EVERCEL INC, SB-2, 1998-09-30

EVERCEL INC
SB-2, 1998-09-30

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------

EVERCEL, INC.
(Exact name of small business issuer as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 3691,3699 APPLIED FOR
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

------------------------

3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
(203) 825-6000
(Address and Telephone Number of Principal Executive Offices)
------------------------------

3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
(203) 825-6000
(Address of principal place of business or intended principal place of business)
------------------------------

JERRY D. LEITMAN
CHAIRMAN
EVERCEL, INC.
3 GREAT PASTURE ROAD
DANBURY, CONNECTICUT 06813
(203) 825-6000
(Name, address and telephone number of Agent for Service)
------------------------------

COPIES TO:

KEVIN P. MALLERY, ESQUIRE
BROWN, RUDNICK, FREED & GESMER
CityPlace I
185 Asylum Street
Hartford, Connecticut 06103
(860) 509-6500
------------------------

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------------

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Lsecurities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED UNIT PRICE FEE(1)
<S> <C> <C> <C> <C>
Rights(2)......................................... 4,128,273(3) -- -- --
Common Stock, $.01 par value...................... 4,128,273(4) $2.00 $8,256,546 $2,436.00
</TABLE>

(1) Calculated pursuant to Rule 457(o)

(2) The Company is granting at no cost to holders of its outstanding Common
Stock transferable subscription rights ("Rights") to subscribe for and
purchase additional shares of the Company's Common Stock at $2.00 per share.
Stockholders will receive one Right for each share of Common Stock of the
Company held by them on the Record Date.

(3) Represents one Right for each share of Common Stock estimated to be
outstanding as of the Record Date, based upon the number of shares of common
stock of Energy Research Corporation outstanding as of September 28, 1998.

(4) Represents one share of Common Stock issuable pursuant to the exercise of
each Right granted in respect of the shares of Common Stock estimated to be
outstanding as of the Record Date.
------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS

4,128,273 SHARES OF COMMON STOCK

EVERCEL, INC.

RIGHTS OFFERING
------------------

Evercel, Inc., a Delaware corporation (the "Company"), is granting at no
cost to holders of the Company's outstanding shares of common stock, par value
$.01 per share ("Common Stock" or "Company Common Stock"), of record at the
close of business on October , 1998 (the "Record Date"), transferable
subscription rights (the "Rights") to subscribe for and purchase additional
shares of Company Common Stock (the "Rights Offering") for a price of $2.00 per
share (the "Subscription Price"). Stockholders of the Company will receive one
transferable Right for each share of Common Stock held by them on the Record
Date. Rights holders may purchase one share of Company Common Stock for each
Right held. Each Right also carries the right to subscribe (the
"Oversubscription Privilege") at the Subscription Price for shares of Company
Common Stock that are not otherwise purchased pursuant to the exercise of
Rights. See "THE RIGHTS OFFERING-- Subscription Privileges --Oversubscription
Privilege." The Rights are evidenced by transferable certificates. The issuance
of shares pursuant to the exercise of Rights is not conditioned upon the sale of
any minimum number shares of Company Common Stock in the Rights Offering.

The Rights will expire at 5:00 p.m., Eastern time, on December , 1998
unless extended by the Company (as extended, the "Expiration Date"). The Company
will not, in any event, extend the Expiration Date beyond January 31, 1999.
Failure to exercise Rights could result in substantial dilution to
non-exercising stockholders. See "RISK FACTORS--Dilution from Rights Offering."
This Rights Offering is being made on an any or all basis, which means that the
Company may accept any subscriptions received even if all 4,128,273 shares of
Company Common Stock are not purchased. See "RISK FACTORS--No Minimum Size of
Rights Offering."

