UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 10/31/97
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 $40,019,430, which is based on the closing price
of $17.125 on January 21, 1998. On January 22, 1998 there were 4,013,647
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 1998 Annual Meeting of Stockholders to be filed
not later than 120 days after the end of registrant's fiscal year ended
October 31, 1997 is incorporated by reference in Part III of this Report
on Form 10-K.
<PAGE> 1
FORM 10-K ANNUAL REPORT
INDEX
PAGE
PART I
Item 1. Business 3
Item 2. Properties 32
Item 3. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security 33
Holders
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 33
Item 6. Selected Financial Data 35
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operation 36
Item 8. Financial Statements and Supplementary Data 44
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of
the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners 44
and Management
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, 46
and Reports on Form 8-K
Signatures 52
<PAGE> 2
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 degrees fahrenheiht. 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 mainly with
Mitsubishi Electric Corp. in Japan and Daimler Benz affiliate
MTU-Friedrichshafen GmbH in Europe, licensees of the Company, in the
product development. (See "License Agreements")
<PAGE> 3
The Company believes that markets for the DFC will be the investor
owned electric and gas utilities (IOU), municipal owned electric
utilities (MOU), 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 1 to 3 megawatt
size range,based on 1.25 MW (nominal) modules with single or
multiple modules per power plant.
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, such as hospital or industrial plants may also be
attracted by cogeneration applications.
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 and largest advanced 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
<PAGE> 4
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, the using of 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.
In March, 1997 the Company in conjunction with project sponsors,
decided to conclude operational testing on the Santa Clara project.
The 4000 hours of grid connected testing and 2500 Mwh AC of
electricity generated, were world records for first-of-a-kind large
fuel cell power plant demonstrations. The project also achieved
records for low SOX and NoX power plant emissions compared with
conventional power plants and for efficiency for fossil fueled
power plants in this size range as well as a record efficiency for
a fossil fuel cell power plant of any type. After the termination
of the demonstration, the fuel cells were 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 $86 million over a five year
period to further design, develop and demonstrate a commercial
<PAGE> 5
prototype power plant with improved, larger fuel cells and a more
compact design (see Principal Development Contracts-Fuel Cells-General
sponsors). Major development emphasis under this agreement
focuses 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 and 1997 continued at a reduced
level as funding was limited by the delays in the government's
appropriation process, additional expenses associated with these
delays and other issues at the Santa Clara Demonstration Project,
and a smaller allocation of funds than required by the original
cooperative agreement.
In fiscal 1997 about $20.1 million was spent under this agreement.
This is less than the scheduled amount under the agreement.
While fiscal 1997 got off to a reasonable start due to a timely
appropriations bill this year, the funding level was 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 and 1997 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 1998 DOE fuel cell budget for stationary power
plants is about 15% less than 1997.
The Company is substantially dependent on government appropriations
for funding its development and demonstration efforts. This
dependence has advantages for the investor but also introduces an
element of risk and schedule uncertainty in the Company's plans.
In addition to DOE agreements, the Company essentially completed a
Defense Advanced Research Project Agency (DARPA) 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. This work in 1996 has led to a U.S. Navy
contract in 1997. Also a Coast Guard derivative contract from John
J. McMullen Assoc. Inc., a ship design firm was received in the
first quarter of 1998. In testing to date, the Company has
demonstrated the ability to operate on natural gas at sites in
Germany, Denmark and California, on coal gas in Louisiana and
<PAGE> 6
Germany and on JP-8 and diesel fuels at its facilities in Danbury.
Additionally, the Company received 1996 DARPA 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, were used in 1997 to design facilities to support
power plant simulations and certain logistical operations in
conjunction with a planned megawatt size simulator being built at
ERC's Danbury site. In 1997 an additional $2.1 million in DARPA
funds was added to the DOE contract.
A higher megawatt class power plant, but significantly more compact
than Santa Clara is expected to begin to operate in late 1999. In
1997 ERC focused on continuing to produce larger area cells and
larger stacks at its manufacturing facility in Torrington, CT and
will initiate testing of these new full-size components and stacks
in Danbury in the first half of 1998. There can be no assurance
that these tests will not be delayed for technical or budgetary
reasons. In addition, ERC installed new manufacturing equipment
in 1997 to produce the larger cells at higher production rates. A
new larger test facility, 400 kW capability, was tested in 1997 and
the first of the larger size stacks is expected to be tested in
this facility, which management believes is the world's largest, in
1998.
All 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 extending cycle life of single cells to
700 cycles. This ongoing 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 or
comparative energy per unit weight at a potentially lower cost than
either nickel cadmium or nickel metal hydride batteries. Moreover,
zinc is environmentally benign compared with cadmium. Also during
<PAGE> 7
the year, the Company built and had tested a full size battery for
hybrid electric vehicle operation for several hundred cycles.
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 product applications, but excluding electric vehicles ie.
Cars & trucks. (See License Agreements)
The Company has tested a 4 Ahr size cell suitable for electronic
devices and has designed and tested a 2 Ahr cell for use as a power
source for a Left Ventricular Assist Device (LVAD) under a National
Institute of Health Small Business Innovative Research Phase II
award. These small batteries are expected to be tested by the LVAD
manufacturer in 1998.
The Company held discussions with potentially interested partners
for either licensing or joint venture opportunities in the electric
vehicle battery area but there can be no assurance that 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, none of which can be guaranteed;
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, 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.
<PAGE> 8
LICENSING AGREEMENTS
====================
General
- -------
Fuel Cells
- ----------
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.
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>
<PAGE> 9
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
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.
<PAGE> 10
Through 1997 ERC has received $1.68 million in license payments
from 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
power plant incorporating Direct Fuel Cell technology. Through
1997 ERC has received $1.7 million in license payments from MELCO.
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
<PAGE> 11
kilowatts of electrical generating capacity using carbonate fuel
cells sold by MTU or its permitted licensees. Through 1997 ERC has
received $1.98 million in license payments from MTU.
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 MTU
conducted a hot fuel cell test in 1997 using their BOP and the ERC
supplied components.
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. Total
direct funding from EPRI through 1997 is approximately $21 million.
Additionally, EPRI provided approximately $5 million to ERC's
subsidiary for the Santa Clara project and a similar amount to
other contractors for the coal gas testing of an ERC fuel cell in
Louisiana.
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
<PAGE> 12
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 1997, ERC has paid to DOE a total of
$200,000 (See "Principal Development Contracts").
Battery
- -------
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
commercialization of the battery, in which case the Company would
receive benefits and rights to certain Corning developments and
activities. The agreement required 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. Through fiscal 1997 ERC received
$0.35 million in license payments from Corning. These payments
began in April 1997.
<PAGE> 13
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
being developed by the Company for approaching these markets is a
nominal 2.5 MW unit currently being designed or a multiple thereof.
The Company has also begun to consider a single module version
(1.25 MW) of its power plant and a three module (3.75MW) in order
to capture additional market opportunities. In general, the cost
per kilowatt increases as the power plant becomes smaller because
of increased cost of balance of plant equipment which, unlike the
fuel cell itself, is size dependent.
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 one or
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 is projected
to 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
<PAGE> 14
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. According to the Electric Power Industry
Outlook 1997-2001; 252 gigawatts of new generation capacity will be
needed between 1994 and 2015 to satisfy electricity demand growth
and to replace retiring units. Electricity prices are projected to
remain relatively stable during this period.
Large utilities may be interested in the fuel cell both as an
efficient, low pollution and cost effective generating system as
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 direct 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 traditionally fueled by coal. 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, a heightened atmosphere of
competition exists in the industry. In 1996 and 1997, a number of
significant mergers took place within the electric IOU sector and
between electric and gas IOUs and between electric IOUs.
<F1> Olesen, Douglas E., The Electricity Journal, Vol. 8, No. 10,
December 1995, p.57 </F1>
<PAGE> 15
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,
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. Recent delays in the
California initiative toward deregulation could cause further
confusion. Legislation favorable to large utilities in California
relative to stranded investment may cause expected rate reductions
to disappear.
At present, capacity margins in the U.S. as a whole average about
25%, but are shrinking and 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 nuclear plants, which may not be economically
feasible in some cases, and the aging of U.S. plants, could result
in market opportunities 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. The nuclear power plants shut
down in the northeast in 1996 did not come back on line in 1997.
While the above developments should be 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 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 1997, the Company focused
<PAGE> 16
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. The 1997 efforts focused on a site specific basis.
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.
