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 July 31, 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 Identification No.)
of incorporation or organization)
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 September 10, 1999 was 4,184,002.
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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
July 31, 1999 and October 31,1998 2
Consolidated Condensed Statements of Operations
for the three months ended July 31, 1999
and July 31, 1998 3
Consolidated Condensed Statements of Operations
for the nine months ended July 31, 1999
and July 31, 1998 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended July 31, 1999
and July 31, 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 13
Market Risk
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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)
July 31, October 31,
1999 1998
------- -------
ASSETS:
CURRENT ASSETS:
Cash & cash equivalents $ 5,324 10,304
Accounts receivable 4,137 3,813
Inventories 93 30
Deferred income taxes 1,073 1,073
Other current assets 228 646
------- -------
Total current assets 10,855 15,866
Property, plant and equipment, net 7,194 8,347
Other assets, net 2,425 2,630
------- -------
Total Assets 20,474 26,843
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt $ 484 755
Accounts payable -- 620
Accrued liabilities 1,925 1,758
Deferred license fee income 1,417 1,329
Customer advances 679 1,170
------- -------
Total current liabilities 4,505 5,632
Long Term Liabilities:
Long-term debt 1,663 1,944
Deferred income taxes 177 177
------- -------
Total liabilities 6,345 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: 4,184,002 and 4,129,273 shares issued
and outstanding at July 31, 1999 and
October 31,1998, respectively -- --
Additional paid-in capital 13,109 12,943
Retained earnings 820 2,327
------- -------
Total common shareholders' equity 13,929 15,270
------- -------
Total shareholders' equity 13,929 15,870
------- -------
Total Liabilities and Shareholders' Equity 20,474 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 July 31,
---------------------------
1999 1998
----------- -----------
Revenues $ 4,416 $ 5,537
Cost and Expenses:
Cost of Revenues 2,783 3,633
Administrative and selling expense 1,366 1,612
Depreciation 339 333
Research and development 297 548
----------- -----------
4,785 6,126
----------- -----------
Income/(loss) from operations (369) (589)
License fee income, net (includes income
from related parties of $62 for each of
the three months ended July 31, 1999 and 1998,
respectively) 85 53
Interest expense (39) (57)
Interest and other income, net 96 81
----------- -----------
Income/(loss) before provision
for income taxes (227) (512)
Provision/(benefit)for income taxes 159 (163)
----------- -----------
Net (loss) ($ 386) ($ 349)
=========== ===========
Earnings per share:
Basic and diluted (loss) per share $ (.09) ($ .08)
=========== ===========
Basic and diluted shares outstanding 4,170,917 4,071,067
=========== ===========
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)
Nine Months Ended July 31,
1999 1998
----------- -----------
Revenues $ 16,488 $ 16,056
Cost and Expenses:
Cost of Revenues 10,691 9,931
Administrative and selling expense 4,867 3,998
Depreciation 1,000 1,225
Research and development 1,457 1,541
----------- -----------
18,015 16,695
----------- -----------
Income/(loss) from operations (1,527) (639)
License fee income, net
(includes income from related parties of
$187 and $284 for the nine months ended
July 31, 1999 and 1998, respectively) 146 649
Interest expense (131) (210)
Interest and other income, net 205 201
----------- -----------
Income/(loss)before provision
for income taxes (1,307) 1
Provision/(benefit)for income taxes 200 (5)
----------- -----------
Net(loss)income $ (1,507) $ 6
=========== ===========
Earnings per share:
Basic earnings (loss) per share $ (.36) $ --
=========== ===========
Basic shares outstanding 4,155,337 4,065,357
=========== ===========
Diluted earnings (loss) per share $ (.36) $ --
=========== ===========
Diluted shares outstanding 4,155,337 4,227,457
=========== ===========
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 NINE MONTHS ENDED JULY 31,
1999 1998
-------- --------
Cash flows from operating activities:
Net Income (loss) $ (1,507) $ 6
Adjustments to reconcile net income (loss) to
Net cash provided by/(used in) operating activities:
Compensation for options granted 100 206
Depreciation and amortization 1,305 1,536
Deferred income taxes -- (567)
(Gain) loss on disposal of property (15) 1
Changes in operating assets and liabilities:
Accounts receivable (360) (1,872)
Inventories (63) (309)
Other current assets 418 (229)
Accounts payable (620) (59)
Accrued liabilities 236 (80)
Customer advances (491) 2,080
Deferred license fee income 88 1,371
-------- --------
Net cash provided by/(used in)
Operating activities (909) 2,084
-------- --------
Cash flows from investing activities:
Capital expenditures (636) (1,162)
Proceeds from sale of property and equipment 603 --
Payments on other assets (586) (10)
-------- --------
Net cash provided by/(used in) investing
activities (619) (1,172)
-------- --------
Cash flows from financing activities:
Repayments of debt (552) (1,506)
Sale of minority interest in joint venture -- 3,220
Common stock issued 182 848
Transfer of minority interest to Evercel, Inc. (3,082) --
-------- --------
Net cash provided by/(used in)
financing activities (3,452) 2,562
-------- --------
Net increase/(decrease) in cash and
cash equivalents (4,980) 3,474
Cash and cash equivalents, beginning of period 10,304 6,802
-------- --------
Cash and cash equivalents, end of period $ 5,324 $ 10,276
======== ========
Supplemental disclosure of cash paid during
the period for:
Interest $ 131 $ 210
Income taxes $ 100 $ 377
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 "Company") 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 July 31,
1999 and the results of operations for the three and nine months ended July 31,
1999 and 1998 and cash flows for such nine 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 nine months ended July 31, 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.
