital
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. The payment of principal and interest was deferred until
November 30, 1996. The indebtedness, including deferred interest, as of
October 31, 1996 was $1,926,000. This loan was secured by the pledge of
stock in the Company's manufacturing subsidiary and certain machinery,
equipment and leasehold improvements at the Torrington, Connecticut,
facility. The accrued interest on the loan was payable at the Company's
option. The principal amount of the loan could be converted at MTU's
option, into the Company's common stock at a conversion rate of $9 per
share prior to November 30, 1996. During fiscal 1996, $877,000 of this
loan was converted into 97,397 shares of common stock of the Company.
MTU extended the maturity of $630,000 of the loan to November 30, 1997
<PAGE> -10-
with the right to convert to common stock at $9 per share. During
December 1996, the Company paid to MTU $1,296,000 of principal and
interest. During December, 1997 the Company paid the entire balance of
principal and interest due in the amount of $673,000.
In December 1994, the Company entered into a $136,000,000 Cooperative
Agreement with the U.S. Department of Energy (DOE) 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 the Company's manufacturing facility. The first stage in this process
is to raise the output capability to 50 MW per year. Approximately $16
million has been estimated for this step. There can be no assurance that
this funding will be available or if available will result in an output
level which will result in a cost competitive fuel cell stack.
Meanwhile, the Company is using existing funds to expand production
capacity incrementally.
The Company has reviewed the hardware and software of its information
systems. The Company believes the year 2000 will not have a material
impact on its financial position.
The Company anticipates that its existing capital resources together with
anticipated revenues will be adequate to satisfy its existing financial
requirements and agreements through fiscal 1998.
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
March 11,1998.
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 Jerry D. Leitman Thomas L. Kempner
Hansraj C. Maru William A. Lawson Michael Bode
Warren D. Bagatelle James D. Gerson Richard M.H.Thompson
Christopher R. Bentley
The results of the voting were as follows:
<PAGE> -11
<TABLE>
ELECTION OF DIRECTORS
- - ---------------------
<CAPTION>
VOTES VOTES
NAME OF DIRECTOR FOR WITHHELD
- - ---------------- ----- --------
<S> <C> <C>
Bernard S. Baker 3,597,154 23,650
Jerry D. Leitman 3,597,754 23,050
Thomas L. Kempner 3,587,754 33,050
Hansraj C. Maru 3,598,154 22,650
William A. Lawson 3,598,154 22,650
Michael Bode 3,597,754 23,050
Warren D. Bagatelle 3,586,754 34,050
James D. Gerson 3,597,754 23,050
Richard M.H. Thompson 3,598,154 22,650
Christopher R. Bentley 3,598,154 22,650
</TABLE>
AMENDMENT OF 1988 STOCK OPTION PLAN
- - -----------------------------------
An amendment to the Company's 1988 Stock Option Plan, to increase
the number of shares available for issuance thereunder, was
presented and approved at the meeting.
BROKER
VOTES FOR VOTES AGAINST ABSTAIN NON-VOTES
--------- ------------- ------- ---------
1,686,738 149,607 27,105 1,757,124
ADOPTION OF 1998 EQUITY INCENTIVE PLAN
- - --------------------------------------
The adoption of the Company's 1998 Equity Incentive Plan was
presented and approved at the meeting.
BROKER
VOTES FOR VOTES AGAINST ABSTAIN NON-VOTES
--------- ------------- ------- ----------
1,733,940 147,266 26,405 1,712,963
<PAGE> -12-
Item 6 - Exhibits and Reports on Form 8
EXHIBIT INDEX
--------------
(a) EXHIBIT DESCRIPTION
EXHIBIT NO.
- - -----------
10.50 Technology Transfer and License Agreement between Energy Research
Corporation and the Joint Venture ("JV") owned jointly by the Xiamen
Daily-Used Chemicals Co., LTD of China ("XDC") and Nan Ya Plastics
Corporation of Taiwan ("Nan Ya") dated February 21, 1998.
