SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission file number 1-14204
ENERGY RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
New York 06-0853042
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3 Great Pasture Road, Danbury, Connecticut 06813
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (203) 825-6000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the Registrant's Common Stock, par value
$.0001, as of June 9, 1999 was 4,167,573.
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ENERGY RESEARCH CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Unaudited Consolidated Condensed
Financial Statements:
Consolidated Condensed Balance Sheets as of
April 30, 1999 and October 31,1998 2
Consolidated Condensed Statements of Operations
for the three months ended April 30, 1999
and April 30, 1998 3
Consolidated Condensed Statements of Operations
for the six months ended April 30, 1999
and April 30, 1998 4
Consolidated Condensed Statements of Cash Flows
for the six months ended April 30, 1999
and April 30, 1998 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security 14
Holders
Item 6. Exhibits and Reports on Form 8-K 15
Signatures
1
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Part I - Financial Information
Item I. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
April 30, October 31,
1999 1998
------- -------
ASSETS:
CURRENT ASSETS:
Cash & cash equivalents $ 6,999 10,304
Accounts receivable 4,094 3,813
Inventories 89 30
Deferred income taxes 1,073 1,073
Other current assets 316 646
------- -------
Total current assets 12,571 15,866
Property , plant and equipment, net 7,218 8,347
Other assets, net 2,492 2,630
------- -------
Total Assets 22,281 26,843
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 628 755
Accounts payable 437 620
Accrued liabilities 2,018 1,831
Deferred license fee income 1,504 1,329
Customer advances 1,399 1,097
------- -------
Total current liabilities 5,986 5,632
Long Term Liabilities:
Long-term debt 1,700 1,944
Deferred income taxes 177 177
------- -------
Total liabilities 7,863 7,753
------- -------
Minority Interest 200 3,220
------- -------
Shareholders' Equity:
Convertible preferred stock, Series C($.01 par
value); 30,000 shares outstanding at
October 31,1998 -- 600
------- -------
Common Shareholders= Equity:
Common stock, ($.0001 par value); 8,000,000 shares
authorized: 4,167,573 and 4,129,273 shares issued
and outstanding at April 30, 1999 and
October 31,1998, respectively -- --
Additional paid-in capital 13,012 12,943
Retained earnings 1,206 2,327
------- -------
Total common shareholders' equity 14,218 15,270
------- -------
Total shareholders' equity 14,218 15,870
------- -------
Total Liabilities and Shareholders' Equity 22,281 26,843
======= =======
See notes to consolidated condensed financial statements.
2
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Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended April 30,
-----------------------------
1999 1998
----------- -----------
Revenues $ 5,788 $ 6,612
Cost and Expenses:
Cost of Revenues 3,553 3,851
Administrative and selling expense 2,140 1,790
Depreciation 331 406
Research and development 337 564
----------- -----------
6,361 6,611
----------- -----------
Income/(loss) from operations (573) 1
License fee income, net (includes income
from related parties of $62 and $67 for
the three months ended April 30, 1999
and 1998, respectively) 77 385
Interest expense (39) (70)
Interest and other income, net 44 69
----------- -----------
Income/(loss)before provision
for income taxes (491) 385
Provision/(benefit)for income taxes 282 137
----------- -----------
Net (loss) income ($ 773) $ 248
=========== ===========
Earnings per share:
Basic earnings (loss) per share $ (.19) $ .06
=========== ===========
Basic shares outstanding 4,164,031 4,071,067
=========== ===========
Diluted earnings (loss) per share $ (.19) $ .06
=========== ===========
Diluted shares outstanding 4,164,031 4,196,802
=========== ===========
See notes to consolidated condensed financial statements
3
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Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Six Months Ended April 30,
---------------------------
1999 1998
----------- -----------
Revenues $ 12,072 $ 10,519
Cost and Expenses:
Cost of Revenues 7,908 6,298