<TABLE>
<CAPTION>
TABLE 1: SOME OF SCDP PROJECT ACCOMPLISHMENTS
<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 - Instantaneous load shed capability
operated in a grid connect utility mode - Virtually flawless balance-of-plant
- - Over 4,000 hours of grid connect operation has been proved over
power delivery 6,000 hours of operation
- - Reached 1.93 MW AC, 7 percent higher - Valuable information on power
than related power allocation among fuel cell stacks in
- - Achieved 44 percent efficiency level, a the event one stack is under-
record for a fossil fuel power plant of performing - the present situation
this size - Insight gained into future power
- - SOx below detection limits and 2 PPM Nox Plant electrical configuration
emissions
- - Meets IEEE Specification 519 for less
than five percent overall voltage
harmonics
- - 2,500 Megawatt hours of AC power
generated
- - Meets Santa Clara 70 decibel noise
specifications with no special sound
proofing provisions
</TABLE>
<PAGE>
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 $1,000 to
$3,000/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. In 1997,
the Company developed and tested a model with ERI to conduct site
specific analysis of cost of electricity, inputting actual user
demand for heat and electricity.
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
1-3 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 1997 but with reduced participation. The group worked
with ERC in the aforementioned model testing.
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 future
demonstrations, final contract terms, the individual utility need
for additional generation capacity in the 1999-2000 time frame and
beyond, the cost of competitive options as well as other factors
which are not known to the Company at this time.
<PAGE> 18
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>
Manufacturing
- -------------
The Company manufactures its fuel cells at its manufacturing
facility located in Torrington, CT. It is the Company's goal to
develop a fuel cell manufacturing plant able to operate at an
annual rated capacity of two megawatts and a single shift.
In 1996, ERC installed certain new manufacturing equipment capable
of producing higher quality components at much higher rates of
production. ERC shipped 300 nine square foot cells to MTU in 1996
using a combination of old and new manufacturing processes. In
1997 the Company added a fully automated cathode production line to
manufacture nine square foot electrodes needed for the commercial
power plants. The Company also established continuous production
of its new low cost anode electrode required for commercial power
plants.
The Company will need to raise additional funds to expand the
capacity of its 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 cost. Meanwhile, the Company is
<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 Genaration 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 &
South West Services, Inc.", October 1993. </F4>
<PAGE> 19
using existing funds to expand production capacity incrementally.
The Company believes it can raise production capability to 25 MW
per year by 1999 funded by its cash flow. There can be no
assurances however, that other needs for the cash will not arise.
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, have conducted
carbonate fuel cell activities on their own utilizing the Company's
technology. The activities of this group complements 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 or 1997.
Batteries
- ---------
See LICENSE AGREEMENTS - Corning, Incorporated and PRINCIPAL
DEVELOPMENT CONTRACTS - Batteries.
<PAGE> 20
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
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 5 year 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. An
additional $2.1 million of DARPA funding was received in 1997,
raising the contract value to $86 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, scale up, 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.
<PAGE> 21
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. The Company 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 Demonstration Project was staged based upon achieving
certain milestones, all of which were met. The contract with the
utilities was completed as budgeted in 1993. ERC is proud of this
achievement since this was the first of a kind demonstration of a
new technology on a commercial scale.
The Company is seeking to continue operation of the Santa Clara
facility by supplying it's commercial fuel cell modules to the city
and use the existing balance of plant. Other SCDP participants
have agreed to this. The Company is in discussion with the city
but there can be no assurance a definitive contract will be
reached.
Other Activities
- ----------------
During fiscal 1995, 1996 and 1997, 100% of the Company's research
and development was funded by customers, including approximately
$0.94, $1.26 and $1.27 million, respectively, of discretionary
independent research and development expense. The Government
funding provided approximately 72%, 76% and 94% of revenues in
fiscal 1995, 1996 and 1997, 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
<PAGE> 22
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, however
congressional budget limits could result in longer terms. 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 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 $18.7 million in 1997 funding
from DOE, of which approximately $1.8 million was assigned to the
SCDP Cooperative Agreement. There can be no assurance that some of
this funding will not be subject to recision. The Congress reduced
the DOE Fossil Energy fuel cell budget for 1998 by about 15%.
ERC's 1998 allocation to date is $12.9 million and there can be no
assurance additional funds will become available.
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, 1997 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
<PAGE> 23
is a major participant funding the SCDP. No new funds are
anticipated from EPRI at this time.
In addition to the activities listed above, the Company was active
in soliciting other business from industry and government
organizations. A $4.7 million Defense Advanced Research Projects
Agency (DARPA) 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 was administered by NASA.
Additional DARPA 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. An additional DARPA $2.1 million
funding was available for this project in 1997. Approximately $1.6
million of Navy funds has been provided in the 1997 budget for the
study of carbonate fuel cells for naval applications. The Company
was awarded a contract for this work on a competitive basis at the
end of the fiscal year and work will commence in 1998.
During the fiscal year 1996 and first quarter of 1997, the Company
produced and shipped approximately $1.5 million of DFC parts to its
licensee, MTU and expects to receive further orders in 1998. 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 one new
Phase I SBIR in 1997.
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 should permit 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
<PAGE> 24
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. In 1997, the
Company extended testing to 700 cycles in single cells and has
designed and ordered tooling for a 30 ampere hour cell for use in
electric vehicles.
Approximately 69% of the Company's discretionary internal research
and development funding, which it receives under its government
contracts, was used in further nickel-zinc battery development
during the 1997 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 but may take steps to increase production of
EV prototype batteries. During 1997, ERC held discussions with
several organizations and corporations in China, Europe and the
U.S. 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 U.S. patents in
fiscal year 1997. Also the Company applied for 1 battery patent in
fiscal year 1997.
<PAGE> 25
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, what the Company has
obtained is owned by the United States Government. The Company
has received a license to use these patents, 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
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 2017. 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
<PAGE> 26
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 has not filed for patent protection in certain
potential major markets such as India, China and Southeast Asia.
Agreements reached with partners in these areas would have to be
based on trade secrets and know-how. In the future, the Company
may seek patent protection in those areas.
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.
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
<PAGE> 27
approach. There is one company in Canada developing a low
temperature fuel cell.
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
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.
<PAGE> 28
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. In Korea, Samsung is pursuing NiZn for
electric vehicle applications. 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 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
relating to, among other things, land use, safe working conditions,
handling and disposal of hazardous and potentially hazardous
<PAGE> 29
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.
ORGANIZATION
============
ORGANIZATION STRUCTURE
- ----------------------
In 1998, the Company, in order to streamline its focus on
commercialization of its technologies, split into three core groups
under the corporate banner of E R C. These groups are the Advanced
Technology Group, the Fuel Cell Group and the Battery Group. While
the groups are separate, they are interdependent; all founded on
the Company's core competence in electrochemical technology. The
Company's subsidiaries, Fuel Cell Manufacturing Corporation and
Fuel Cell Engineering Corporation are within the Fuel Cell Group,
and are being phased out over time, as the need for these
subsidiaries has passed.
The Advanced Technology Group concentrates its efforts on research
and development of electrochemical technologies, including securing
and executing both Government and industry research & development
contracts. In effect, the Advanced Technology Group is the
<PAGE> 30
historical business of the Company. The Fuel Cell Group is the
product group for the Company's Direct Fuel Cell. It consists of
product development, engineering, project management, manufacturing
and eventually, sales and marketing. The Battery Group is similar
to the Fuel Cell Group, although currently not as large. It
includes its own research and development, as well as product
development and engineering.
The business development function reports to the Company and
continues to provide support for both Advanced Technology Group and
Fuel Cells Group. Corporate staff functions such as finance and
accounting, personnel will continue to report to the Company
corporate and provide services for the three operating groups.
Also in 1998, the Company changed its corporate image with a new
signature.
EMPLOYEES
- ---------
As of December 31, 1997, the Company had 149 full-time employees,
of which approximately 67 were engineers, scientists, and other
degreed professionals and 82 were professional, technical,
administrative and manufacturing support personnel. The Company
considers relations with its employees to be good. The loss of key
employees could cause delays in completing contracted work and
development and commercialization activities.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
In August, 1997, the Company appointed Jerry D. Leitman as
President and Chief Executive Officer, as well as a Director,
replacing Dr. Bernard Baker, who was appointed non-executive
chairman of the Board and has continued to be employed on a part
time basis.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Jerry D. Leitman 55 President and Chief Executive Officer and
(After Aug 1, 1997) 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 53 Senior Vice President, Chief Financial
Officer, Treasurer & Corporate Secretary
</TABLE>
<PAGE> 31
Jerry D. Leitman was previously President of ABB Asea Brown
Boveri's global air pollution control businesses from 1992 to 1995.
Prior to ABB Mr. Leitman was Group Executive Vice President of
FLAKT AB, a Swedish multinational, responsible for FLAKT s
worldwide industrial businesses from 1989 to 1992. Mr. Leitman has
both a BS & MS in Mechanical Engineering from Georgia Institute of
Technology 1965 & 1967 respectively.
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 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.
