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, 1998 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission file number 1-14204 ENERGY RESEARCH CORPORATION (Exact name of registrant as specified in its charter) New York 06-0853042 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3 Great Pasture Road, Danbury, Connecticut 06813 (Address of principal executive offices) (Zip code) Registrant's telephone number including area code: (203) 792-1460 - --------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of the Registrant's Common Stock, par value $.0001, as of September 9,1998 was 4,128,273. 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, 1998 and October 31, 1997 2 Consolidated Condensed Statements of Operations for the three months ended July 31, 1998 and July 31, 1997 3 Consolidated Condensed Statements of Operations for the nine months ended July 31, 1998 and July 31, 1997 4 Consolidated Condensed Statements of Cash Flows for the nine months ended July 31, 1998 and July 31, 1997 5 Notes to Unaudited Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Part I - Financial Information Item I. Financial Statements <TABLE> ENERGY RESEARCH CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) <CAPTION> July 31, October 31, 1998 1997 <S> <C> <C> ASSETS: CURRENT ASSETS: Cash & cash equivalents $10,276 $6,802 Accounts receivable 4,700 2,828 Inventories 356 47 Deferred income taxes 821 205 Other current assets 508 279 Total current assets 16,661 10,161 Property , plant and equipment, net 8,190 8,254 Other assets, net 2,717 3,018 Total Assets $27,568 $21,433 LIABILITIES AND SHAREHOLDERS EQUITY: Current Liabilities: Current portion of long-term debt $ 784 $1,702 Accounts payable 806 865 Accrued liabilities 1,102 1,182 Customer advances 2,080 - Current portion of deferred license fee income 1,417 46 Total current liabilities 6,189 3,795 Long Term Liabilities: Long-term debt 2,111 2,699 Deferred income taxes 219 170 Total liabilities 8,519 6,664 Minority Interest 3,220 - Shareholders Equity: Convertible preferred stock, Series C($.01 par value); 30,000 shares issued and outstanding at July 31, 1998 and October 31, 1997, respectively 600 600 Common Shareholders Equity: Common stock, ($.0001 par value); 8,000,000 shares authorized: 4,126,398 and 4,000,650 shares issued and outstanding at July 31, 1998 and October 31, 1997, respectively - - Additional paid-in capital 12,514 11,460 Retained earnings 2,715 2,709 Total common shareholders equity 15,229 14,169 Total shareholders equity 15,829 14,769 Total Liabilities and Shareholders Equity $27,568 $21,433 </TABLE> See notes to consolidated condensed financial statements.
Part 1 - Financial Information Item 1. Financial Statements <TABLE> ENERGY RESEARCH CORPORATION CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) <CAPTION> Three Months Ended July 31, 1998 1997 <S> <C> <C> Revenues $5,537 $6,448 Cost and Expenses: Cost of Revenues 3,633 3,721 Administrative and selling expense 1,612 1,792 Depreciation 333 451 Research and development 548 383 6,126 6,347 Income/(loss) from operations (589) 101 License fee income, net (includes income from related parties of $62 and $79 for the three months ended July 31, 1998 and 1997, respectively) 53 207 Interest expense (57) (98) Interest and other income, net 81 75 Income/(loss) before provision for income taxes (512) 285 Provision for income taxes (163) 90 Net Income/(loss) ($349) $195 Earnings per share: Basic earnings/(loss) per share ($.08) $.05 Basic shares outstanding 4,116,318 3,976,610 Diluted earnings per share N/A $.05 Diluted shares outstanding 4,302,487 4,158,878 </TABLE> See notes to consolidated condensed financial statements.