Administrative and selling expense 3,501 2,386
Depreciation 661 892
Research and development 1,160 993
----------- -----------
13,230 10,569
----------- -----------
Income/(loss) from operations (1,158) (50)
License fee income, net (includes income
from related parties of $125 and $142
for the six months ended April 30, 1999
and 1998, respectively) 61 596
Interest expense (92) (153)
Interest and other income, net 109 120
----------- -----------
Income/(loss)before provision
for income taxes (1,080) 513
Provision/(benefit)for income taxes 41 158
----------- -----------
Net(loss)income $ (1,121) $ 355
=========== ===========
Earnings per share:
Basic earnings (loss) per share $ (.27) $ .09
=========== ===========
Basic shares outstanding 4,147,943 4,039,442
=========== ===========
Diluted earnings (loss) per share $ (.27) $ .09
=========== ===========
Diluted shares outstanding 4,147,943 4,173,507
=========== ===========
See notes to consolidated condensed financial statements
4
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Part 1 - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30,
1999 1998
-------- --------
Cash flows from operating activities:
Net Income (loss) $ (1,121) $ 355
Adjustments to reconcile net income (loss) to
net cash provided by/(used in) operating activities:
Compensation for options granted 67 134
Depreciation and amortization 865 1,077
Deferred income taxes -- (124)
Changes in operating assets and liabilities:
Accounts receivable (317) (1,386)
Inventories (59) (102)
Other current assets 434 (60)
Accounts payable (183) (548)
Accrued liabilities 309 242
Customer advances 302 1,217
Income taxes payable (58) 77
Deferred license fee income 175 1,458
-------- --------
Net cash provided by/(used in)
Operating activities 414 2,340
-------- --------
Cash flows from investing activities:
Capital expenditures (335) (567)
Payments on other assets (3) (162)
-------- --------
Net cash provided by/(used in) investing
activities (338) (729)
-------- --------
Cash flows from financing activities:
Repayments of debt (371) (1,209)
Common stock issued 72 524
Transfer of minority interest to Evercel, Inc. (3,082) --
-------- --------
Net cash provided by/(used in)
financing activities (3,381) (685)
-------- --------
Net increase/(decrease) in cash and
cash equivalents (3,305) 926
Cash and cash equivalents, beginning of period 10,304 6,802
-------- --------
Cash and cash equivalents, end of period $ 6,999 $ 7,728
======== ========
Supplemental disclosure of cash paid during
the period for:
Interest $ 92 $ 149
Income taxes $ 100 $ 316
Other non cash transactions:
Conversion of convertible preferred stock $ 600 $ --
Net assets transferred to Evercel, Inc. $ 669 $ --
See notes to consolidated condensed financial statements.
5
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Part I - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements for Energy Research
Corporation (the "Registrant"), have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial position of the Company as of April
30, 1999 and the results of operations for the three and six months ended April
30, 1999 and 1998 and cash flows for such six month periods have been included.
Information included in the Consolidated Condensed Balance Sheet as of October
31, 1998 has been derived from audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended October 31, 1998 ("1998
10-K"), but does not include all disclosures required by generally accepted
accounting principles.
The results of operations for the three and six months ended April 30, 1999 and
1998 are not necessarily indicative of the results to be expected for the full
year.
The reader should supplement the information in this document with prior
disclosures in the form of previous 10-Q's and the 1998 10-K.
As described in the Company's Form 8-K filed March 9, 1999, the Company on
February 22, 1999, effected a spin-off to its stockholders of 100% of the shares
of Evercel, Inc. ("Evercel"), a wholly-owned subsidiary of the Company.
Effective February 16, 1999, the Company transferred to Evercel the principal
assets and liabilities of its battery business group. Following the transfer,
the Company distributed to its stockholders in a tax-free distribution one share
of Evercel Common Stock for every three shares of Common Stock of the Company
held on the record date of February 19, 1999.