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 Note 6 to consolidated financial
statements long term debt. Additionally, ERC has leased a 63,000
square foot facility in Torrington, Connecticut for its
manufacturing operations. The lease expires February 1, 2001. 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.
<PAGE> 32
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
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.
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. From September 21, 1994 -
February 25, 1997 the Common Stock traded on The Nasdaq Stock
Market (NASDAQ) and since February 26, 1997 the Common Stock has
traded on the American Stock Exchange (AMEX).
The following table sets forth the range of high and low prices of
the Common Stock on the AMEX and NASDAQ for the fiscal quarters
indicated, as reported by AMEX and the NASDAQ.
<TABLE>
<CAPTION>
COMMON STOCK
- ------------
Year Ended 10/31/97 High Low
- ------------------- ------ ------
<S> <C> <C>
First Quarter $15.625 $ 9.750
Second Quarter 13.000 9.375
Third Quarter 10.750 8.500
Fourth Quarter 20.500 9.375
Year Ended 10/31/96 HIGH LOW
- ------------------- ------ ------
First Quarter $12.250 $10.250
Second Quarter 14.375 9.500
Third Quarter 22.250 11.500
Fourth Quarter 15.750 11.250
</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.
<PAGE> 33
Under the terms of the Company's Loan Agreement with First Union Bank of
Connecticut, the Company may not without the written consent of First
Union Bank declare or pay any dividend.
On January 22, 1997 there were approximately 1,694 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 Company. The
principal amount of $216,000 and $450,000 plus $210,573 in accrued
interest, were converted in the transactions.
<PAGE> 34
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)
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Sales $24,830 $29,446 $33,955 $30,084 $22,211
Gross Profit 9,188 8,551 7,696 8,020 7,948
Operating Expenses:
Administrative & Selling 6,081 4,858 4,513 4,730 4,657
Depreciation 1,768 1,919 1,801 1,663 1,645
Research & Development 1,270 1,260 944 1,348 1,148
Operating income 69 514 438 279 498
Interest & other income,
net 307 442 317 148 174
Interest expense (354) (503) (459) (435) (490)
License fee income net 650 357 357 364 356
Income before income taxes 672 810 653 356 538
Income tax expense 247 301 211 136 197
Net Income $ 425 $ 509 $ 442 $ 220 $ 341
Net income per share
(primary & fully diluted) $ .10 $ .13 $ .11 $ .06 $ .09
Number of shares used
in per share calculation 4,207,144 4,063,061 3,972,281 3,939,925 3,895,667
BALANCE SHEET DATA
Working capital 6,366 8,087 8,216 7,619 8,545
Total assets 21,433 23,540 23,847 22,515 20,930
Long-term debt 2,699 4,363 6,487 5,839 6,237
Total shareholders' equity 14,769 14,062 12,238 11,685 10,206
</TABLE>
<PAGE> 35
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
<PAGE> 36
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
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 and
terminated operations about one year later.
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. 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 1997, the
funding received for its major cooperative agreement was less than
the contracted amount due to a DOE budget shortfall. The Company
adjusted its expenditures to the lower funding rates as it did in
1996. This caused delays in the work being done under existing
contracts which inevitably cause delays in the Company's activities
and commercialization schedule.
<PAGE> 37
In 1997, the Company was 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. 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. In 1997, an additional $2 million in DARPA funds were
added to the contract. In the 1998 budget $12.8 million has been
allocated to the Company's DOE fuel cell cooperative agreement
which, together with carryover funds from 1997 and other funding
services, are expected to bring 1998 funding to a level similar to
1997.
RESULTS OF OPERATIONS
- ---------------------
1997 compared to 1996. Revenues decreased 16% to $24,830,000 in
the 1997 period from $29,446,000 in the 1996 period. The expected
decrease in revenues was due primarily to the completion of the
two- megawatt Direct Fuel Cell power plant project in Santa Clara,
California. The decrease was partially offset by an increase in
billings under the Company's other contracts.
Cost of revenues decreased 25% to $15,642,000 in the 1997 period
from $20,895,000 in the 1996 period. The decrease was due
primarily to the completion of the two- megawatt Direct Fuel Cell
power plant project mentioned above.
Administrative and selling expense increased 25% to $6,081,000 in
the 1997 period from $4,858,000 in the 1996 period. The 1997
period reflects an increase in various expenses including bid and
proposal activity, employment costs, amortization and legal and
professional fees. Depreciation decreased 8% to $1,768,000 in the
1997 period from $1,919,000 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 $1,270,000 in the
1997 period and $1,260,000 in the 1996 period.
Income from operations decreased 87% to $69,000 in the 1997 period
from $514,000 in the 1996 period. The decrease was due primarily to
the recovery of non-recurring costs associated with certain Company
contracts in the 1996 period and the incurrence of certain non-
<PAGE> 38
recoverable employment related costs due to the hiring of a new
chief executive officer in the 1997 period. The remainder of the
decrease was due to the decrease in the revenues mentioned above.
Income from operations in the 1998 period will be reduced by
certain non-recoverable employment costs.
License fee income, net, increased 82% to $650,000 in the 1997
period from $357,000 in the 1996 period. The increase was
primarily due to the recognition of license income under the
Company's battery license with Corning, Inc.
Interest expense decreased 30% to $354,000 in the 1997 period from
$503,000 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 31% to $307,000 in the
1997 period from $442,000 in the 1996 period. The decrease was
primarily due to the use of cash for debt repayment during the
first quarter of fiscal 1997.
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.
<PAGE> 39
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.
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.
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, 1997, the Company had working capital of $6,366,000
including $6,802,000 of cash and cash equivalents, compared to
working capital of $8,087,000 including $7,597,000 of cash and cash
equivalents and $1,956,000 of marketable securities at October 31,
1996. The Company decreased its investment in marketable securities
<PAGE> 40
by $1,956,000 to acquire machinery and equipment for the
manufacturing subsidiary. 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 1997, $2,252,000 of cash was provided by the
Company's operating activities. During the 1997 period, accounts
receivable was relatively unchanged at $2,828,000. Net cash from
operating activities also included the Company's net income of
$425,000 and depreciation and amortization of $2,162,000. During
the 1997 period, accounts payable decreased $367,000 primarily due
to the completion of the two megawatt Direct Fuel Cell power plant
project.
The Company's capital expenditures are incurred primarily to
support ongoing contracts and to replace existing equipment.
Capital expenditures for the fiscal 1997 period were $2,801,000. 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 the credit facility during 1995 and
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.
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
<PAGE> 41
loan was 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 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 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 its
Direct Fuel Cell Manufacturing capability. 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.
<PAGE> 42
The Company anticipates that its existing capital resources
together with anticipated revenues will be adequate to satisfy its
existing financial requirements and agreements through 1998.
However, the Company may require additional capital beginning in
1998 if the aforementioned plan to expand manufacturing capability
in its Torrington, CT facility is implemented.
<PAGE> 43
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 OF
THE REGISTRANT" 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 1998 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 1998 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 1998 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 1998 Annual Meeting of
Stockholders.
<PAGE> 44
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 1998
Annual Meeting of Stockholders.
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) Financial Statements
1) Independent Auditors' Report
KPMG Peat Marwick LLP (See page F-2, hereof.)
2) Consolidated Balance Sheets as of October 31, 1997 and 1996
(See page F-3 hereof.)
3) Consolidated Statements of Income for Years Ended
October 31, 1997, 1996 and 1995 (See page F-4, hereof.)
4) Consolidated Statements of Changes in Common
Shareholders' Equity for the Years Ended October 31,
1997, 1996 and 1995 (See page F-5, hereof.)
5) Consolidated Statements of Cash Flows for the Years
Ended October 31, 1997, 1996 and 1995 (See page F-6, hereof.)
6) Notes to Consolidated Financial Statements (See pages F-7 thru F-22,
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)
<PAGE> 46
(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)
<PAGE> 47
(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)
<PAGE 48
(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)
<PAGE> 49
(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
10.48 Technology Transfer and License Agreement between Energy Research
Corporation and Corning Inc. dated January 20, 1997.(confidential
treatment requested for certain portions of this document)
10.49 *Employment Agreement between Energy Research Corporation and the
President and Chief Executive Officer dated August 1, 1997.
<PAGE> 50
(A) (3) EXHIBITS TO THE 10-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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)
23.1 Consent of KPMG Peat Marwick LLP.
27 Financial data schedule
* Management Contract or Compensatory Plan or Arrangement
(b) REPORTS ON FORM 8-K.