The Company was formed as a wholly-owned subsidiary of Energy Research
Corporation, a New York corporation ("ERC") on June 22, 1998. ERC expects to
transfer to the Company the principal assets related to its battery business
group ("Battery Business Group"), and the Company will assume certain
liabilities related to those assets, effective on or about October 31, 1998.
Immediately prior to the grant of the Rights by the Company, ERC will distribute
to its stockholders (the "Distribution") one share of Company Common Stock for
each share of Common Stock of ERC that such stockholders hold. As of September
28, 1998, 4,128,273 shares of ERC Common Stock were outstanding. The
Distribution is expected to occur on or about November , 1998 (the
"Distribution Date"). See "THE DISTRIBUTION." Prior to the Rights Offering and
the Distribution Date, there has been no public market for the Company Common
Stock or the Rights. The Company expects to seek approval for trading of the
Common Stock and the Rights on The Nasdaq Stock Market. The Subscription Price
has been determined by the Company's Board of Directors without consultation
with any underwriter and may not reflect the actual value of the Company Common
Stock. See "RISK FACTORS--Offering Price Not Based on Actual Value."
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS ISSUER (1)
<S> <C> <C> <C>
Per Share................... $2.00 $0 $2.00
Total....................... $8,256,546 $0 $8,256,546
</TABLE>

- ------------------------

(1) Before deducting expenses payable by the Company estimated at $500,000.
------------------------------

The Rights and the underlying shares of Common Stock offered by this
Prospectus are offered by the Company subject to prior sale, to withdrawal,
cancellation or modification of the offer without notice, to delivery to and
acceptance by the Company and to certain further conditions. It is expected that
delivery of the shares will be made at the offices of Continental Stock Transfer
& Trust Company, on or about December , 1998.

------------------------

The date of this Prospectus is October , 1998.
<PAGE>
ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission in
Washington, D.C. a Registration Statement on Form SB-2 under the Securities Act
of 1933, as amended, with respect to the Rights and the Common Stock offered by
this Prospectus. For further information with respect to the Company and the
Rights and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits listed in the Registration Statement.
The Registration Statement can be examined at the Public Reference Section of
the Securities and Exchange Commission at 450 Fifth Street, NW, Washington DC
20549, and copies may be obtained upon payment of the prescribed fees. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission, including the Company, at (http://www.sec.gov).

The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request, a copy of any of the information that
was incorporated by reference in the Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Such requests should be directed to
Louis P. Barth, Chief Financial Officer, Secretary and Treasurer, c/o Energy
Research Corporation, 3 Great Pasture Road, Danbury, Connecticut 06813, (203)
825-6000.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

Forward-looking statements in this Prospectus, including without limitation
statements relating to the adequacy of the Company's resources, expansion plans
and licensing opportunities, are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that such forward-looking statements involve risks and uncertainties, including
without limitation: developments that affect the Company's joint venture
partners or licensees; potential quarterly fluctuations in the Company's
operating results; competition; risks associated with expansion; the Company's
reliance on key employees; risks generally associated with the commercialization
of its products; and other risks and uncertainties indicated from time-to-time
in the Company's filings with the Securities and Exchange Commission.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO (THE
"FINANCIAL STATEMENTS") APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL REFERENCES
IN THIS PROSPECTUS TO THE TERM THE "COMPANY" PRIOR TO THE DISTRIBUTION DATE
REFER TO THE BATTERY GROUP OF, AND AS OPERATED BY, ERC, UNLESS OTHERWISE
REQUIRED BY THE CONTEXT. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS
PROSPECTUS ASSUMES (I) THE TRANSFER BY ERC TO THE COMPANY OF THE PRINCIPAL
ASSETS RELATED TO THE BATTERY BUSINESS GROUP OF ERC AND THE ASSUMPTION BY THE
COMPANY OF CERTAIN RELATED LIABILITIES, (II) THE EXECUTION BY THE COMPANY AND
ERC OF THE DISTRIBUTION AGREEMENT, THE TAX SHARING AGREEMENT, THE SERVICES
AGREEMENT AND THE AGENCY AGREEMENT DESCRIBED HEREIN, (III) THE DISTRIBUTION TO
THE STOCKHOLDERS OF ERC OF ONE SHARE OF COMPANY COMMON STOCK FOR EACH SHARE OF
COMMON STOCK OF ERC HELD BY THEM, AND (IV) THE FILING OF AN AMENDED AND RESTATED
CERTIFICATION OF INCORPORATION (THE "CERTIFICATE") AND THE ADOPTION OF THE
RESTATED BY-LAWS (THE "BY-LAWS") OF THE COMPANY REFLECTING THE PROVISIONS
DESCRIBED HEREIN. SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.