In accordance with the License Assistance Agreement between the Company and
Evercel, Evercel has agreed to provide all services and assistance necessary for
Evercel to effectively, fulfill, on behalf of the Company, all of the Company's
obligations under the joint venture contract for Xiamen Three Circles--ERC
Battery Corp., Ltd. (the "Joint Venture") and the related license agreement
until such time as the Company obtains the approval from the Chinese partner and
appropriate Chinese governmental authority for the assignment of such agreements
to Evercel. In return for such assistance, the Company will pay to Evercel an
amount equal to the sum of all money, dividends, profits, reimbursements,
distributions and payments actually paid to the Company in cash or in kind or
otherwise accruing to the Company pursuant to the Joint Venture contract and
related license agreement.
On February 22, 1999, the effective date of the spin-off, the Company
deconsolidated the financial statements of Evercel and the Joint Venture from
the consolidated financial statements of the Company. As part of the spin-off of
Evercel, the Company transferred capital assets (net), prepaid spin-off costs,
accounts receivable and short-term liabilities amounting to $1,228,000,
$501,000, $36,000 and $1,096,000 respectively.
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Part I - Financial Information
Item 1. Financial Statements
ENERGY RESEARCH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
CONTINUED
NOTE 2: EARNINGS PER SHARE
Basic and diluted earnings (loss) per share are calculated based upon the
provisions of SFAS 128, adopted in 1998, using the following data:
Three Months Six Months
Ended April 30 Ended April 30
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Weighted average basic
Common Shares 4,164,031 4,071,067 4,147,943 4,039,442
Effect of dilutive securities
Stock options -- 95,735 -- 104,065
Preferred "C" convertible -- 30,000 -- 30,000
--------- --------- --------- ---------
Weighted Average Basic
Common Shares Adjusted
for diluted calculation 4,164,031 4,196,802 4,147,943 4,173,507
========= ========= ========= =========
The computation of diluted loss per share for the second quarter and year to
date follows the basic calculation since common stock equivalents were
antidilutive. The weighted average number of options outstanding for the period
ending April 30, 1999 is 549,528.
7
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Part I - Financial Information
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains forward looking statements, including statements regarding
the Company's plans and expectations regarding the development and
commercialization of its fuel cell technology. When used in this Report, the
words "expects", "anticipates", "estimates", "should", "will", "could", "would",
"may", and similar expressions are intended to identify forward-looking
statements. All forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Factors that could cause such a difference include, without
limitation, the risk that the Company's Direct Fuel Cell Power Plant will not
operate as efficiently as planned, the risk that the Company's or MTU'S
commercial field trials will not be conducted as anticipated, the risk that
future funding under government contracts will not be obtained as anticipated,
the risk that the Company will not initiate commercial sales as currently
scheduled, the risk that the Company's manufacturing capacity will not be
increased as planned, general risks associated with product development,
manufacturing and introduction, changes in the utility regulatory environment,
potential volatility of energy prices, rapid technological change, and
competition, as well as other risks set forth in the Company's filings with the
Securities and Exchange Commission. The forward-looking statements contained
herein speak only as of the date of this Report. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any such statement to reflect any change in the Company's expectations or any
change in events, conditions or circumstances on which any such statement is
based.
Overview
As described in the Company's Form 8-K filed March 9, 1999, the Company on
February 22, 1999, effected a spin-off to its stockholders of 100% of the shares
of Evercel, Inc. ("Evercel"), a wholly-owned subsidiary of the Company.
Effective February 16, 1999, the Company transferred to Evercel the principal
assets and liabilities of its battery business group. Following the transfer,
the Company distributed to its stockholders in a tax-free distribution one share
of Evercel Common Stock for every three shares of Common Stock of the Company
held on the record date of February 19, 1999.
Results of Operations
Comparison Three Months ended April 30, 1999 and April 30, 1998
Revenues decreased 12% to $5,788,000 in the second quarter of fiscal 1999 from
$6,612,000 for the same period in the last fiscal year. The decrease was due to
the reduced activity level under the Cooperative Agreement with the U.S. Dept.
of Energy partially offset by revenues from contracts awarded in the first
quarter of fiscal 1999.