None
<PAGE> 51
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/ Jerry D. Leitman
BY: JERRY D. LEITMAN, PRESIDENT
DATE: JANUARY 22, 1998
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/ Jerry D. Leitman /s/ Louis P. Barth
BY: JERRY D. LEITMAN BY: LOUIS P. BARTH, SENIOR VICE
CHIEF EXECUTIVE OFFICER, DIRECTOR PRESIDENT, CHIEF FINANCIAL OFFICER
(PRINCIPAL EXECUTIVE OFFICER) CORP. SECRETARY, TREASURER (PRINCIPAL
DATE: JANUARY 22, 1998 ACCOUNTING AND FINANCIAL OFFICER)
DATE: JANUARY 22, 1998
/s/ Warren Bagatelle /s/ Christopher R. Bentley
BY: WARREN D. BAGATELLE, DIRECTOR BY: CHRISTOPHER R. BENTLEY, DIRECTOR
DATE: JANUARY 22, 1998 DATE: JANUARY 22, 1998
/s/ Michael Bode /s/ James D. Gerson
BY: MICHAEL BODE, DIRECTOR BY: JAMES D. GERSON, DIRECTOR
DATE: JANUARY 22, 1998 DATE: JANUARY 22, 1998
/s/ Thomas L. Kempner /s/ William A. Lawson
BY: THOMAS L. KEMPNER, DIRECTOR BY: WILLIAM A. LAWSON, DIRECTOR
DATE: JANUARY 22, 1998 DATE: JANUARY 22, 1998
/s/ Hansraj C. Maru /s/ Richard M.H. Thompson
BY: HANSRAJ C. MARU, DIRECTOR BY: RICHARD M.H. THOMPSON, DIRECTOR
DATE: JANUARY 22, 1998 DATE: JANUARY 22, 1998
/s/ Bernard S. Baker
BY: BERNARD S. BAKER, DIRECTOR
DATE: JANUARY 22, 1998
<PAGE> 52
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 and 1995
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-2
Consolidated Balance Sheets - October 31, 1997 and 1996 F-3
Consolidated Statements of Income for Years Ended
October 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Common
Shareholders' Equity for the Years Ended October 31,
1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended October 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-22
<PAGE> 1
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, 1997 and 1996,
and the related consolidated statements of income, changes in common
shareholders' equity and cash flows for each of the years in the
three-year period ended October 31, 1997. 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 audits.
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, 1997 and
1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended October 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
__________________________
January 12, 1998
Stamford, CT
<PAGE> 2
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,802 $ 7,597
Marketable securities -- 1,956
Accounts receivable 2,828 2,848
Inventories 47 72
Deferred income taxes 205 209
Other current assets 279 231
------ ------
Total current assets 10,161 12,913
Property, plant and equipment, net 8,254 7,245
Other assets, net 3,018 3,382
------ ------
Total Assets $21,433 $23,540
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt 1,702 $ 2,380
Accounts payable 865 1,232
Accrued liabilities 1,182 1,108
Income taxes payable -- 11
Current portion of deferred license fee income 46 95
------ ------
Total current liabilities 3,795 4,826
Long-Term Liabilities:
Long-term debt 2,699 4,363
Capital lease obligation -- 8
Deferred license fee income -- 17
Deferred income taxes 170 264
------ ------
Total liabilities 6,664 9,478
------ ------
Shareholders' Equity:
Convertible preferred stock, Series C ($.01 par
value); 30,000 shares outstanding in 1997
and 1996 600 600
------ ------
Common Shareholders' Equity:
Common stock, ($.0001 par value);
8,000,000 shares authorized: 4,000,650
and 3,911,787 shares issued and outstanding
in 1997 and 1996, respectively -- --
Additional paid-in capital 11,460 11,178
Retained earnings 2,709 2,284
------ ------
Total common shareholders' equity 14,169 13,462
------ ------
Total shareholders' equity 14,769 14,062
------ ------
Total Liabilities and Shareholders' Equity $21,433 $23,540
====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE> 3
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $24,830 $29,446 $33,955
Costs and expenses:
Cost of revenues 15,642 20,895 26,259
Administrative and selling 6,081 4,858 4,513
Depreciation 1,768 1,919 1,801
Research and development 1,270 1,260 944
------ ------ ------
Total costs and expenses 24,761 28,932 33,517
------ ------ ------
Income from operations 69 514 438
License fee income, net 650 357 357
Interest expense (354) (503) (459)
Interest and other income, net 307 442 317
------ ------ ------
Income before provision for
income taxes 672 810 653
Provision for income taxes 247 301 211
------ ------ ------
Net income $ 425 $ 509 $ 442
====== ====== ======
Primary and fully diluted income
per common share $ .10 $ .13 $ .11
====== ====== ======
Weighted average common and
common equivalent shares
outstanding 4,207,144 4,063,061 3,972,281
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 4
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(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, 1994 3,699,683 $ 9,193 $1,333 $(41) $10,485
Issuance of Common Stock
under Benefit Plans 29,231 70 -- -- 70
Value 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
Issuance of Common Stock
under Benefit Plans 96,621 188 -- -- 188
Common Stock Retired (8,119) -- -- -- --
Conversion of Notes Payable
to Common Stock 361 3 -- -- 3
Tax effect of disqualifying
disposition of incentive
Stock Options -- 91 -- -- 91
Net Income -- -- 425 -- 425
--------- ------ ------ ---- ------
Balance at October 31. 1997 4,000,650 $11,460 $2,709 -- $14,169
========= ====== ===== ==== ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 5
ENERGY RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 425 $ 509 $ 442
Adjustments to reconcile net income to
net cash provided by operating activities:
Bad debt (recovery) -- -- (27)
Depreciation and amortization 2,162 2,156 2,148
Deferred income taxes (90) 46 (15)
Conversion of accrued interest to
principal on long-term debt 38 109 120
(Gain)loss on disposal of property (1) 3 4
Realized loss on sale of marketable securities -- -- 64
(Increase) decrease in operating assets:
Accounts receivable 20 355 4,251
Inventories 25 107 (101)
Other current assets (48) (144) 45
Increase (decrease) in operating liabilities:
Accounts payable (367) (1,151) (634)
Accrued liabilities 74 (416) 589
Income taxes payable 80 (60) 55
Deferred license fee income (66) (66) (65)
----- ----- -----
Net cash provided by operating activities 2,252 1,448 6,876
----- ------ -----
Cash Flows from Investing Activities:
Capital expenditures (2,801) (1,904) (1,520)
Proceeds-sale of marketable securities and fixed assets 2,025 2,000 2,341
Payments on other assets (77) (97) (1,161)
Purchase of marketable securities -- -- (3,929)
----- ----- -----
Net cash used in investing activities (853) (1) (4,269)
----- ----- -----
Cash Flows from Financing Activities:
Repayment on long-term debt (2,382) (3,823) (538)
Proceeds from long-term financing -- 4,113 1,245
Common stock issued 188 438 70
----- ----- -----
Net cash provided by (used in)
financing activities (2,194) 728 777
----- ----- -----
Net Increase (Decrease) in Cash and Cash Equivalents (795) 2,175 3,384
Cash and Cash Equivalents-Beginning of Year 7,597 5,422 2,038
----- ----- -----
Cash and Cash Equivalents-End of Year $6,802 $7,597 $5,422
===== ===== =====
Cash paid during the period for:
Interest $ 344 $ 404 $ 459
Income taxes 446 508 251
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.
<PAGE> 6
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. 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.
<PAGE> 7
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.
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
<PAGE> 8
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 $42, $1,131 and $221 of long-term contract revenues
from corporate shareholders of the Company during fiscal years
ended October 31, 1997, 1996 and 1995, 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, 1997, 1996 and 1995, under license agreements with
corporate shareholders of the Company.
Revenues from the U.S. Government and its agencies directly and
through primary contractors were $23,377, $22,410 and $24,303,
for the years ended October 31, 1997, 1996 and 1995,
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.
Stock Option Plan
-----------------
Prior to November 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations.
<PAGE> 9
As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price.
On November 1,1996, the Company adopted SFAS NO. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made in fiscal years beginning after December 15, 1994 as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the recognition
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
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,
<PAGE> 10
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." This statement, effective commencing in
fiscal year 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 does not have a material impact on the Company's
financial position and its operating results.
Accounting Changes
------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128 -
"Earnings Per Share", which is effective for financial statements
for both interim and annual periods ending after December 15, 1997.
SFAS 128 requires presentation of basic and diluted per-share amounts
for income from continuing operations and for net income. The Company
does not expect the adoption of SFAS 128 to materially impact earnings
per share.
Note 2. Marketable Securities:
----------------------
At October 31, 1996, the Company's marketable securities were
classified as held-to maturity and related amortized cost amounts
to $1,956.
