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