Cost of revenues decreased 8% to $3,553,000 in the second quarter of fiscal 1999
from $3,851,000 in the same period last fiscal year. The decrease was due to the
decreased revenues for the quarter.
Administrative and selling expense increased 20% to $2,140,000 in the second
quarter of fiscal 1999 from $1,790,000 in the same period in the last fiscal
year. This increase was largely due to a non-recurring charge of $600,000 for
severance costs associated with a reduction in the Company's labor force. The
Company expects that, as a result of its efforts to commercialize its fuel cell
8
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technology, costs will exceed contract revenues for the year. Offsetting this
increase was a decrease in consulting fees and unallowable costs of $250,000 as
compared to the prior year. Depreciation decreased 18% to $331,000 in the 1999
period from $406,000 in the 1998 period. The decrease was due primarily to the
completion of the depreciation of the machinery and equipment originally
installed in the Company's fuel cell manufacturing facility.
Research and development expense decreased 40% to $337,000 in the second quarter
of fiscal 1999 from $564,000 in the same period in the last fiscal year. This
decrease was a result of the transfer to Evercel of the research and development
efforts for nickel zinc batteries in connection with the spin-off of Evercel.
Income from operations resulted in a loss of $573,000 in the second quarter of
fiscal 1999 compared to a profit of $1,000 in the same period last fiscal year.
The loss was primarily due to severance costs recognized in the quarter and to a
lesser extent ERC absorbing the commercialization and operating cost of the
battery group for part of the quarter, and increased costs associated with the
commercialization of the Company's Direct Fuel Cell(TM) technology.
License fee income, net, resulted in $77,000 of income in the second quarter of
fiscal 1999 compared to $385,000 of income in the same period last fiscal year.
Lower license fee income in the current quarter resulted from the termination of
the Company's battery license with Corning in May 1998 and the receipt in 1998
of license fee income related to the Nan Ya battery license. The Company expects
that, in fiscal 1999, ERC will recognize $1,300,000 in deferred license fees
received in February 1998 related to the Nan Ya battery license upon final
acceptance of certain Evercel technology. The final acceptance of this
technology has been delayed beyond original expectations due to delays
associated with the testing of the batteries.
Interest expense decreased 44% to $39,000 in the second quarter of fiscal 1999
from $70,000 in the same period last year. The decrease can be attributed to the
overall reduction of the outstanding indebtedness of the Company.
Interest and other income, net, decreased 36% to $44,000 in the second quarter
of fiscal 1999 from $69,000 in the same period last year. The decrease is the
result of lower cash balances and interest rates.
The Company recognized a tax provision in the current quarter amounting to
$282,000. This provision reflects the inclusion of a valuation allowance of
$463,000 in the estimated annual effective tax rate calculation. This valuation
allowance relates to a foreign tax credit carryforward that is not expected to
be utilized prior to the expiration of the five-year carryforward period. The
Company believes that its efforts to commercialize the Direct Fuel Cell
technology will incur losses, which negatively affect the Company's ability to
utilize foreign tax credit carryforwards.
Results of Operations
Comparison Six Months ended April 30, 1999 and April 30, 1998
Revenues increased 15% to $12,072,000 in the 1999 period from $10,519,000 in the
1998 period. The increase was due to the recognition of $1,167,000 on the
shipment of a contract for the development and manufacture of fuel cell stack
components and revenue recognition on contracts awarded in the first quarter of
fiscal 1999. These increases were partially offset by the reduced activity level
under the Cooperative Agreement with the U.S. Dept. of Energy.
9
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Cost of revenues increased 26% to $7,908,000 in the 1999 period from $6,298,000
in the 1998 period. The increase was due to the increased revenues mentioned
above, costs related to the development of manufacturing processes associated
with fuel cell stack development and operating costs of the battery group.