Note 3. Accounts Receivable
-------------------
Accounts receivable at October 31, 1997, and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
U.S. Government:
Amount billed $ 102 $ 114
Unbilled recoverable costs 2,156 1,057
Retainage 420 338
2,678 1,509
Commercial Customers:
Amount billed 88 397
Unbilled recoverable costs 32 929
Retainage 7 8
Other 23 5
150 1,339
$ 2,828 $ 2,848
</TABLE>
<PAGE> 11
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 acceptance by the
customer.
Note 4. Property, Plant and Equipment
-----------------------------
Property, plant and equipment at October 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
Estimated
1997 1996 Useful Life
---- ---- -----------
<S> <C> <C>
Land $ 524 $ 524 --
Building and improvements 3,490 3,115 30 years
Machinery and equipment 12,787 11,147 3-8 years
Furniture and fixtures 972 984 6-10 years
Construction in progress 1,738 1,331
19,511 17,101
Less, accumulated
depreciation and
amortization 11,257 9,856
$ 8,254 $ 7,245
</TABLE>
Note 5. Other Assets
------------
Other assets at October 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Power Plant Contract $ -- $ 41
Power Plant License 2,504 2,788
Other 514 553
Total $ 3,018 $ 3,382
</TABLE>
<PAGE> 12
The Power Plant Contract and License are being amortized over 4 and 10
years, respectively. Accumulated amortization was $1,091,$767 and
$558 at October 31, 1997, 1996 and 1995, respectively.
Note 6. Long-Term Debt
--------------
Long-term debt at October 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note payable (a) 668 1,926
Note payable (b) 1,408 2,042
Note payable (c) 250 550
Note payable (d) 2,075 2,225
4,401 6,743
Less, Current portion (1,702) (2,380)
Total long-term debt $ 2,699 $ 4,363
</TABLE>
(a) 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 $38 and $611 of
accrued interest as of October 31, 1997 and 1996, 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 were 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 1997
Consolidated Balance Sheet the Company repaid $630 of principal
and accrued interest.
<PAGE> 13
(b) 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, 1997, the commercial
paper rate was 5.49%. All borrowings under this credit facility
are collateralized by certain assets acquired with the proceeds
of this loan.
(c) 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 Rate (LIBOR) plus 1.75%. At October 31, 1997,
the LIBOR was 5.63%.
(d) 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, 1997, the LIBOR was 5.63%.
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 (d) above is
collateralized by a first mortgage on the Company's Danbury,
Connecticut location. The credit agreement associated with Notes
(c) and (d) 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, 1997, the above notes payable mature as
follows: fiscal 1998, $1,702; fiscal 1999,$755; fiscal 2000,
$319; and fiscal 2001, $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
<PAGE> 14
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 $83 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 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 $463,$460 and $429 for the
fiscal years ended October 31, 1997, 1996 and 1995, respectively.
Aggregate minimum annual payments under the lease agreements for
the five years subsequent to October 31, 1997 are: 1998, $477;
1999, $361; 2000, $356; 2001, $98; and 2002, $13.
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.
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 1997, ERC has paid to DOE a total of $200.
Note 8. Shareholders' Equity
--------------------
The Company's common shares are currently traded on The American
Stock Exchange. 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
were exercisable for a period of four years commencing June 25,
1993. During 1996, 22,667 warrants were exercised. The remaining
warrants expired June 25,1997.
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
<PAGE> 15
of convertible, nonredeemable Preferred "C". The redemption value of
the Preferred "B" was $1,200. The Preferred "C" Shares
originally had 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.
At October 31, 1997, 738,652 shares of common stock have been
reserved for issuance pursuant to the Company's stock option
plan and the plan amendment to be approved by the shareholders,
FCMC's $630 convertible notes payable, the convertible Preferred
"C" Stock and Section 423 Stock Purchase Plan.
Note 9. Stock Option Plan
-----------------
The Board has adopted a Stock Option Plan (the Plan). Under the
terms of the Plan, options to purchase up to 600,000 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, 1997.
In connection with the hiring of the Company's Chief Executive
Officer, options were granted to purchase 149,000 shares of the
<PAGE> 16
Company's common stock at the Purchase price of $9.875 per share
(the market value at the date of the grant). The company also
agreed to grant options to purchase an additional 101,000 shares
upon approval by the shareholders at the next annual meeting of the
shareholders. The per share weighted-average fair value of stock options
granted in 1997 and 1996 was $7.15 and $8.06 on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
Risk Free
Dividend Interest Rate Expected Volatility
Year Rate Range Life Factor
---- -------- ------------ -------- ----------
<C> <C> <C> <C> <C>
1997 0% 6.07-6.66% 10 years .5044
1996 0% 5.63-5.71% 10 years .5044
</TABLE>
The Company applies APB Opinion No.25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No.123, the Company's net
income would have been reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Income: As reported $425,000 $509,000
Pro forma $ 39,000 $476,000
Earnings Per Share: As reported $ .10 $ .13
Pro forma $ .01 $ .12
</TABLE>
Pro forma net income reflects only options granted in 1997 and
1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No.123 is not reflected in the pro
forma net income amounts presented above because compensation
cost is reflected over the options' vesting period, generally 4
years, and compensation cost for options granted prior to
November 1,1995 is not considered.
<PAGE> 17
The following table summaries the plan activity for the years ended
October 31, 1997 and 1996:
<TABLE>
1996 1997
Fixed Weighted Avg. Weighted Avg.
Options Shares Exercise Price Shares Exercise Price
------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding
beginning or
year 281,200 $4.26 289,900 $5.08
Granted 30,000 $12.25 219,000 $10.60
Exercised (21,300) $4.33 (91,292) $1.85
Outstanding
at year end 289,900 $5.08 417,668 $8.68
Options
Exercisable
at year end 240,900 $3.86 176,168 $5.84
Weighted-
average fair
value of
options
granted
during the
year $8.06 $7.15
</TABLE>
<PAGE> 18
The following tables summarize information about fixed stock options
outstanding and exercisable at October 31, 1997 and 1996:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Range Number Weighted-Avg.
of Outstanding Remaining Weighted-Avg.
Exercise Price at 10/31/97 Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
<C> <C> <C> <C>
$ 1.67 61,668 0.5 years $ 1.67
$ 4.50 40,000 2.6 years $ 4.50
$9.75-$13.00 316,000 8.5 years $10.58
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
------------------------------------
Range Number Outstanding at Weighted-Avg.Exercise Price at
10/31/97 10/31/96 10/31/97 10/31/96
----- -------- -------- ------- -------
<C> <C> <C> <C> <C>
$ 1.67 61,668 150,900 $ 1.67 $ 1.67
$ 4.50 40,000 40,000 $ 4.50 $ 4.50
$ 9.75-$13.00 74,500 50,000 $10.00 $ 9.75
</TABLE>
The share holders of the Company adopted a Section 423 Stock purchase
Plan at the April 30, 1993 Annual Meeting. The total shar es 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 up to 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.
<PAGE> 19
Plan activity for the years ended October 31, 1997, 1996 and 1995, was as
follows:
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
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
Issued @$10.31 (1,076)
Issued @$8.55 (4,313)
Balance at October 31, 1997 119,984
</TABLE>
Note 10. 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 $412,$395 and $371 to expense during the
years ended October 31, 1997, 1996 and 1995, 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
$346,$320, and $296 to expense during the years ended October 31,
1997, 1996 and 1995, respectively.