(confidential treatment requested for certain portions of this
document)
27 Financial Data Schedule
(b) Reports On Form 8-K
NONE
<PAGE> -13-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGY RESEARCH CORPORATION
/s/ Louis P. Barth
------------------
Louis P. Barth
Senior Vice President, CFO
Treasurer/Corporate Secretary
Dated: June 15, 1998
<PAGE> -14-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<CASH> 7728
<SECURITIES> 0
<RECEIVABLES> 4214
<ALLOWANCES> 0
<INVENTORY> 149
<CURRENT-ASSETS> 12744
<PP&E> 20078
<DEPRECIATION> 12149
<TOTAL-ASSETS> 7929
<CURRENT-LIABILITIES> 5423
<BONDS> 0
0
0
<COMMON> 15182
<OTHER-SE> 600
<TOTAL-LIABILITY-AND-EQUITY> 23668
<SALES> 10519
<TOTAL-REVENUES> 10519
<CGS> 6298
<TOTAL-COSTS> 10569
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> 513
<INCOME-TAX> 158
<INCOME-CONTINUING> 355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
EXHIBIT NO. 10.50
Confidential Treatment has been
Requested for portions of this
document, Deleted portions are
marked with an asterisk.
TECHNOLOGY TRANSFER
AND
LICENSE AGREEMENT
FOR
Ni-Zn BATTERY TECHNOLOGY
BETWEEN
XIAMEN DAILY-USED CHEMICALS CO.,
LTD.
NAN YA PLASTICS CORPORATION
ENERGY RESEARCH CORPORATION
FEBRUARY 21, 1998
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
THIS AGREEMENT is made and entered into this 21st day of February, 1998, by
and between the JOINT VENTURE, a China corporation having a place of
business in Xiamen,Fujian, China (hereinafter "JV") owned jointly by the
XiAMEN DAILY-USED CHEMICALS Co., LTD. (XDC of China located in 722 Xiahe
Road, Xiamen, Fujian, China and NAN YA PLASTICS Corporation of Taiwan
(NAN YA) located in 201, Tung Hwa N. Road, Taipei,Taiwan and ENERGY
RESEARCH CORPORATION, a New York corporation having a place of business
at 3 Great Pasture Road, Danbury, CT 06813 (hereinafter "ERC").
INTRODUCTION
ERC has developed certain technology and technical know-how for a sealed
Nizn battery including technology for a fibrillated electrode, an improved
zinc electrode, and a light-weight nickel electrode that uses graphite.
ERC has represented to JV that such technology has been used to develop a
NiZn battery and has demonstrated and described this technology (subject to
non-disclosure agreements) to representatives of XDC and NAN YA and XDC and
NAN YA have determined to their satisfaction that they wish the JV to acquire
the technology substantially as described.
JV wishes to commercialize a NiZn battery using the know-how of ERC and
for that purpose wishes to enter into the license for such know-how set
forth below. ERC, in consideration of the payments and obligations
described below, wishes to enter into the license of its know-how to JV as
set forth below for the purpose of allowing JV to make, have made and sell
or otherwise commercialize a NiZn battery for certain uses and in certain
territories as described below.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions set forth below and intending to be legally bound, the
parties agree as follows:
1. DEFINITION AND SCOPE OF THE AGREEMENT
As used in this Agreement, the following terms shall have the
following respective meanings which are intended to define the
scope of the Agreement:
1.1 "JV" shall mean an entity which XDC and NAN YA have formed as a joint
venture, company or partnership.
1.2 "Effective Date" is the date set forth above, i.e., February 21, 1998.
1.3 "ERC Facility" shall mean the ERC facility located at 3 Great Pasture Road,
Danbury, CT 06813.
<PAGE> -1-
1.4 "ERC Know-How" shall mean all of the technical information, know-how,
inventions (whether patented or not), trade secrets, and other technical,
engineering and design information and data, including without limitation,
all processes and techniques owned by ERC or in which ERC acquires a licensable
interest, during the term of this Agreement, useful for the commercial
manufacture of NiZn batteries within the Field, such as designs, drawings,
blueprints, flow sheets, reports, manuals, specifications, process
descriptions, operating procedures, materials and parts fists and other
written or printed materials that are owned by ERC and which may be useful or
helpful to JV in the development and production of NiZn batteries within
the Field.