Administrative and selling expense increased 47% to $3,501,000 in the 1999
period from $2,386,000 in the 1998 period. The increase in costs were due to the
Company recognizing a non-recurring $600,000 charge for severance costs, as
previously described. Additionally, an overall increase in sales proposal
efforts and increased legal and professional and administrative costs associated
with the spin-off and commercialization of Evercel contributed to the cost
increase. Depreciation decreased 26% to $661,000 in the 1999 period from
$892,000 in the 1998 period. The decrease was due primarily to the completion of
the depreciation of the machinery and equipment originally installed in the
Company's fuel cell manufacturing facility.
Research and development expense increased 17% to $1,160,000 in the 1999 period
from $993,000 in the 1998 period. The increase is due to the continued
development effort for the commercialization of Nickel Zinc batteries until the
effective date of the spin-off of Evercel in February 1999.
Income from operations resulted in a loss of $1,158,000 in the 1999 period
compared to a loss of $50,000 in the 1998 period. The loss was primarily due to
the severance charge, the Company absorbing the commercialization and operating
cost of the battery group until February 1999, the added costs associated with
the development of manufacturing processes for the Company's fuel cell stack and
increased costs associated with the commercialization of the Company's Direct
Fuel Cell technology.
License fee income, net, resulted in $61,000 of income in the 1999 period
compared to $596,000 of income in the 1998 period. Lower license fee income in
the current quarter resulted from the termination of the Company's battery
license with Corning in May 1998 and the receipt in 1998 of license fee income
related to the Nan Ya battery license. The Company expects that, in fiscal 1999,
ERC will recognize $1,300,000 in deferred license fees related to the Nan Ya
battery license, as described above.
Interest expense decreased 40% to $92,000 in the 1999 period from $153,000 in
the 1998 period. The decrease can be attributed to the overall reduction of the
outstanding indebtedness of the Company.
Interest and other income, net, decreased 9% to $109,000 in the 1999 period from
$120,000 in the 1998 period. The decrease is the result of lower cash balances
and interest rates.
The Company recognized a tax provision of $41,000 representing a tax rate of
3.8%. As previously discussed this rate reflects the recording of a valuation
allowance for Foreign Tax Credit Carryforwards.
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. In 1998, the Company also received license fees
of $1,500,000 from the Xiamen Three Circles Co., Ltd. (formerly Xiamen
Daily-Used Chemicals Co.,) and Nan Ya Plastics Corporation of Taiwan License
Agreement and $3,000,000 from the Xiamen-Three Circles--ERC Battery Corp., Ltd.
(the "Joint Venture") License Agreement. The $3,000,000 was subsequently
invested in the
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Joint Venture to obtain a 50.5% ownership position therein, which ownership
interest will be transferred to Evercel when consent to the transfer is received
from the Chinese partner and the appropriate Chinese governmental authority.
At April 30, 1999, the Company had working capital of $6,585,000 including
$6,999,000 of cash and cash equivalents, compared to working capital of
$10,234,000 including $10,304,000 of cash and cash equivalents at October 31,
1998. Current assets net of cash remained unchanged. Cash and cash equivalents
were reduced by $3,020,000 representing cash in the Joint Venture. The Joint
Venture was deconsolidated as of February 22, 1999 as part of the spin-off of
Evercel. Working Capital was also impacted by increases in customer advances and
deferred license fee income which offset the reductions in the current portion
of long term debt and accounts payable.
The Company's capital expenditures are incurred primarily to support ongoing
contracts to replace existing equipment and until February 22, 1999 outfitting
the Evercel manufacturing facility. Capital expenditures for the 1999 period
were $757,000. Of that amount $335,000 was purchased for the Company and
$422,000 represents current purchases, until February 22, 1999, for Evercel. The
current purchases were included in the transfer to Evercel which amounted to
$1,225,000 of Net Fixed Assets.
On December 22, 1998, Evercel entered into a commitment to borrow up to
$1,000,000 for the purpose of acquiring machinery and equipment. The Company had
unconditionally guaranteed the commitment and pledged $1,000,000 of cash.