THE DISTRIBUTION AND THE RIGHTS OFFERING

Immediately after the Distribution, the Company is granting at no cost to
holders of its Common Stock as of the Record Date, transferable subscription
rights to subscribe for and purchase additional shares of Company Common Stock
(a "Right") at a purchase price of $2.00 per share. Each holder of Common Stock
of the Company will receive one transferable Right for each share of Common
Stock held of record at the close of business on October , 1998 (the "Record
Date"). See "THE RIGHTS OFFERING."

THE COMPANY

The Company is engaged in the development and commercialization of an
innovative, patented, nickel-zinc ("Ni-Zn") rechargeable battery, as well as the
research and design of other advanced battery technologies. The Company's Ni-Zn
battery technology offers high energy density, long cycle life and low material
costs, resulting in a low weight, high power battery with a substantial price
advantage over other comparable technologies. The Company's Ni-Zn battery may be
used in a range of rechargeable battery applications, including electric
vehicles, golf carts, electric wheelchairs, scooters, bicycles, power tools,
boats, and consumer and electronic products. The Company intends to fully
commercialize its Ni-Zn technology through a combination of direct sales,
licensing agreements and joint venture relationships.

The Company's executive offices are located at 3 Great Pasture Road,
Danbury, Connecticut 06813, telephone: (203) 825-6000.

3
<PAGE>
THE RIGHTS OFFERING

<TABLE>
<S> <C>
Rights.......................... The Company is granting at no cost to holders of its
Common Stock as of the Record Date, transferable
subscription rights to subscribe for and purchase
additional shares of Common Stock (a "Right"). Each holder
of Common Stock of the Company will receive one
transferable Right for each share of Common Stock held of
record on the Record Date. An aggregate of approximately
4,128,273 Rights will be distributed to the holders of
Common Stock (based upon the number of shares of ERC
Common Stock outstanding as of September 28, 1998). Each
Right will be exercisable to purchase one share of Common
Stock of the Company at a purchase price of $2.00 per
share. An aggregate of approximately 4,128,273 shares of
Company Common Stock (the "Underlying Shares") has been
reserved for issuance upon exercise of the Rights. The
distribution of the Rights by the Company and the sale of
shares of Common Stock upon the exercise of Rights are
referred to herein as the "Rights Offering." See "THE
RIGHTS OFFERING--The Rights."

Record Date..................... October , 1998

Expiration Date................. December , 1998, 5:00 p.m., Eastern time, or such later
date to which the Company may extend the expiration of the
Rights, except that the Company has agreed to allow any
ERC stockholders exercising their Oversubscription
Privilege (as defined below) to exercise Rights held by
them on the first business day following the Expiration
Date. The Company will not, in any event, extend the
Expiration Date beyond January 31, 1999.

Basic Subscription Privilege.... Rights holders are entitled to purchase for the
Subscription Price one share of Common Stock for each
Right held (the "Basic Subscription Privilege"). See "THE
RIGHTS OFFERING-- Subscription Privileges--Basic
Subscription Privilege."