Part 1 - Financial Information Item 1. Financial Statements <TABLE> ENERGY RESEARCH CORPORATION CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) <CAPTION> Nine Months Ended July 31, 1998 1997 <S> <C> <C> Revenues $16,056 $18,203 Cost and Expenses: Cost of Revenues 9,931 11,521 Administrative and selling expense 3,998 4,248 Depreciation 1,225 1,416 Research and development 1,541 860 16,695 18,045 Income/(loss) from operations (639) 158 License fee income, net (includes income from related parties of $204 and $237 for the nine months ended July 31, 1998 and 1997, respectively) 649 441 Interest expense (210) (271) Interest and other income, net 201 234 Income before provision for income taxes 1 562 Provision for income taxes (5) 216 Net Income $ 6 $346 Earnings per share: Basic earnings per share $-0- $.09 Basic shares outstanding 4,065,357 3,941,176 Diluted earnings per share $-0- $.05 Diluted shares outstanding 4,227,457 4,179,869 </TABLE> See notes to consolidated condensed financial statements.
Part 1 - Financial Information Item 1. Financial Statements <TABLE> ENERGY RESEARCH CORPORATION CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, <CAPTION> 1998 1997 <S> <C> <C> Cash flows from operating activities: Net Income $ 6 $ 346 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Compensation for options granted 206 - Depreciation and amortization 1,536 1,697 Deferred income taxes (567) - Conversion of accrued interest to principal on long-term debt - 29 (Gain) loss on disposal of property 1 - Changes in operating assets and liabilities: Accounts receivable (1,872) 615 Inventories (309) (45) Other current assets (229) (254) Accounts payable (59) (558) Accrued liabilities (80) (32) Customer advances 2080 - Income taxes payable - (2) Deferred license fee income 1,371 38 Net cash provided by/(used in) Operating activities 2,084 1,834 Cash flows from investing activities: Capital expenditures (1,162) (2,415) Proceeds from sale of marketable securities - 1,999 Payments on other assets (10) (42) Net cash provided by/(used in) investing activities (1,172) (458) Cash flows from financing activities: Repayments of long-term debt (1,506) (2,116) Sale of minority interest in joint venture 3,220 - Common stock issued 848 123 Net cash provided by/(used in) financing activities 2,562 (1,993) Net increase/(decrease) in cash and cash equivalents 3,474 (617) Cash and cash equivalents, beginning of period 6,802 7,597 Cash and cash equivalents, end of period $ 10,276 $ 6,980 Supplemental disclosure of cash paid during the period for: Interest $210 $267 Income taxes $377 $314 </TABLE> See notes to consolidated condensed financial statements.
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 July 31, 1998 and the results of operations for the three and nine months ended July 31, 1998 and 1997 and cash flows for such nine month periods have been included. Information included in the Consolidated Condensed Balance Sheet as of October 31, 1997 has been derived from audited financial statements included in the Company's Annual Report on Form 10-K for the year ended October 31, 1997, but does not include all disclosures required by generally accepted accounting principles. The results of operations for the nine months ended July 31, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. The reader should supplement the information in this document with prior disclosures in the form of previous 10-Q's and the 1997 10-K. NOTE 2: LICENSE AGREEMENTS AND SIGNIFICANT CONTRACTS The Company recognizes from licensees income in each reporting period. The Company is not obligated to return any of the license income earned. A royalty is payable to the Company on commercial product sales. To date the Company has not received any royalty payments. The Company is obligated to share new technological developments with the licensee concerning the licensed technology. Under the licenses the Company is not obligated to continue development of the technology. In December 1994, the Company entered into a $136,000,000 Cooperative Agreement with the U.S. Department of Energy (DOE) in which the DOE would provide $78,000,000 to the Company over the next five years to support the continued development and improvement of the Company's commercial product. The balance of the funding is expected to be provided by the Company, the Company's partners or licensees, other private agencies and utilities. Approximately 60% of the non-DOE portion has been committed or credited to the project in the form of in-kind or direct cost share from non-U.S. government sources. There can be no assurance that the final 40% of the private sector funding will be available on favorable terms, if at all. Failure of the Company to obtain the required funding could result in a delay or reduction of DOE funding.