Evercel repaid this Note in full on April 9, 1999.
On February 5, 1999, Evercel entered into a Loan agreement and Line of Credit
Note (Line of Credit) to borrow up to $3,450,000 (including borrowings noted
above) from the Company for working capital and capital expenditures purposes,
pending the closing of Evercel's rights offering. Any outstanding borrowings
were to be secured by all of Evercel's tangible and intangible personal property
and bear interest at the London Interbank Offered Rate (LIBOR) plus 1 1/2%,
payable monthly in arrears. Evercel has received the proceeds from the rights
offering, and the line of credit between Evercel and the Company was terminated
effective April 5, 1999. On April 30, 1999 all outstanding borrowings were paid
in full.
In December 1994, the Company entered into a Cooperative Agreement with the U.S.
Department of Energy (DOE) pursuant to which the DOE agreed to provide funding
to the Company over the next five years to support the continued development and
improvement of the Company's commercial product. The current aggregate dollar
amount of that contract is $144,000,000 with the DOE providing $86,000,000 in
funding, $65,800,000 of which has been funded by DOE from inception through
1998. Approximately $12,200,000 has been allocated by the DOE to the Company's
Cooperative Agreement for calendar year 1999. 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 90% 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. Failure of the Company to obtain
the required final 10% of the funding from non-U.S. government sources on a
timely basis, could result in delay or reduction of DOE funding.
The Company will need to raise additional funds to expand its direct Fuel Cell
manufacturing facility to 50MW per year. Approximately $16 million has been
estimated for this step. In addition, as the potential market for the Company's
Direct Fuel Cell(TM) develops, the Company may need to raise additional funds to
participate in projects to demonstrate performance. The Company cannot assure
that this funding will be available on favorable terms, if at all, or that such
funding if obtained would enable the company to achieve the desired objectives.
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The Company anticipates that its existing capital resources together with
anticipated revenues will be adequate to satisfy its existing financial
requirements and agreements through 1999.
Year 2000 Readiness Disclosure
The Company has evaluated the Y2K issue with respect to its financial and
management information systems, its products and its suppliers. At this point in
its assessment, the Company is not currently aware of any Y2K problems that are
reasonably likely to have a material effect on the Company's business, results
of operations or financial condition, without taking into account the Company's
efforts to avoid such problems.
The Company believes that its accounting and information systems will be
compliant as a result of installing new software. The Company anticipates that
it will be able to complete, test and implement all upgrades of this software
that may be material to its business on a timely basis. The implementation of
this software is part of an on-going project to upgrade the information systems
at ERC. If this software is not implemented on a timely basis, the cost to
upgrade the existing software would be $50,000. There is a risk that
notwithstanding its internal review, if the Company has not properly identified
all year 2000 compliance issues with respect to its management and information
systems, the Company may not be able to implement all necessary changes to these
systems on a timely basis and within budget. Such a failure could result in a
material disruption to the Company's business, which could have a material
adverse effect on its business, results of operations and financial condition.
The Company is also exposed to the risk that it could experience material
payment or sales delays from its major customers, including the U.S. Government,
due to year 2000 issues relating either to their management information or
production systems. The Company has inquired of these third parties in an
attempt to ascertain their year 2000 readiness. At this time, the Company is
unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third parties, such as its suppliers and
customers, to achieve year 2000 compliance. Moreover, such third parties, even
if year 2000 compliant, could experience difficulties resulting from year 2000
issues that may affect their suppliers, service providers and customers. As a
result, although the Company does not currently anticipate that it will
experience any material shipment delays from their major product suppliers or
any material payment or sales delays from its major customers due to year 2000
issues, these third parties could experience year 2000 problems that could have
a material adverse effect on the Company's business, results of operations and
financial condition.