Oversubscription Privilege...... Each holder of Rights who elects to exercise his Basic
Subscription Privilege may also subscribe at the
Subscription Price for an unlimited number of additional
Underlying Shares (the "Oversubscription Privilege") that
are not otherwise purchased pursuant to the Basic
Subscription Privilege. If an insufficient number of
Underlying Shares is available to satisfy fully all
elections to exercise the Oversubscription Privilege, the
available Underlying Shares will be prorated among holders
who exercise their Oversubscription Privilege based on the
respective numbers of Rights exercised by such holders
pursuant to the Basic Subscription Privilege. See "THE
RIGHTS OFFERING-- Subscription
Privileges--Oversubscription Privilege."

Subscription Price.............. $2.00 in cash per share of Company Common Stock subscribed
for pursuant to the Basic Subscription Privilege or the
Oversubscription Privilege.
</TABLE>

4
<PAGE>

<TABLE>
<S> <C>
Company Common Stock Outstanding
after Rights Offering......... A maximum of 8,256,546 shares, excluding shares issuable
pursuant to certain outstanding stock options. See
"CAPITALIZATION," "MANAGEMENT," and "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."

Transferability of Rights and
Company Common Stock.......... Prior to the Rights Offering and the Distribution Date,
there has been no public market for the Common Stock or
the Rights. The Rights will be transferable. The Company
expects to seek approval for trading of the Rights and the
Company Common Stock on The Nasdaq Stock Market. See "THE
RIGHTS OFFERING--Exercise of Rights."

Procedure for Exercising
Rights........................ Basic Subscription Privileges and Oversubscription
Privileges may be exercised by properly completing the
Subscription Certificate evidencing the Rights (a
"Subscription Certificate") and forwarding such
Subscription Certificate (or following the Guaranteed
Delivery Procedures (as described in "THE RIGHTS
OFFERING--Exercise of Rights")), with payment of the
Subscription Price for each Underlying Share subscribed
for pursuant to the Basic Subscription Privilege, to the
Subscription Agent on or prior to the Expiration Date. No
payment will be required for any Underlying Shares
subscribed for pursuant to the Oversubscription Privilege.
If not all the Rights are exercised pursuant to the Basic
Subscription Privilege, the Company currently intends to
extend the Expiration Date to permit holders who have
exercised their Oversubscription Privilege to forward the
Subscription Price for the additional Underlying Shares to
be acquired by them. If the mail is used to forward
Subscription Certificates, it is recommended that insured,
registered mail be used. Once a holder of Rights has
exercised the Basic Subscription Privilege or the
Oversubscription Privilege, such exercise may not be
revoked. See "THE RIGHTS OFFERING--Exercise of Rights."

Persons Holding Common Stock, or
Wishing to Exercise Rights,
Through Others................ Persons holding Common Stock, and receiving the Rights
distributable with respect thereto through a broker,
dealer, commercial bank, trust company or other nominee,
as well as persons holding stock certificates personally
who would prefer to have such institutions effect
transactions relating to the Rights on their behalf,
should contact the appropriate institution or nominee and
request it to effect the transactions for them. Such
holders should be aware that brokers or other nominee
holders may establish deadlines for receiving instructions
from beneficial holders significantly in advance of the
Expiration Date. See "THE RIGHTS OFFERING--Exercise of
Rights."
</TABLE>

5
<PAGE>

<TABLE>
<S> <C>
Issuance of Company Common
Stock......................... Certificates representing shares of Company Common Stock
purchased pursuant to the exercise of Rights will be
delivered to subscribers as soon as practicable after the
sixth business day following the Expiration Date. The
issuance of shares pursuant to the exercise of Rights is
not conditioned upon the sale of any minimum number of
shares of Company Common Stock in the Rights Offering. See
"THE RIGHTS OFFERING--Subscription Privileges."

Use of Proceeds................. Proceeds of the Rights Offering will be used to lease and
equip a new facility for production and manufacturing
purposes, for working capital purposes, for possible
investments in joint ventures, and for general corporate
purposes.

Subscription Agent.............. Continental Stock Transfer & Trust Company (the
"Subscription Agent").