1.5 "Field Of the Agreement" or "Field" means the manufacture, use and sale,
lease or other transfer of NiZn batteries for electric or electric or hybrid
electric vehicles (i.e. vehicles powered solely by electricity but which may
rely on other means of providing electric power in addition to storage
batteries), including on the road passenger cars, trucks and buses, provided
however,that for the purpose of this Agreement, electric vehicles do not
include any two and three wheel vehicles, motor bikes and trikes, rickshaw,
industrial traction equipment, lawn care equipment, and off-road recreational
vehicles, regardless of how they may be powered. Examples of recreational
vehicles are golf carts, boats and all terrain vehicles (ATVs).
1.6 "Licensed Technology" shall mean ERC Know-How.
1.7 "Licensed Territories" means the Exclusive License Territory and
Non-Exclusive Territory. The "Exclusive Licensed Territory" shall mean Mainland
China, Taiwan, Hong-Kong, and Macao and the 'Non-Exclusive Licensed Territory".,
shall mean the other countries of Southeast Asia listed in Appendix A.
1.8 "Net Sales" means the sum of all sales at the Net Selling Price of the
NiZn batteries in the Field.
1-9 "Net Selling Price" means the gross invoice Price of NiZn batteries
manufactured by the JV hereunder and then sold by the JV in the Field in arms
length commercial transactions in the ordinary course of business, without any
deduction other than returns, rebates and refunds actually given and the
following items of expense to the extent to which they are actually given or
paid and expressly included in the gross invoice price-
1. Sales discounts;
2. Transportation insurance premiums
3. Transport expenses on sales.
For the purpose of computing the Net Selling Price for sales or other
transfers of the NiZn batteries to affiliates of the JV that do not
represent arms length commercial transactions in the ordinary course of
business, the Net Selling Price shall be unanimously determined by XDC,
NAN YA and ERC.
<PAGE> -2-
1. 10 "Party" means the JV or ERC, or when used in the plural, JV and ERC.
II LICENSE GRANT
2.1 License. ERC hereby grants to the JV, during the term stated in Section
6. 1, an exclusive(even against ERC) license to use the Licensed Technology
solely within the Licensed Territory and within the Field, subject to and in
accordance with the terms and conditions of this Agreement; provided, however,
the foregoing license shall convert to a non exclusive license upon JV's or
ERC's election under Section 5.2. The JV, XDC and NAN YA agree that ERC owns
and retains all rights in the Licensed Technology, that the JV receives only
those rights expressly granted to it in this Agreement, and that the JV shall
make no use of any trade names or marks of ERC without ERC's express written
consent.
2.2 New Developments. During the period that the license granted the JV
under Section 2.1 remains exclusive, ERC or its assigns shall promptly from
time to time, but at least once a year,disclose to the JV any ERC or its assigns
Know-How or patents arising or issued after the Effective Date hereof and
not previously disclosed to the JV and if reasonably requested by the JV,
provide the JV from time to time with a list of all patent applications filed
by ERC relating in any way to the Field. Similarly, during the exclusive period,
the JV shall promptly disclose to ERC or its assigns any inventions,
discoveries, know-how, technical information, improvements or other
developments, whether or not patentable, relating to the Licensed Technology
that it develops or in which it acquires a licensable interest during the
term of this Agreement; and ERC or its assigns shall have a worldwide,
perpetual royalty-free license to use these new developments, for all
purposes outside the Licensed Territory.
2.3 Compliance with Law. The JV shall comply with all applicable laws
and regulations when using the Licensed Technology, including any applicable
U.S. export control laws, and shall take all steps required to record and
authenticate this Agreement, or otherwise render it valid and enforceable,
within the Licensed Territory.
2.4 Other Agreements. During the period that the License granted under
Section 2.1 remains exclusive, ERC will not work with any other entity in the
Field in the Exclusive Licensed Territory.
III. PAYMENTS
3.1 Total Payments. Total payments for the Licensed Technology
(excluding royalties) is $5 million U.S. dollars. This amount is to
be paid in U.S. currency in three installments as defined below. These payments,
and all royalty payments due under Part V, shall be net of any applicable taxes,
withholdings, duties or the like owed by the JV or ERC (excluding only income
or corporate excise taxes imposed by the U.S. and its states and
instrumentalities); thus all payments made to ERC shall be grossed up as needed
to ensure that the net amounts actually received by ERC will not be less than
the amount it would have received if such taxes and the like were not required
to be paid.
