-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WtY0qzpBfuec4fKTd/U/EbdTMWaLv8AAbTRz4BtmtSHrdvXZbop0xYsuw1PmHiFa HIXQjtAqZyY4jkdqR+158A== 0000891554-99-001799.txt : 19990915 0000891554-99-001799.hdr.sgml : 19990915 ACCESSION NUMBER: 0000891554-99-001799 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENERGY RESEARCH CORP /NY/ CENTRAL INDEX KEY: 0000886128 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 060853042 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14204 FILM NUMBER: 99711551 BUSINESS ADDRESS: STREET 1: 3 GREAT PASTURE RD CITY: DANBURY STATE: CT ZIP: 06813 BUSINESS PHONE: 2038256000 MAIL ADDRESS: STREET 1: 3 GREAT PASTURE ROAD CITY: DANBURY STATE: CT ZIP: 06813 10-Q 1 QUARTERLY REPORT 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. 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 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 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 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 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 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 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 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 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 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 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. 11 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. 12 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 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 EX-27 2 FDS --
5 1,000 9-MOS OCT-31-1999 MAY-1-1999 JUL-31-1999 5,324 0 4,137 0 93 10,855 21,342 14,148 20,474 4,505 0 0 0 13,109 0 20,474 16,488 16,488 10,691 18,015 0 0 131 (1,307) 200 (1,507) 0 0 0 (1,507) (0.36) (0.36)
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