Apart from its activities described herein, the Company has developed a
contingency plan to address Y2K issues. As the Company is primarily involved in
the research and development of fuel cell technology, it is not subject to major
supply issues at this time. The Company believes that alternate sources of
material are available to supply Company requirements and the Company will
prepare its plans to identify these. To the extent that the Company does not
identify any material non-compliant year 2000 issues affecting the Company or
third parties, such as the Company's suppliers, service providers and customers,
the most reasonably likely worst case year 2000 scenario is a systemic failure
beyond the control of the Company, such as a prolonged telecommunications or
electrical failure, or a general disruption in United States or global business
activities that could result in a significant economic downturn. The Company
believes that the primary business risk will be limited to, loss of customers or
orders, increased operating costs, inability to obtain materials on a timely
basis or
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other business interruptions of a material nature, as well as claims of
mismanagement, misrepresentation, or breach of contract, any of which could have
a material adverse effect on the Company's business, results of operations and
financial condition.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Exposure
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long term debt obligations.
The investment portfolio includes short term United States Treasury instruments
with maturities of three months or less. Cash is invested overnight with high
credit quality financial institutions. The Company's notes payable expire in
2000 and 2001. Based on the Company's overall interest exposure including all
interest rate sensitive instruments, a near-term change in interest rate
movements would not materially affect the consolidated results of operations or
financial position of the Company.
Part II Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
Energy Research Corporation's Annual Shareholders= Meeting was held on March
30,1999.
The meeting involved an election of the following directors to hold office until
the next annual meeting of shareholders and until a successor is elected and
qualified. All of the directors on the slate were elected.
Bernard S. Baker Jerry D. Leitman Thomas L. Kempner
Hansraj C. Maru William A. Lawson Michael Bode
Warren D. Bagatelle James D. Gerson Richard M.H.Thompson
Christopher R. Bentley
The results of the voting were as follows:
ELECTION OF DIRECTORS
VOTES VOTES
NAME OF DIRECTOR FOR WITHHELD
- ---------------- --- --------
Bernard S. Baker 2,635,928 35,074
Jerry D. Leitman 2,638,328 32,674
Thomas L. Kempner 2,637,378 33,624
Hansraj C. Maru 2,638,328 32,674
William A. Lawson 2,637,328 33,674
Michael Bode 2,638,028 32,974
Warren D. Bagatelle 2,635,428 35,574
James D. Gerson 2,636,628 34,374
Richard M.H. Thompson 2,636,878 34,124
Christopher R. Bentley 2,638,328 32,674
14
<PAGE>
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION
EXHIBIT NO.
- -----------
10.2 Services Agreement, dated February 22, 1999 between the Company and
Evercel (incorporated by reference to exhibit 10.2 contained in the
Form 10-QSB of Evercel, Inc. for the period ended January 31, 1999);
10.3 License Assistance Agreement, dated February 16, 1999 between the
Company and Evercel (incorporated by reference to exhibit 10.3
contained in the Form 10-QSB of Evercel, Inc. for the period ended
January 31, 1999);
10.4 Tax Sharing Agreement, dated February 16, 1999 between the Company
and Evercel (incorporated by reference to exhibit 10.4 contained in
the Form 10-QSB of Evercel, Inc. for the period ended January 31,
1999);
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed a Current Report on Form 8-K on March 9, 1999 to
report that on February 22, 1999 the Registrant effected a special tax-free
distribution to its stockholders of one share of Common Stock, $.01 par value,
of Evercel, Inc. for every three shares of Common Stock, $.0001 par value, of
the Registrant held of record as of the close of business on February 19, 1999;
Evercel, Inc. was formerly a wholly-owned subsidiary of the Registrant to which
the Registrant had transferred, effective February 16, 1999, the principal
assets and liabilities related to the Registrant's battery business group.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGY RESEARCH CORPORATION
/s/ Joseph G. Mahler
-------------------------------
Joseph G. Mahler
Senior Vice President, CFO
Treasurer/Corporate Secretary
Dated: June 14, 1999
16
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