<PAGE> -3-
3.2 First Payment. The first payment, in the amount of $1.5 million, is to
be made within 30 days of signing of the license agreement.
3.3 Second Payment. The second payment of $2.0 million is to be made
within 30 days upon satisfactory completion of the Test Program as defined
in Appendix B. In the event the Test Program is not completed satisfactorily,
ERC will return $1.3 million to the JV within 30 days after all batteries sent
to the JV are returned to ERC in their original sealed state and all test data
obtained by the JV are also returned.
3.4 Final Payment. The final payment of $1.5 million is to be made after
duplication of the battery and the battery test results by JV based on the
Licensed Technology at its facilities. At ERC's option, all or part of the final
payment may be used to buy an equity interest in the JV. In the event the JV is
capitalized at less than { *** } (based on cash contributions), ERC
shall have the right to buy an equity interest greater than { *** }%
or to purchase a { ***}% interest and receive the balance in cash. For example,
if the cash capitalization of the JV is ${ *** }, ERC, at its option
could purchase a { *** }% equity position, or alternatively, buy a
{ *** }% equity position and receive $ { *** } in cash. If the
ERC buys its equity right after Second Payment is made, ERC is obligated to pay
interest to JV at a fixed interest rate on the amount of the equity it buys
until Final Payment. The interest rate will. be unanimously determined by
JV and ERC through good faith negotiation and based on prevailing bank rates
at the time.
3.5 The Licensed Technology will be transferred to the JV for use in the
Field pursuant to this license agreement, after completion of activities
described in Section 3.3 and Appendix B.(See Article IV - Technology Transfer)
IV. TECHNOLOGY TRANSFER
4.1 Upon the satisfactory conclusion of the Test Program under Section 3.3
and Appendix B, ERC shall transfer all know-how as described in Section 1.4 to
the JV for its use in the Field pursuant to this license agreement. Such
transfer shall take place at ERC Facilities in Danbury, CT to persons
designated by the JV. ERC will provide up to { *** } man hours to
the transfer process at no cost to the JV. Persons designated by the JV
will have access to all personnel and equipment at ERC's Danbury facility to
facilitate the transfer.
4.2 In the event final payment is not made under Section 3.4 by the JV,
the JV and XDC and NAN YA will return all information received under Section
4.1 or from prior disclosures. The JV, XDC and NAN YA agree not to use the
licensed Technology for any purpose and ERC shall have the right to determine
by any means that the Licensed Technology is not being used.
V. ROYALTIES
5.1 Royalty Payments. As additional consideration for the license granted
herein, the JV shall pay to ERC a { *** } royalty on the Net Sales of
NiZn batteries it manufactures or has
<PAGE> -4-
manufactured and sells in the Field for a period of { *** } beginning
from the first commercial sales. The royalty payments will commence with the
product sales and will be payable quarterly 30 days after the close of each
calendar quarter in which products subject to royalty are sold Royalties shall
be payable in U.S. Dollars; where it is necessary to convert from Renminbi to
Dollars for this purpose, the exchange rate will be determined by the rate
published by the State Administration of Exchange Control, )Xiamen Branch,
P.R. China for the last day of the quarter for which payment is due.
5.2 Change to Non-Exclusive License. Either the JV or ERC may cause the
license in the Exclusived Territory to become non-exclusive. In no event
can this exclusive license become non-exclusive before { *** }.
If either party notifies the other after that date to change the license to
become non-exclusive, the royalty rate shall become { *** }% in
all Licensed Territories.
5.3 Royalty Records and report. The JV shall keep accurate, detailed
records and books of account containing all information reasonably required
to compute and verify royalties due under this Agreement. These records shall
include information concerning sales by both the JV and its affiliates and shall
be maintained for at least five (5) years after the year to which they relate.