6
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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 Nine Months
Ended July 31 Ended July 31
------------- -------------
1999 1998 1999 1998
--------- --------- --------- ---------
Weighted average basic
Common Shares 4,170,917 4,116,318 4,155,337 4,065,357
Effect of dilutive securities
Stock options -- 156,169 -- 132,100
Preferred "C" convertible -- 30,000 -- 30,000
Weighted Average Basic
Common Shares Adjusted
--------- --------- --------- ---------
for diluted calculation 4,170,917 4,302,487 4,155,337 4,227,457
========= ========= ========= =========
The computation of diluted loss per share for the third 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 July
31, 1999 is 530,074.
NOTE 3: SUBSEQUENT EVENTS
At a special meeting of Shareholders held September 2, 1999, shareholders voted
to change the Company's name to FuelCell Energy, Inc. Shareholders also approved
an increase to the Company's authorized common stock from 8,000,000 to
20,000,000 shares and a proposal to change the Company's state of incorporation
from New York to Delaware ("the Reincorporation"). The name change, increase in
authorized common stock and reincorporation are expected to become effective on
or about September 21, 1999 by means of a merger of the Company with and into
FuelCell Energy, Inc., a wholly-owned Delaware subsidiary of the Company, with
FuelCell Energy, Inc. being the surviving corporation.
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 July 31, 1999 and July 31, 1998
Revenues decreased 20% to $4,416,000 in the third quarter of fiscal 1999 from
$5,537,000 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 fiscal 1999.
Cost of revenues decreased 23% to $2,783,000 in the third quarter of fiscal 1999
from $3,633,000 in the same period last fiscal year. The decrease was due to the
decreased revenues for the quarter.
Administrative and selling expense decreased 15% to $1,366,000 in the third
quarter of fiscal 1999 from $1,612,000 in the same period in the last fiscal
year. This decrease was due to costs recognized in the third quarter of 1998
associated with an unsuccessful acquisition of a battery manufacturing company
and the spin-off of Evercel, Inc. Costs related to the name change, increase in
authorized shares and reincorporation from New York to Delaware partially offset
this decrease. Depreciation increased to $339,000 in the 1999 period from
$333,000 in the 1998 period.
8
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Research and development expense decreased 46% to $297,000 in the third quarter
of fiscal 1999 from $548,000 in the same period in the last fiscal year. Prior
year expenses included the development of a nickel zinc battery technology which
was transferred, as a part of the spin-off, to Evercel. Income from operations
resulted in a loss of $369,000 in the third quarter of fiscal 1999 compared to a
loss of $589,000 in the same period last fiscal year. The loss was primarily due
to the Company absorbing the increased costs associated with the
commercialization of the Company's Direct Fuel Cell(TM) technology. The Company
expects that, as a result of its efforts to commercialize its fuel cell,
technology costs will exceed contract revenues for the year.
License fee income, net, resulted in $85,000 of income in the third quarter of
fiscal 1999 compared to $53,000 of income in the same period last fiscal year.
Higher license fee income in the current quarter resulted from costs incurred in
the third quarter of 1998 which were not incurred in the same period this fiscal
year. The Company expects upon final acceptance of Evercel's technology in the
fourth quarter of fiscal 1999, to recognize $1,300,000 in deferred license fees
which were received in February 1998 related to the Nan Ya battery license. 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 34% to $39,000 in the third quarter of fiscal 1999
from $57,000 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, increased 19% to $96,000 in the third quarter of
fiscal 1999 from $81,000 in the same period last year. The increase is
attributable to favorable interest rates on short term investments.
The Company recognized a tax provision in the current quarter amounting to
$386,000. 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 for the foreseeable future resulting in the
Company's inability to utilize foreign tax credit carryforwards.