Standby Underwriting............ There will be no standby underwriters with respect to
unexercised Rights.

Nasdaq Symbol...................

Risk Factors.................... See "RISK FACTORS" hereunder for a more complete
description of certain factors that investors should
consider prior to exercising their Rights.
</TABLE>

6
<PAGE>
THE DISTRIBUTION

<TABLE>
<S> <C>
Distributing Company............ Energy Research Corporation, a New York corporation.

Distributed Company............. Evercel, Inc., a Delaware corporation incorporated on June
22, 1998, which as of the close of business on October ,
1998, owned and operated the battery group of ERC.

Distribution.................... Immediately prior to the grant of the Rights by the
Company, on the Distribution Date, ERC will distribute to
its stockholders one share of Common Stock of the Company
for each share of ERC Common Stock held of record on the
Record Date. It is expected that on or about November ,
1998, the Distribution Agent will begin to mail stock
certificates representing shares of Common Stock to
holders of record of ERC Common Stock as of the Record
Date. See "THE DISTRIBUTION--Manner of Effecting the
Distribution."

Record Date..................... October , 1998.

Distribution Date............... November , 1998.

Shares to be Distributed........ Based on the number of shares of ERC Common Stock
outstanding on September 28, 1998, approximately 4,128,273
shares of the Common Stock will be issued to ERC
stockholders in the Distribution. The shares to be
distributed to ERC stockholders will constitute all of the
shares of Common Stock outstanding immediately after the
Distribution, other than shares that may be issued
pursuant to certain outstanding stock options.

Distribution Agent.............. Continental Stock Transfer & Trust Company (the
"Distribution Agent").

No Payment Required............. ERC stockholders will not be required to make any payment
or to take any other action to receive their portion of
the Distribution. See "THE DISTRIBUTION--Manner of
Effecting the Distribution."

Tax Consequences................ The ERC Board has made a condition of the Distribution
that receipt of shares of Company Common Stock by holders
of ERC Common Stock will be tax free.
</TABLE>

7
<PAGE>
SUMMARY FINANCIAL DATA

The following table sets forth the summary operating data and balance sheet
data of the Company for the periods and as of the dates indicated. The selected
financial data was derived from the financial statements of the Battery Business
Group of ERC and should be read in conjunction with such financial statements
and related notes and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" included elsewhere in this Prospectus. The
financial information with respect to the nine months ended July 31, 1998 and
1997 in the opinion of management includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
for such periods (in thousands, except share amounts).

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
--------------------- ---------------------
1996 1997 1997 1998
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Operating Data:
Revenues.............................................................. $ 355 $ 436 $ 295 $ 421
Cost and expenses:
Cost of revenues.................................................... 246 98 117 30
Depreciation and amortization....................................... 34 40 26 37
Administrative and selling.......................................... 199 268 180 1,076
Research & development.............................................. 644 897 480 1,283
--------- ---------- --------- ----------
Loss from operations before income taxes.............................. (768) (867) (508) (2,005)
--------- ---------- --------- ----------
Net loss.............................................................. $ (507) $(572) $ (335) $(1,323)
--------- ---------- --------- ----------
--------- ---------- --------- ----------
Pro forma net loss per share (basic and diluted).................... $(0.14) $(0.32)
---------- ----------
---------- ----------
Pro forma weighted average shares (basic and diluted)............... 4,128,273 4,128,273
---------- ----------
---------- ----------
</TABLE>

<TABLE>
<CAPTION>
AT JULY 31, 1998
ACTUAL(1) AS ADJUSTED(2)
<S> <C> <C>
---------------------------
Balance Sheet Data:
Total assets......................................................................... $ 3,624 $ 11,381
Working capital...................................................................... 2,845 10,602
Shareholders' equity/net assets...................................................... 315 8,072
</TABLE>

- ------------------------

(1) Reflects the combination of Evercel, Inc. and the Battery Business Group of
ERC as if the combination was effective as of July 31, 1998.