Part I - Financial Information Item 1. Financial Statements <TABLE> ENERGY RESEARCH CORPORATION NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTINUED <CAPTION> NOTE 3: EARNINGS PER SHARE Basic and diluted earnings per share are calculated based upon the provisions of SFAS 128, adopted in 1998, using the following data: Three Months Nine Months Ended July 31 Ended July 31 1998 1997 1998 1997 <S> <C> <C> <C> <C> Weighted average basic Common shares 4,116,318 3,976,610 4,065,357 3,941,176 Effect of dilutive securities Stock options 156,169 82,268 132,100 138,693 Preferred C convertible 30,000 30,000 30,000 30,000 Convertible debt 70,000 70,000 Weighted average basic Common shares adjusted for diluted calculation 4,302,487 4,158,878 4,227,457 4,179,869 </TABLE>
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 July 31, 1998 and July 31, 1997 Revenues decreased 14% to $5,537,000 in the 1998 period from $6,448,000 in the 1997 period. The decrease was due primarily to the completion of the two-megawatt Direct Fuel Cell power plant project in Santa Clara, California in the 1997 period. The decrease in revenues was partially offset by an increase in billings under the Companys other contracts. Cost of Revenues were relatively unchanged at $3,633,000 and $3,721,000 in the 1998 and 1997 periods, respectively. Administrative and selling expense decreased 10% to $1,612,000 in the 1998 period from $1,792,000 in the 1997 period. The administrative and selling expense includes approximately $571,000 of costs associated with the commercialization of the Company's battery business. Approximately 35% of these costs included expenses associated with several agreements in China including a nickel-zinc battery license for bicycles, scooters and other applications and the formation of a joint venture to manufacture and sell batteries and a second joint venture to develop various electrochemistry based products. Approximately 35% of these costs were associated with the negotiations to acquire a privately held battery company. After due diligence issues arose, the Company decided not to proceed with the transaction. The remainder of the costs were internal expenses associated with the above as well as internal costs associated with the potential battery company spinoff currently being considered. Depreciation decreased 26% to $333,000 in the 1998 period from $451,000 in the 1997 period. The decrease is due primarily to the completion of the depreciation of the original equipment installed in the fuel cell manufacturing facility. Research and development expense increased 43% to $548,000 in the 1998 period from $383,000 in the 1997 period. The increase was substantially due to expanded battery development activities. Income from operations resulted in a loss of $589,000 in the 1998 period compared to $101,000 of income in the 1997 period. In addition to the $571,000 administrative and selling expense discussed above, the Company also included $65,000 of other internal expenses in cost of revenues associated with the battery activity explained above. Income from operations also included certain non-recoverable employment costs associated with the hiring of the chief executive officer in the fourth fiscal quarter of 1997. Income from operations during the remainder of 1998 will be
reduced by certain non-recoverable employment costs. License fee income, net, decreased 74% to $53,000 in the 1998 period from $207,000 in the 1997 period. The decrease is primarily due to Corning, Inc. terminating the battery license agreement with the Company during the second fiscal quarter 1998. The remainder of the decrease was due to the incurrence of cost associated with a battery test as part of the electric vehicle battery license with Nan Ya Plastics Corporation of Taiwan and Xiamen Three Circles Co., Ltd of Xiamen, Peoples Republic of China. The amortization of the ten-year paid-up fuel cell license , which was pre-paid in 1988 with Sanyo Electric Co., Ltd(Sanyo) in Japan,( the "Sanyo License") ended during the second fiscal quarter 1998. As anticipated, Sanyo did not renew its license with the Company. License fee income, net, is expected to be higher in the fiscal year 1998 than in fiscal year 1997. The previously deferred license fee income of $1,300,000 is expected to be recognized as income during the second fiscal quarter 1999. Interest expense decreased 42% to $57,000 in the 1998 period from $98,000 in the 1997 period. The decrease