When rendering payment of the foregoing royalties, the JV shall provide ERC with
a written report showing the calculation of the royalty, the number of products
to which the royalty is applicable and their Net Selling Price. At its expense,
ERC may, by its designated independent public accountants, audit once annually
all JV royalty records and books to confirm the accuracy of the JV's
calculations of the Net Selling Price and royalties due; provided however,
that in the event such an audit discloses that the actual royalty amount due
under this Agreement for the applicable period is more than five percent (5%)
greater than the royalty amount reported by the JV for such period, the JV
shall pay the reasonable costs of such audit incurred by ERC.
VI. DEFAULT, TERMINATION AND LIABILITY
6.1 Term and Termination for Default. The licenses granted to the JV shall
continue until terminated as provided in this Agreement. In the event that a
Party (the "defaulting Party") shall (a) fail to make any payment hereunder
when and as due, or (b) otherwise materially default in its obligations
hereunder and fail to remedy such default within thirty (30)days after such
default shall have been called to its attention by written notice from the
other Party, then, and in any such event, the other Party, at its option, may
terminate, upon thirty(30) days written notice, this Agreement and all its
obligations and any licenses to the Parties hereunder except as provided in
Section 6.5.
6.2 Non-Waive . No failure or delay on the part of either Party to exercise
any of its rights under this Article for any one or more defaults shall be
construed to prejudice its rights in connection with such or any subsequent
default.
6.3 Return of Information Upon Termination Upon termination of this
Agreement for any reason, the JV will deliver to ERC all technical
information it has received from ERC or derived from the Licensed
Technology.
<PAGE> -5-
6.4 Continuing Obligation . If the JV terminates the Agreement and
continues to manufacture or sell any NiZn batteries after such termination, the
JV shall continue to pay ERC royalty under the terms in this agreement but at
the non-exclusive rate of { *** }% unless the technology used for
the manufacture of the NiZn battery is unanimously determined not to belong to
ERC's Licensed Technology by the JV and ERC. Notwithstanding the earlier
termination of this Agreement, the Parties' obligations under Sections
3.3, 4.2, 5.3, 6.3 and Article VII and for payment of royalties on the Net
Sales of NiZn batteries, in the Field and subject to the license agreement under
Sections 5. 1 or 5.2, sold before such termination shall survive such
termination.
6.5 Liability and Indemnity. ERC makes no warranties concerning any products
developed by the JV. Rather, the JV shall be responsible for all uses it makes
of the Licensed Technology, for complying with all laws and regulations, and for
any warranties or liabilities to purchasers of its NiZn batteries; and the JV
shall indemnify and hold harmless ERC and its affiliates from any claims, suits,
losses or liabilities of any kind or nature whatsoever arising from or in
connection with the JV's use of the Licensed Technology or sale of NiZn
batteries. Under no circumstances will ERC be liable to the JV for any indirect,
special or consequential damages, irrespective of the cause.
VII. CONFIDENTIAL INFORMATION
Subject to the exercise by the JV of its rights in the Licensed Technology
under Article 11, all written information marked "proprietary" or
"confidential" (or if oral, subsequently reduced to a writing so marked and
delivered to the receiving party within thirty (30) days of its oral
disclosure)which any Party discloses to the other in connection with Agreement
whether contained in blueprints, drawings, reports, letters or memoranda,
process descriptions, operating procedures or other recorded form, shall be
treated as confidential unless (a) such information shall have been in the
possession of the receiving Party prior to its receipt from the disclosing
Party, (b) such information is or becomes part of the public knowledge or
literature through no fault of the receiving Party, or (c) such information
shall otherwise become available to the receiving Party from a source other
than the disclosing Party, and said source not being in violation of any
obligation of secrecy with respect to such information. Information which is
so considered to be confidential shall be held by the receiving Party for its
sole benefit and used only in accordance with this Agreement. The receiving
Party shall use all reasonable efforts to prevent the use of all or any part
of such confidential information belonging to the disclosing Party in any other
connection, or the transmission thereof to third Parties, unless and until it
has first obtained the written consent of the disclosing Party specifically
authorizing such use or transmission. The Parties understand that information
may be provided which is subject to a confidentiality agreement with a third
Party.The Parties agree that such information shall be held in confidence in
accordance with the terms of the third Party confidentiality agreement. No
Party shall be obligated to divulge third Party confidential information to
the other Party.