<PAGE> 20
Note 11. Income Taxes
------------
The Company's deferred tax assets and liabilities consisted of
the following at October 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Inventory reserve $ 11 $ 8
Capital loss carryforward 55 55
Vacation accrual 113 135
Self-insurance 49 46
Royalty income 19 46
AMT credit -- 2
Other 26 --
Gross deferred tax assets 273 292
Valuation allowance 55 55
Deferred tax assets after
valuation allowance 218 237
Deferred liabilities:
Accumulated depreciation (183) (292)
Gross deferred tax
liabilities (183) (292)
Net Deferred Tax Assets/(Liability) $ 35 $ (55)
</TABLE>
The components of Federal income tax expense (benefit) were as follows
for the years ended October 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 327 $ 236 $ 181
Foreign 10 10 10
337 246 191
Deferred:
Federal (90) 55 20
Foreign -- -- --
(90) 55 20
Total Income
Tax Expense $ 247 $ 301 $ 211
</TABLE>
<PAGE> 21
The components of state income tax expense which are included in
administrative and selling expenses were as follows for the years
ended October 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 234 $ 148 $ 91
Deferred (23) (9) (7)
Total State Income
Tax Expense $ 211 $ 139 $ 84
</TABLE>
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate for the years ended
October 31, 1997, 1996 and 1995 was as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal
income tax rate 34.0% 34.0% 34.0%
Tax-exempt interest -- -- (5.4)
Other, net 2.7 3.2 3.7
Effective Income Tax Rate 36.7% 37.2% 32.3%
</TABLE>
<PAGE> 22
<TABLE>
EXHIBIT NO. 11
ENERGY RESEARCH CORPORATION
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
<CAPTION>
Twelve Months
Ended October 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PRIMARY
- -------
Shares outstanding, beginning of
period 3,911,787 3,728,914 3,699,683
Weighted average number of shares
issued, retired and issuable
share equivalents 295,357 334,147 272,598
--------- --------- ---------
Weighted average number of common
and common equivalent shares
outstanding 4,207,144 4,063,061 3,972,281
========= ========= =========
Net income $ 425,000 $ 509,000 $ 442,000
========= ========= =========
Net income per common share $ .10 $ .13 $ .11
========= ========= =========
FULLY DILUTED
- -------------
Weighted average number of common
and common equivalent shares
outstanding as adjusted for
full dilution 4,277,144 4,133,061 4,252,281
Adjustment for interest, net of
tax, on convertible long-term debt $ 25,000 $ 25,000 $ 80,000
========= ========= =========
Adjusted net income $ 450,000 $ 534,000 $ 522,000
========= ========= =========
Net income per common share <F1> $ .11 $ .13 $ .12
========= ========= =========
<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>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ENERGY
RESEARCH CORPORATION'S FORM 10K FOR THE PERIOD ENDED OCTOBER 31, 1997 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-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 6,802
<SECURITIES> 0
<RECEIVABLES> 2,828
<ALLOWANCES> 0
<INVENTORY> 47
<CURRENT-ASSETS> 10,161
<PP&E> 19,511
<DEPRECIATION> 11,257
<TOTAL-ASSETS> 21,433
<CURRENT-LIABILITIES> 3,795
<BONDS> 0
0
0
<COMMON> 14,169
<OTHER-SE> 600
<TOTAL-LIABILITY-AND-EQUITY> 21,433
<SALES> 24,830
<TOTAL-REVENUES> 24,830
<CGS> 15,642
<TOTAL-COSTS> 24,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 354
<INCOME-PRETAX> 672
<INCOME-TAX> 247
<INCOME-CONTINUING> 425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
Consent of Independent Accountants
The Board of Directors
Energy Research Corporation:
We consent to incorporation by reference in the registration statements
(No.333-20807, No.33-77008 and No.33-68866) on Form S-8 of Energy Research
Corporation and Subsidiaries of our report dated January 12, 1998, relating
to the consolidated balance sheets of Energy Research Corporation and
Subsidiaries as of October 31, 1997 and 1996, and the related consolidated
statements of income, changes in common shareholders' equity and cash flows
for each of the years in the three-year period ended October 31, 1997, which
report appears in the October 31,
1997 annual report on Form 10-K of Energy Research Corporation.
Stamford, CT
January 23, 1998
EXHIBIT 10.49
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of the
lst day of August, 1997 between ENERGY RESEARCH
CORPORATION, a New York corporation (the "Company"), and
JERRY LEITMAN, an individual with a current mailing
address at 8845 Willowbrae Lane, Roswell, Georgia 30076,
(the "the Employee"). Unless the context otherwise
requires, the term "Company", shall include the Company
and each of its subsidiaries.
W I T N E S E T H
WHEREAS, the Company desires to employ the Employee
as its President and Chief Executive Officer and the
Employee desires to be employed in such capacity in
accordance with the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the covenants,
conditions, undertakings and premises contained herein,
the sufficiency which is hereby acknowledged, the Company
and the Employee agree follows:
ARTICLE 1
EMPLOYMENT AND DUTIES
1.1. Employment; Duties
Subject to the terms and conditions set forth
herein, commencing August 4, 1997 (the "Commencement
Date") the Company agrees to employ the Employee and the
Employee agrees to be employed as President and Chief
Executive Officer of the Company. In such position, the
Employee shall perform such duties as are or may be
assigned to the Employee by the Board of Directors of the
Company (the "Board of Directors") from time to time. In
connection therewith, the Employee shall report to and be
subject to the supervision of the Executive Committee of
the Board of Directors.
1.2. Full Time
The Employee shall devote his full working time,
attention, energies, skills and best efforts exclusively
to the performance of his duties hereunder The 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 the Employee, on his own time, (a) may manage
his own investments, and those of his immediate family,
and (b) may serve as a member of the board of directors
of other corporations subject to the restrictions set
forth in Section 5.1, so long as such activity (as
described in either clause (a) or (b) above), does not,
in the reasonable judgment of the Company's Board of
Directors, adversely affect the performance of his duties
hereunder.
1
<PAGE>
1.3. Board Membership
The Employee, effective upon the Commencement Date,
shall become a member of the Board of Directors and its
Executive Committee. Thereafter, for so long as the
Employee is serving as Chief Executive Officer of the
Company, the Company will nominate the Employee for re-election
as a management nominee of the Board ofDirectors and use its
reasonable best efforts to cause
the Employee to be so re-elected and, if so elected, to
appoint the Employee as a member of the Executive
Committee of the Board of Directors. If at any time the
Employee ceases to serve as President and Chief
Executive Officer of the Company, if the Board of
Directors so requests, the Employee shall immediately
tender his resignation from Board of Directors and shall
automatically be deemed to have so resigned whether or
not such resignation is tendered.
ARTICLE 2
2.1. Term
The term of the Employee's employment by the Company
hereunder shall commence on the Commencement Date and,
except as otherwise provided in this Agreement with
respect to earlier termination, shall continue until
terminated by either party pursuant to Article 7.
ARTICLE 3
COMPENSATION
3.1. Base Salary
For all service to be rendered by the Employee under
this Agreement, including services as a officer, director
and member of any committee, and such other duties as the
Board of Directors or the Executive Committee may assign
to him in accordance with Section 1.1 hereof, the Company
agrees to pay the Employee a base salary of $320,000 per
annum. The Employee's base salary shall be subject to
periodic review and adjustment by the Board of Directors
in its sole discretion, provided that the base salary may
not be reduced below $320,000 per year. The base salary
shall be payable at such times as is customary for
employees of the Company and in accordance with the
normal payroll practices of the Company.
3.2. Incentive Compensation
Commencing with the Company's fiscal year beginning
November 1, 1997, the Employee shall be a participant in
a new Company incentive compensation plan to be developed
by the Employee in consultation with the Compensation
Committee of the Board of Directors, subject to the
approval of the Board of Directors (the "Incentive
Compensation Plan").
3.3. Expenses
2
<PAGE>
(a) General. In addition to base salary and
incentive compensation, the Company shall reimburse the
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 miscellaneous
business expenses, in accordance with the Company's
policies and practices as may be in effect from time to
time.
(b) Moving Expenses. The Company agrees to pay for
or reimburse the Employee, in an amount not to exceed
$75,000 in the aggregate (the "Moving Expense Cap"), for
all reasonable out-of-pocket expenses incurred by him in
connection with his relocation (including the relocation
of his family (spouse and minor children)) from Atlanta,
Georgia to the vicinity of the Company headquarters
location (the "Company Location"), including, without
limitation, (i) reasonable moving company expenses and
storage fees, (ii) reasonable fees and expenses incurred
in connection with the sale of his home in Georgia, (iii)
reasonable fees and expenses incurred in connection with
his purchase of a home in the vicinity of the Company
Location, (iv) reasonable expenses associated with visits
by the Employee's spouse to the Company Location to
assist in the purchase of the new residence, and (v)
reasonable interim living expenses to maintain an
apartment in the vicinity of the Company Location through
the earlier to occur of the Employee's purchase of his
new residence or March 31, 1998. It is further
understood and agreed that the Employee's family may
remain located in Georgia until up to March 31, 1998 and
that relocation expenses, subject to the Moving Expense
Cap, shall also include the Employee's reasonable travel
expenses to and from Georgia to visit his family
(excluding business travel) during this interim period.
The Employee shall coordinate all travel through the
Company
(c) Documentation. Reimbursement or payment by the
Company of the Employee's expenses as set forth in this
Section 3.3 shall be subject to the Employee's submission
of written, itemized expense accounts and such additional
substantiation and justification as the Company may
reasonably request consistent with the Company's
reimbursement policies generally applicable for its
salaried employees.
ARTICLE 4
COMPANY BENEFITS
4.1. Vacation
The Employee shall be entitled to receive four weeks
of paid vacation per calendar year (pro rated for any
partial year), which shall be taken at such time or times
as will not unreasonably hinder or interfere with the
Company's business or operations.
4.2. Death Benefit and Life Insurance
(a) The Employee is entitled to participate in any
life insurance, accidental death and dismemberment and
travel accident plans maintained by the Company for its
employees, on terms no less favorable than those extended
to any other senior executives of the Company.
3
<PAGE>
(b) The Company 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 the
Employee, and the Employee shall have no right, title or
interest therein.
(c) The 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.