Results of Operations
Comparison Nine Months ended July 31, 1999 and July 31, 1998
Revenues increased 3% to $16,488,000 in the 1999 period from $16,056,000 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 fiscal 1999. These
increases were partially offset by the reduced activity level under the
Cooperative Agreement with the U.S. Dept. of Energy.
Cost of revenues increased 22% to $10,691,000 in the 1999 period from $9,931,000
in the 1998 period. The increase was due to costs related to the development of
manufacturing processes associated with fuel cell stack development, operating
costs of the battery group and the increase in revenues previously mentioned.
Administrative and selling expense increased 22% to $4,867,000 in the 1999
period from $3,998,000 in the 1998 period. The increase in costs were due to the
Company recognizing a non-recurring $600,000 charge for severance costs, an
overall increase in sales proposal efforts and increased legal, professional and
administrative costs associated with the spin-off and commercialization of
Evercel. Depreciation decreased 18% to $1,000,000 in the 1999 period from
$1,225,000 in the 1998 period. The decrease was due primarily to the completion
9
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of the depreciation of the machinery and equipment originally installed in the
Company's fuel cell manufacturing facility.
Research and development expense decreased 5% to $1,457,000 in the 1999 period
from $1,541,000 in the 1998 period. As previously mentioned this decrease was
the result of the transfer of the research and development efforts for nickel
zinc batteries to Evercel.
Income from operations resulted in a loss of $1,307,000 in the 1999 period
compared to income of $1,000 in the 1998 period. The loss was primarily due to
severance costs, 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 $146,000 of income in the 1999 period
compared to $649,000 of income in the 1998 period. Lower license fee income
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 the fourth quarter of 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 38% to $131,000 in the 1999 period from $210,000 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, remained relatively unchanged at $205,000 in the
1999 period from $201,000 in the 1998 period. Favorable interest rates on short
term investments offset the use of cash in the 1999 period.
The Company recognized a tax provision of $200,000 representing a tax rate of
15.3%. 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 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 July 31, 1999, the Company had working capital of $6,350,000 including
$5,324,000 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 decreased $31,000. 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. Decreases in accounts payable, customer advances and the reduction in
the current portion of long term debt also impacted Working Capital.
10
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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 $1,058,000. Of that amount $636,000 was purchased for the Company and
$422,000 represented purchases for Evercel. Included in the transfer to Evercel
were $1,228,000 of Net Fixed Assets.
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 manufacturing
capacity and to participate in projects to demonstrate performance. The Company
estimates that approximately $16,000,000 would expand its Direct Fuel Cell
manufacturing facility to 50 megawatts of production per year. The Company
believes that as production volume grows the capital cost for its products and
the resulting cost of generating electricity will decline. The Company estimates
that at 50 MW of production the cost of generation will be approximately 7 cents
per kilowatt/hour and as production approaches 400 MW per year, approximately 5
cents per KWH The Company estimates that production volume economies of scale
will enable it to achieve its cost goal of generating electricity at 5 cents per
KWH within five years. 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.
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 implementation of this
software is part of an on-going project to upgrade the information systems at
ERC. 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.
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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 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 variable rate 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
At a special meeting of Shareholders held September 2, 1999, shareholders voted
to change the Company's name to FuelCell Energy, Inc. Shareholders also approved
an increase to the Company's authorized common stock from 8,000,000 to
20,000,000 shares and a proposal to change the Company's state of incorporation
from New York to Delaware ("the reincorporation"). The name change, increase in
authorized common stock and reincorporation are expected to become effective on
or about September 21, 1999 by means of a merger of the Company with and into
FuelCell Energy, Inc., a wholly-owned Delaware subsidiary of the Company, with
FuelCell Energy, Inc. being the surviving corporation.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
(a) EXHIBIT DESCRIPTION
EXHIBIT NO.
(b) REPORTS ON FORM 8-K
13
<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: September 14, 1999
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> MAY-1-1999
<PERIOD-END> JUL-31-1999
<CASH> 5,324
<SECURITIES> 0
<RECEIVABLES> 4,137
<ALLOWANCES> 0
<INVENTORY> 93
<CURRENT-ASSETS> 10,855
<PP&E> 21,342
<DEPRECIATION> 14,148
<TOTAL-ASSETS> 20,474
<CURRENT-LIABILITIES> 4,505
<BONDS> 0
0
0
<COMMON> 13,109
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,474
<SALES> 16,488
<TOTAL-REVENUES> 16,488
<CGS> 10,691
<TOTAL-COSTS> 18,015
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> (1,307)
<INCOME-TAX> 200
<INCOME-CONTINUING> (1,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,507)
<EPS-BASIC> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