<PAGE> -6-
VIII. NOTICES
All notices required to be given hereunder shall be in writing and shall be
given by first class mail, postage prepaid, addressed to the Parties as follows:
To the JV: Xiamen Daily-Used Chemicals Co., LTD.
722 Xiahe Road,
Xiamen, Fujian, P. R. China
Attention: Sheng Qi, General Manager
Tel: 0592-2074764
Fax: 0592-2022193
Nan Ya Plastics Corporation
201, Tung Hwa N. Road
Tiapei, Taiwan
Attention: Chang, Chin Lung, Vice President
Tel: 886-2-717-8268
Fax: 886-2-713-6411
To ERC: Energy Research Corporation
3 Great Pasture Road
Danbury, CT 06813
Attention: Jerry D. Leitman, President
Tel: (203)-792-1460
Fax: (203)-798-2945
cc: Ross M. Levine, Manager, Contracts
& Assistant Secretary
or such other address as a Party shall by notice request.
IX. ENTIRE AGREEMENT
The terms and provisions herein contained constitute the entire Agreement
between the Parties and shall supersede all previous communications,
representations, agreements or the Parties hereto with respect to the
subject matter hereof, and no agreement or understanding varying or
extending the same will be binding upon either Party hereto unless
in writing; and signed by duly authorized officers or representatives
of the respective Parties. This Agreement is written in both the English
and Chinese languages, both versions will be equally valid.
<PAGE> 7
X. MISCELLANEOUS
10.1 Plant Location. The Ni-Zn battery pilot plant and commercial
manufacturing facility will be initially located in Xiamen, China.
If necessary, the Ni-Zn battery can also be produced in Taiwan.
10.2 Applicable Law. This Agreement shall be construed in accordance with the
laws of the State of new York as they apply to contracts entered into in NewYork
by parties residing there, notwithstanding any choice of law principles to the
contrary. The IV and JV Principals agree that the state and federal courts of
New York shall have jurisdiction over them with respect to all matters arising
under or in respect to this Agreement.
10.3 Legality. The parties each declare that, to the best of their respective
knowledge, as of the date first written above, there are no laws or regulations
in effect that materially limit or restrict their ability to My Fully their
obligations under this Agreement.
10.4 This Agreement may not be modified or amended except by a writing duly
signed by the authorized representatives of both Parties-
10.5 Effect of Unenforceable Provisions. In the event any one or more of
the provisions contained in this Agreement shall be invalid, illegal or
unenforceable in any respect, said provision(s) shall be deemed severed and
deleted herefrom and the validity, legality and/or enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
10.6 Government Information. Nothing in this Agreement shall authorize the
disclosure of, or access to, classified or restricted information, material or
know-how of the Government of the United States of America to persons not
authorized or licensed to disclose or receive such classified or restricted
information.
10.7 Relationship. The relationship of the Parties herein shall be that of
independent contractors and nothing herein contained shall be deemed to create
any relationship of agency.
10.8 Assignment. Neither Party may assign this Agreement without the written
consent of the other Party, except to a wholly-owned or majority-owned
subsidiary of the assigning Party.
<PAGE> - 8-
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in a manner binding upon them by their duly authorized officers as of the date
first above written. This Agreement expires upon completion of { *** }
of royalty payments after the first commercial sales.
The undersigned JV, Xiamen Daily-Used Chemicals Co., LTD. and Nan Ya
Plastics Corporation accept their joint and several liability for all
the payment and performance obligations of the JV under this Agreement.
THE JV
XIAMEN DAILY-USED CHEMICALS CO., LTD.
BY: /s/ Zhi Yi
Title: President
NAN YA PLASTICS CORPORATION
By: /s/ Chin Lung Chang
Title: Vice President
ERC
ENERGY RESEARCH CORPORATION
By: /s/ Jerry Leitman
Title: President
<PAGE> -9-
APPENDIX A
DEFINITION OF NON-EXCLUSIVE LICENSED
COUNTRIES IN SOUTHEAST ASIA
The purpose of this Appendix A is to define non-exclusive licensed countries
in Southeast Asia agreed by parties through good faith negotiation.