was due primarily to the complete repayment of debt to MTU-Friedrichshafen (MTU) during the first fiscal quarter 1998. The Company also completed the repayment of a machinery and equipment loan to First Union Bank during the current 1998 period. Interest and other income, net, increased 8% to $81,000 in the 1998 period from $75,000 in the 1997 period. Results of Operations Comparison Nine Months Ended July 31, 1998 and July 31, 1997 Revenues decreased 12% to $16,056,000 in the 1998 period from $18,203,000 in the 1997 period. The expected decrease was due primarily to the completion of the two-megawatt Direct Fuel Cell power plant demonstration project in Santa Clara, California in the 1997 period. The decrease in revenues was partially offset by an increase in billings under the Companys other contracts. Revenues for fiscal year 1998 are expected to be lower than fiscal year 1997. Cost of revenues decreased 14% to $9,931,000 in the 1998 period from $11,521,000 in the 1997 period. The decrease was due primarily to the lower revenues mentioned above. During the 1998 period approximately $847,000 of unbilled, but recoverable engineering and manufacturing overhead costs were incurred. These costs will be recognized with the associated revenues during the remainder of the fiscal year. Administrative and selling expense decreased 6% to $3,998,000 in the 1998 period from $4,248,000 in the 1997. The administrative and selling expense includes approximately $571,000 of costs
associated with the commercialization of the Company's battery business, including licenses, joint ventures, a terminated acquisition and spinoff costs mentioned above in the comparison of the three months ended July 31, 1998. During the 1998 period, approximately $1,201,000 of unbilled, but recoverable administrative and selling expenses were incurred. These costs will be recognized with the associated revenues during the remainder of the fiscal year. Depreciation decreased 13% to $1,225,000 in the 1998 period from $1,416,000 in the 1997 period. The decrease is due primarily to the completion of the depreciation of the original equipment installed in the fuel cell manufacturing facility. Research and development expense increased 79% to $1,541,000 in the 1998 period from $860,000 in the 1997 period. The increase was substantially due to expanded battery activities including the manufacture and successful testing of a nickel-zinc electric vehicle battery. A second electric vehicle battery is currently being manufactured. Income from operations resulted in a loss of $639,000 in the 1998 period compared to $158,000 of income in the 1997 period. In addition to the $571,000 administrative and selling expense discussed above, the Company also included $65,000 of other internal expenses in cost of revenues associated with the battery activity explained above. Income from operations also included certain non-recoverable employment costs associated with the hiring of the chief executive officer in the fourth fiscal quarter of 1997. Income from operations during the remainder of 1998 will be reduced by certain non-recoverable employment costs. License fee income, net, increased 47% to $649,000 in the 1998 from $441,000 in the 1997 period. The increase was due substantially to the battery license agreement with Nan Ya Plastics Corporation of Taiwan and Xiamen Three Circles Co., Ltd.( formerly Xiamen Daily- Used Chemicals Co., Ltd.) of Xiamen, Peoples Republic of China. The increase was also due to the battery license agreement with Corning, Inc. During the 1998 period Corning, Inc. terminated its license with the Company, therefore, license fee income, net, in future periods is not expected to include payments from Corning, Inc. The amortization of the Sanyo License ended during the second fiscal quarter 1998. As anticipated, Sanyo did not renew its license with the Company. License fee income, net, is expected to be higher in the fiscal year 1998 than in fiscal year 1997. The previously deferred license fee income of $1,300,000 is expected to be recognized as income during the second fiscal quarter 1999. Interest expense decreased 23% to $210,000 in the 1998 period from $271,000 in the 1997 period. The decrease was due primarily to the complete repayment of debt to MTU-Friedrichshafen (MTU) during the first fiscal quarter 1998. The Company also completed the repayment of a machinery and equipment loan to First Union Bank during the current 1998 period.