4.3. Liability Insurance
The Company will obtain and maintain at all times
directors' and officers' liability insurance for the
Employee, so long as such insurance can be obtained on
terms acceptable to the Company's Board of Directors.
4.4. Indemnification
The Company agrees to defend and shall indemnify and
hold the Employee harmless to the fullest extent
permitted by law from any and all liability, costs, and
expenses which may be assessed against the 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 the Employee.
4.5. Retirement Plan
The Employee is entitled to participate in any
retirement plan maintained by the Company for its
employees (including, without limitation, pension,
annuity, profit-sharing and deferred compensation plans).
4.6. Severance Benefit
If at any time prior to the fifth anniversary of the
Commencement Date (the "Severance Period"), the Employee
ceases to be employed by the Company as a result of the
Company's termination of the Employee pursuant to Section
7.4 (which shall not include any termination that is
otherwise within Article 6) or the Employee's termination
of his employment pursuant to Section 7.1, the Company
shall pay the Employee as a severance benefit, (a) two
times his then base salary plus (b) an amount equal to
the Employee's bonus from the Company, if any, for the
immediately preceding year. This severance benefit shall
be payable by the Company through (i) the continuation of
the Employee's base salary for a period of one year and
(ii) the payment of the balance in four equal quarterly
installments, with the first such payment due three
months after the termination and the final payment due
one year after the termination. The severance obligation
set forth in this Section 4.6 shall be in lieu of and not
in addition to any other severance benefits made
available to other employees of the Company. After the
termination of the Severance Period, the severance
benefit, if any, payable to the Employee upon his
termination shall be in accordance with the Company's
then existing severance policy, if any, for its salaried
employees.
4
<PAGE>
4.7. Stock Options
(a) Effective on the execution of this Agreement,
the Company shall issue to the Employee an option to
purchase 250,000 shares of the Company's Common Stock
with an exercise price equal to the closing price of the
Company's Common Stock on the American Stock Exchange on
the date hereof, pursuant to an Option Agreement in the
form set forth as Exhibit A to this Agreement.
(b) Notwithstanding anything to the contrary in the
foregoing, the Employee acknowledges and agrees that
there are only 149,000 shares available for issuance
under the Company's 1988 Stock Option Plan, as amended,
and that, as a result, the option to purchase 101,000 of
the 250,000 shares will be subject to stockholder
approval in connection with a proposed increase in the
number of shares of Common Stock available for issuance
under the 1988 Plan or the adoption of a new stock option
plan at the Company's next annual meeting of
stockholders. The Company hereby undertakes to cause
such a proposal to be presented for stockholder approval
at such meeting and to use its reasonable best efforts to
cause such a proposal to be adopted. The option to
purchase shares in excess of that permitted under the
1988 Plan shall be of no force and effect unless and
until such additional shares are approved. In the event
that such additional shares are not authorized, the
Company shall grant the Employee so called phantom stock,
stock appreciation rights or such other rights as shall
provide the Employee with benefits substantially
equivalent to the benefits that the Employee would have
received with respect to that portion of the option which
has been nullified.
4.8. Other Benefit Plans
The Employee shall further be entitled to
participate in and receive benefits under any accident,
disability, health and dental insurance, profit sharing,
or similar plans generally made available to its
employees.
ARTICLE 5
RESTRICTIONS
5.1. Non-Competition
(a) So long as the Employee is employed by the
Company, serving as a director of the Company or is
receiving payments from the Company hereunder (whether in
connection with the Employee's employment hereunder or as
a result of the termination of the Employee's employment
hereunder) or otherwise in connection with the Employee's
employment with the Company after the termination of this
Agreement, and for a period of two years thereafter (the
"Noncompetition Period"), the Employee shall not,
directly or indirectly, whether as owner, partner,
shareholder, director, consultant, agent, employee,
guarantor, surety or otherwise, or through any person,
consult with or in any way aid or assist any competitor
of the Company or engage or attempt to engage in any
employment, consulting or other activity which directly
or indirectly competes with the Business of the Company.
For purposes of this Agreement, the term "employment"
shall include the performance of services by Employee as
an employee,
5
<PAGE>
consultant, agent, independent contractor or otherwise
and the term "Business" shall mean the research,
development, manufacture, sale or distribution of fuel
cells, batteries or related products and any other
business engaged in, planned or under development by the
Company with respect to which the Employee has had access
to Company Information or Customer Information (as such
terms are defined in Section 5.3) during the
Noncompetition Period. The Employee acknowledges that
his participation in the conduct of any such Business
alone or with any person other than the Company will
materially impair the Business and prospects of the
Company.
(b) In addition to and without limiting the
foregoing, during the Noncompetition Period, Employee
shall not knowingly do, attempt to or assist any other
person in doing or attempting to do any of the following:
(i) hire any director, officer, employee, or agent of the
Company (a "Company Employee") or encourage any such
person to terminate such relationship with the Company,
as the case may be (for purposes hereof, the Employee
shall be deemed to have so encouraged a Company Employee
to terminate such relationship with the Company if the
Employee hires or otherwise assists any person in hiring
any such Company Employee within six months after the
Company Employee terminates his or her relationship with
the Company), (ii) encourage any customer, client,
supplier or other business relationship of the Company to
terminate or alter such relationship, whether contractual
or otherwise, to the disadvantage of the Company; (iii)
encourage any prospective customer or supplier not to
enter into a business relationship with the Company; (iv)
impair or attempt to impair any relationship, contractual
or otherwise, written or oral, between the Company and
any customer, supplier or other business relationship of
the Company; or (v) sell or offer to sell or assist in or
in connection with the sale to any customer or
prospective customer of the Company any products of the
type sold or rendered by the Company.
(c) Nothing in this Agreement shall preclude
Employee from making passive investments of not more than
2% of a class of securities of any business enterprise
registered under the Securities Exchange Act of 1934.
5.2. Intellectual Property
(a) The Employee agrees to promptly disclose to the
Company all ideas and suggestions coming within the scope
of the business of the Company, whether now existing or
hereafter arising and wherever located, which were
conceived or refined by him during his employment with
the Company, whether or not conceived or made during
regular working hours, and all such ideas and suggestions
shall be the sole property of the Company. In the event
that any such idea or suggestion is deemed by the Company
to be an invention of patentable nature, the Employee,
whether or not in the employ of the Company, will assist
the Company in obtaining, maintaining and enforcing
patents for the invention in the United States of America
and in any and all foreign countries. In addition, the
Employee will supply evidence, give testimony, sign and
execute all papers and do all other legal and proper
things which the Company reasonably may deem necessary
for obtaining, maintaining, and enforcing patents for
said invention and for vesting in the Company full title
thereto. The foregoing obligations of the Employee shall
be further subject to the Employee being reimbursed for
his reasonable out-of-
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pocket expenses in connection with services rendered by
him pursuant to the previous two (2) sentences.
(b) The Employee acknowledges that all works of
authorship (including, without limitation, works of
authorship that contain software program code) relating
to the business of the Company and produced during
Employee's employment with the Company, whether they are
or are not created on the Company's premises or during
regular working hours, are works made for hire and are
the property of the Company, and that copyrights in those
works of authorship are the property of the Company. If
for any reason the Company is not the author of any such
work of authorship for copyright purposes, the Employee
hereby expressly assigns all of his rights in and to that
work to the Company and agrees to sign any instrument of
specific assignment requested.
5.3. Confidentiality.
The Employee recognizes that the Company is engaged
in a continuous program of research and development
relating to its business opportunities, market
forecasting, data processing, operating procedures,
products, methods, systems, techniques, machinery,
tooling, designs, specifications, processes, plans, "know
how" and trade secrets and that the Company has developed
information regarding costs, profits, markets, products,
customer lists, tooling, designs, plans for present and
future development and expansion into new markets and
other proprietary information, which is secret and
confidential in nature and is not available to the
public, which gives the Company a special competence in
its various fields of endeavor which are otherwise deemed
to be proprietary to the Company, all of which have been
acquired or developed at considerable expense to the
Company. The Employee acknowledges that a relationship
of confidence and trust will be developed between the
Employee and the Company with respect to information of
a confidential or secret nature made known to Employee
during the term of the Employee's employment by the
Company. The information referred to in the preceding
two sentences is hereafter collectively referred to as
the "Company Information." The Employee further
recognizes that the Employee will have access to certain
information concerning the Company's customers which the
Company treats and desires to continue to treat on a
confidential basis ("Customer Information") and that the
Employee, during the course of his employment with the
Company will have access to such Customer Information.