The non-exclusive licensed countries in the Southeast Asia are as follows:
(1) Brunei
(2) Myanmar (formerly known as Burma)
(3) Cambodia
(4) Indonesia
(5) Laos
(6) Malaysia
(7) Philippine
(8) Singapore
(9) Thailand
(10) Vietnam
<PAGE> 10
APPENDIX B
TEST PROGRAM FOR NI-Zn BATTERY TECHNOLOGY
TRANSFER AND LICENSE AGREEMENT
The purpose of this Appendix B is to define agreement for Ni-Zn battery testing
conditions reached by parties through good faith negotiation.
The parties agree as follows:
1. The testing will be conducted in parallel by Xiamen and Nan Ya, and testing
results from either party have equivalent weight for determining battery
performance.
2. One { *** } battery module and ten { *** } single cells
will be provided to Xiamen and Nan Ya each for testing, respectively.
3. Nan Ya will use it's own facility to conduct the testing in Taiwan, and
Xiamen will use ERC's testing facility to conduct the testing in US.
4. Nan Ya and Xiamen will use the same procedures agreed by a parties to conduct
the testing.
5. Whether or not the testing results meet the criteria will be unanimously
determined by Xiamen and NanYa.
6. If the testing from either parties does not meet the criteria, the
testing will be allowed to repeat, but in no event later than
{ *** } of the Effective Date of the License Agreement.
7. The testing parameters, testing conditions, and testing criteria are given
in Table I
<PAGE> -11-
<TABLE>
TABLE 1.
TESTING PARAMETERS, CONDITIONS, AND TESTING
CRITERIA FOR Ni-Zn BATTERY
<CAPTION>
BATTERY FOR TESTING
PARAMETERS TESTING CONDITIONS TESTING CRITERIA COMMENT
- - -------------------- ------------------------ -------------------- -------------- --------------
<S> <C> <C> <C> <C>
Specific Energy, Wh/kG { *** } discharge rate { *** } Module { *** }
Energy Density (Wh/L) { *** } discharge rate { *** } Module { *** }
Specific Power, W/kg { *** } { *** } Module { *** }
Specific Power (regen), W/kg { *** } { *** } Module { *** }
W/kg
Power Density, W/L { *** } { *** } Module { *** }
Recharge Time, h { *** } { *** } Module { *** }
Fast Recharge Time (40% { *** } { *** } Module { *** }
to 80% SOC), min
Life, Cycles (80% DOD) { *** }discharge rate { *** } Module { *** } (1)
Power and Capacity
Degradation after 500
Cycles, % Rated
Specification { *** } { *** } Module { *** }
Continuous Discharge in 1
h (no failure), % rated
energy capacity { *** } { *** } Module { *** }
Efficiency, % { *** } discharge rate { *** } Module { *** }
{ *** } charge
Self-Discharge, Capacity
Degradation % Rated
Specification { *** } { *** } Single Cell { *** }
Maximum Operation { *** } { *** } Single Cell Capacity Degradation (2)
Temperature (Capacity { *** } Rated
Degradation, % Rated Specification
Specification
Minimum Operation { *** } { *** } Single Cell { *** } Rated
Temperature (Capacity Specification
Degradation, % Rated >Capacity
Specification) Degradation
{ *** } Rated
Specification (2),(3)
</TABLE>
<PAGE> -12-
COMMENT:
(1) The discharge of each cycle will be cut-off at { *** } ; the
charge level and the charge process of each cycle will be defined in the
testing plan agreed by the all parties.
(2) Minimum and maximum operating temperature tests will be conducted on
{ *** } single cells. The testing will determine the capacity
degradation (% rated specification) of the cell at the specified minimum
and maximum operating temperatures. Only discharge capacity will be measured
at the specified minimum and maximum operating temperatures. The discharge
capacity will be measured after the battery reaches specified temperatures.
The degradation of the discharge capacity at temperatures { *** }
is required to be between { *** } and { *** } rated
specification. The degradation of discharge capacity at { *** }
is not allowed to be greater than { *** } rated specification.
(3) { *** }
<PAGE> -13-