interest and other income, net, decreased 14% to $201,000 in the 1998 period from $234,000 in the 1997 period. The decrease was due primarily to the use of cash for the repayment of debt and the use of cash for unbilled, but recoverable expenses mentioned above. Liquidity and Capital Resources Working capital at July 31,1998 was $10,472,000, including $10,276,000 of cash and cash equivalents, compared to working capital of $6,366,000 at October 31, 1997, including $6,802,000 of cash and cash equivalents. The cash and cash equivalents at July 31, 1998 is also inclusive of $3,220,000 in two majority owned joint ventures in China. During the 1998 period, $2,084,000 of cash was provided by operating activities of the Company. During that period, accounts receivable increased $1,872,000, and accounts payable decreased $59,000. Accounts receivable includes the incurrence of $2,048,000 of unbilled but recoverable costs that will be recognized with the associated revenues during the remainder of the fiscal year. Net cash from operating activities also included the Companys net income of $6,000 and an increase in deferred license fee income $1,371,000. During the period the Company received customer advances of $2,080,000. The Company's capital expenditures are incurred primarily to support ongoing contracts and to replace existing equipment. Capital expenditures for the 1998 period were $1,162,000. The capital expenditures were financed from the recovery of depreciation expense under cost-reimbursement contracts and cooperative agreements. During the 1998 period the Company invested $481,000 in the aggregate in two majority owned joint ventures in the People's Republic of China. The Company obtained a 51% ownership in Xiamen Three Circles-ERC Battery Company, Ltd. and granted the joint venture a nickel-zinc license for certain market applications including electric bicycles, scooters and other applications. The Company also obtained a 66 2/3% ownership of Xiamen-ERC Technology Company, Ltd. to develop and commercialize various advanced electrochemical technologies. In fiscal year 1990, the Company borrowed $1,980,000 from MTU at a rate of 6% per annum. The payment of principal and interest was deferred until November 30, 1996. The indebtedness, including deferred interest, as of October 31, 1996 was $1,926,000. This loan was secured by the pledge of stock in the Company's manufacturing subsidiary and certain machinery, equipment and leasehold improvements at the Torrington, Connecticut, facility. The accrued interest on the loan was payable at the Company's option. The principal amount of the loan could be converted at MTU's option, into the Company's common stock at a conversion rate of $9 per share prior to November 30, 1996. During fiscal 1996, $877,000 of this loan was converted into 97,397 shares of common stock of the Company. MTU extended the maturity of $630,000 of the loan to November 30, 1997 with the right to convert to common stock at $9 per share. During December 1996, the Company paid to MTU $1,296,000 of principal and interest. During December, 1997 the Company paid the entire balance of principal and interest due in the amount of $673,000.
In December 1994, the Company entered into a $136,000,000 Cooperative Agreement with the U.S. Department of Energy (DOE) in which the DOE would provide $78,000,000 to the Company over the next five years to support the continued development and improvement of the Company's commercial product. The balance of the funding is expected to be provided by the Company, the Company's partners or licensees, other private agencies and utilities. Approximately 60% of the non-DOE portion has been committed or credited to the project in the form of in-kind or direct cost share from non-U.S. government sources. There can be no assurance that the final 40% of the private sector funding will be available on favorable terms, if at all. Failure of the Company to obtain the required funding could result in a delay or reduction of DOE funding. The Company will need to raise additional funds to expand the capacity of the Company's manufacturing facility. The first stage in this process is to raise the output capability to 50 MW per year. Approximately $16 million has been estimated for this step. There can be no assurance that this funding will be available or if available will result in an output level which will result in a cost competitive fuel cell stack. Meanwhile, the Company is using existing funds to expand production capacity incrementally. The Company has reviewed the hardware and software of its information systems. The Company believes the year 2000 will not have a material impact on its financial position. The Company anticipates that its existing capital resources together with anticipated revenues will be adequate to satisfy its existing financial requirements and agreements through fiscal 1998.
Item 6 - Exhibits and Reports on Form 8 EXHIBIT INDEX (a) EXHIBIT DESCRIPTION EXHIBIT NO. 10.51 Technology Transfer and License Contract, dated May 29, 1998 for Ni-Zn Battery Technology among Xiamen ERC Battery Corp., Ltd., and Xiamen Daily-Used Chemicals Co., Ltd. and Energy Research Corporation. (confidential treatment requested) 10.52 Cooperative Joint Venture Contract, dated as of July 7, 1998, between Xiamen Three Circles Co., Ltd. and Energy Research Corporation for the establishment of Xiamen Three Circles-ERC Battery Corp., Ltd., a Sino Foreign Manufacturing Joint Venture.(confidential treatment requested) 10.53 Amendment to the Energy Research Corporation 1988 Stock Option Plan, as amended. 10.54 The Energy Research Corporation 1998 Equity Incentive Plan. 27 Financial Data Schedule (b) Reports On Form 8-K NONE
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: September 14, 1998