Accordingly, the Employee agrees that:
A. The Employee shall not disclose, either
directly or indirectly, under any circumstances (except
as reasonably required in furtherance of the business of
the Company), at any time, any of the Company Information
or Customer Information to any person, firm, corporation,
association or other entity for any reason or purpose
whatsoever; provided that the Employee shall not be
deemed to be in breach of such covenant if (i) the
Employee makes such disclosure pursuant to a subpoena or
order of a court of competent jurisdiction, (ii) the
Employee shall have promptly given written notice to the
Company of the request or demand for such
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disclosure, (iii) the Company shall have been afforded
the right to participate at its own expense in objecting
to or limiting the nature and scope of such disclosure
and (iv) the disclosure is subject to all judicial
protection available for like material, such as
protective orders and sealed records of proceedings. The
Employee further agrees not to use, directly or
indirectly, under any circumstances for his own benefit
or for the benefit of any person, firm, corporation or
other entity (except as reasonably required in
furtherance of the business of the Company), at any time,
any of the Company Information or Customer Information.
B. Upon termination of the Employee's employment
with the Company, the Employee shall deliver to the
Company all files and records of any nature which are in
the Employee's possession or control and which relate in
any manner to his employment or to the activities of the
Company.
5.4. Injunctive Relief
The Employee acknowledges that the restrictions
contained in this Article are reasonable in view of the
nature of the business in which the Company is engaged
and his position with the Company which will provide him
with extensive knowledge of the business.
The Company and the Employee mutually agree that the
Employee's obligations under this Article are of a
special and unique character which gives them a peculiar
value, and the Company cannot be reasonably or adequately
be compensated in damages in an action at law in the
event the Employee breaches such obligations. The
Employee therefore expressly agrees that, in addition to
any other rights or remedies which the Company may
possess, the Company shall be entitled to injunctive and
other equitable relief to prevent a breach of this
Article by the 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 the
Company may have.
5.5. 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.
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ARTICLE 6
DEATH; DISABILITY
6.1. Death
If the Employee dies while employed under this
Agreement, this Agreement shall terminate immediately.
The Company will pay to the 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 the Employee under the Incentive
Compensation Plan, but not yet paid, and such death
benefits as may be provided pursuant to Section 4.2.
6.2. Disability
If the Employee fails to perform his duties under
this Agreement due to "Disability", as defined in Section
6.2 B(i) or (ii), the Company may terminate this
Agreement upon 30 days written notice to him. In that
event, the Company shall pay the Employee his base salary
under Section 3.1 through the date of termination. If
the Employee fails to perform his duties under this
Agreement due to "Disability," as defined in Section 6.2
B(iii), then the Company may immediately terminate this
Agreement upon the payment to the Employee of his base
salary for a period of seven (7) months, less such
payments previously made by the Company to the Employee
on account of such Disability. In addition, upon any
termination based upon Disability, the Company shall pay
to the Employee any incentive compensation awarded to the
Employee under the Incentive Compensation Plan but not
yet paid; provided, however, that to the extent the
Employee is receiving disability benefits pursuant to the
Company's disability insurance policy, the amount of such
benefits shall be credited against the Employee's base
salary during the period prior to the date of
termination.
A. If the Company gives notice of termination
under this Section and, before the termination date
stated in the notice, the 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 the Employee to perform for the Company 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 the
Employee is Disabled shall be made by the Board of
Directors on the basis of written medical evidence
reasonably satisfactory to it.
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ARTICLE 7
TERMINATION
7.1. Termination by the Employee for Good Reason
The Employee may terminate this Agreement for good
reason upon thirty (30) days written notice to the
Company setting forth with specificity the grounds for
termination upon the occurrence of any of the following:
(a) the failure of the Company to observe or comply with
any of its material obligations under this Agreement, if
such failure has not been cured within 30 days after
written notice thereof has been given by the Employee to
the Company; (b) the failure of the Employee to be
elected or reelected to the Board of Directors or its
Executive Committee as provided in Section 1.3, (c) the
dissolution of the Company; or (d) any merger in which
the Company is not the surviving corporation and in which
the stockholders of the Company 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 the Company or
change of control of the Company, provided the Employee
has not approved the transaction by voting for it either
as a director or shareholder. For purposes of clause (a)
a material breach by the Company shall include a material
change in the reporting responsibilities of the Employee
such that the Employee is no longer effectively serving
as the Chief Executive Officer of the Company, a
relocation to offices that do not serve as the principle
executive offices of the Company, a material reduction in
benefits or other perquisites of office such that the
Employee is not receiving the benefits set forth herein
or the benefits and other perquisites generally granted
for executive positions within the Company. For purposes
of clause (d) 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 the Company. In the event of a termination for
good reason under this Section, the Company shall pay the
Employee (i) his base salary as then in effect under
Section 3.1 through the date of termination, (ii) any
incentive compensation awarded to the Employee under the
Incentive Compensation Plan, but not yet paid, and (iii)
the severance benefit set forth in Section 4.6.
7.2. Termination by the Company for Cause
The Company may terminate this Agreement for cause
in the manner set forth below. For purposes of this
Section, "cause" shall mean a material breach by the
Employee of the terms of this Agreement with results that
are materially and demonstrably injurious to the business
of the Company. The term "cause" as used in the
preceding sentence does not include the 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, the Company shall pay to the Employee his base
salary under Section 3.1 through the date of termination
stated in the notice plus any incentive compensation
awarded to the Employee under the Incentive Compensation
Plan but not yet paid, and the Employee shall, if so
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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 the Company for Cause-Procedure
Notwithstanding anything to the contrary set forth
herein, the Employee shall not be deemed to be have been
terminated for cause without (i) delivery to the Employee
of written notice setting forth the reasons for the
Company's intention to terminate for cause, (ii) an
opportunity for the Employee, together with his counsel,
to be heard before the Board of Directors and (iii)
delivery to the 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
the Employee was guilty of conduct that supports the
termination for cause, specifying the conduct which gave
rise to such termination.
7.4. Termination by the Company or the Employee
Without Cause
Either the Company or the Employee may terminate
this Agreement for reasons other than as set forth above
in Section 7.1 or Section 7.2 and which are not otherwise
within Article 6 upon 30 days written notice. Upon such
termination, the Company shall pay the Employee his base
salary under Section 3.1 through the date of termination
(provided, however, that the 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 the Employee under the Incentive
Compensation Plan, but not yet paid, and any accrued
vacation. In addition, upon the Company's termination of
the Employee without cause, the Company shall be required
to pay the Employee the severance benefit set forth in
Section 4.6. Nothing herein shall prohibit the Company
from relieving the Employee of any or all of his duties
hereunder pending the expiration of the 30-day notice
period.
7.5. Termination of Duties
Notwithstanding anything to the contrary set forth
herein, at any time on or after delivery of written
notice to the Employee, the Company may relieve the
Employee of all of his duties and responsibilities
hereunder and may relieve the Employee of authority to
act on behalf of, or legally bind, the Company; provided,
however, that any such action by the Company shall not
relieve the Company of its obligation to pay to the
Employee all compensation and benefits otherwise provided
for in this Agreement.
ARTICLE 8
MISCELLANEOUS
8.1. No Conflicting Agreements.
The Employee represents and warrants to the Company,
that the Employee is not under any obligation to any
person or entity which is inconsistent with or in
conflict with any of the terms of this Agreement or which
would prevent, limit or impair in any way the Employee's
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performance of all the terms of this Agreement and
the Employee agrees not to enter into any agreement,
either written or oral, in conflict herewith.
8.2. Entire Agreement
This Agreement contains the entire understanding and
agreement between the Company and the Employee and cannot
be amended, modified, or supplemented in any respect
except by subsequent written agreement entered into by
both parties.
8.3. Successors of the Company
This Agreement shall inure to the benefit of and be
binding upon the Company, its successors and assigns,
including, without limitation, any person, firm,
corporation or other entity which may acquire all or
substantially all of the Company's assets and business,
or with or into which the Company may be consolidated or
merged, and this provision shall apply in the event of
any subsequent merger, consolidation or transfer. In
every respect, this Agreement shall inure to the benefit
of and be binding upon the Employee, his heirs, executors
and personal representatives and, being personal in
nature, shall not be assignable by the Employee.
8.4. 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.
8.5. 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 the Company 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 the 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.
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8.6. 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.
8.7. 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.
8.8. Survival
Each of the terms and provision of this Agreement
which are expressly or impliedly so intended shall
survive the termination of this Agreement.
8.9. Applicable Law
This Agreement shall be governed by and construed
according to the laws of the State of Connecticut.
8.10. Attorney's Fees
In the event of a dispute between the parties
relating to this Agreement, the parties agree that the
losing party shall pay the reasonable attorney's fees and
expenses of the prevailing party.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year first stated above.
ENERGY RESEARCH
CORPORATION
By: /s/ Thomas L. Kempner
---------------------
Thomas L. Kempner
Chairman of the Board
/s/ Jerry Leitman
---------------------
Jerry Leitman
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