(2) As adjusted to reflect the Rights Offering of 4,128,273 Rights and the net
proceeds therefrom.

8
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS WHEN EVALUATING AN INVESTMENT IN
THE RIGHTS OR THE UNDERLYING SHARES OFFERED HEREBY. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE
CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE
TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.

OFFERING PRICE NOT BASED ON ACTUAL VALUE. Prior to the Rights Offering and
the Distribution Date, there has been no public market for the Common Stock or
the Rights. The Subscription Price has been determined arbitrarily by the
Company's Board of Directors and is not based on an independent valuation of the
Company or its assets or other recognized criteria of investment value.
Moreover, the Subscription Price bears no direct relation to the book value,
earnings, assets or other generally accepted valuation criteria of the Company.
The Subscription Price, therefore, does not indicate that the Common Stock has a
value of or could be resold at that price. While the Board of Directors of the
Company believes that the Subscription Price is lower than the actual value of
the Common Stock of the Company, the actual value or resale value of the Common
Stock may be higher or lower than the Subscription Price.

UNCERTAINTY OF FUTURE PROFITABILITY. In the past, the Company has had
limited revenues. The Company is not profitable, and no assurance can be given
that the Company will become profitable in the foreseeable future, if ever. KPMG
Peat Marwick LLP, in its independent auditors report on the Battery Business
Group's financial statements included herein, states that the Company's
recurring losses from operations raise substantial doubt about the Company's
ability to continue as a going concern. For the fiscal years ended October 31,
1996 and 1997 and the nine months ended July 31, 1998, if the Company had been
an independant entity, the Company would have had losses of $507,000, $572,000
and $1,323,000, respectively. Future operating results of the Company will
depend upon many factors, including its ability to raise capital, demand for the
Company's products, the efforts and success of the Company's licensees and joint
venture partners in developing and marketing products incorporating the
Company's technology, the development of battery markets, the level of
competition faced by the Company, and the ability of the Company to develop,
market and license new products and effectively manage operating expenses. There
can be no assurance that the Company will generate net income or be profitable
in the future.

NO HISTORY AS A STAND-ALONE COMPANY. The Company, as a business group
within ERC, commenced operations in January 1970 and has been engaged
principally in research and development and limited production of battery
technologies as a part of ERC's ongoing operations. The Company has not been
operated as a separate entity in the past. A number of changes will occur as a
result of the Distribution and Rights Offering, including the appointment of
certain new members of senior management. In addition, once the Services
Agreement (defined below) terminates, the Company will be responsible for
managing all of its own administrative and employee arrangements, and for
supervising all of its legal and financial affairs, including publicly reported
financial statements. In addition, until a new chief executive officer is
appointed, Jerry D. Leitman, the President and Chief Executive Officer of ERC
will also be the acting President and Chief Executive Officer of the Company.
There can be no assurance that the Company will be able to operate profitably as
an independent company.

DEPENDENCE ON NI-ZN PRODUCT LINE; UNCERTAINTY OF MARKET ACCEPTANCE OF
ADVANCED RECHARGEABLE BATTERIES. In the nine months ended July 31, 1998 and the
fiscal years ended October 31, 1997 and 1996, contract revenues and licensing
fees related to the Company's Ni-Zn battery represented all of the Company's
revenues. The Company believes that its dependence on the Ni-Zn product line is
likely to continue for at least the next several years, unless and until the
Company successfully develops and commercializes other new products.

9
<PAGE>
Since the Company intends to focus its manufacturing, research and
development and marketing efforts on the success of its advanced rechargeable
batteries, it will be dependent initially upon the market acceptance generally,
and of its Ni-Zn batteries which are based on its Ni-Zn technology. The
Company's Ni-Zn batteries have not yet achieved wide market acceptance. There
can be no assurance that market acceptance of its Ni-Zn batteries will ever be
achieved. The introduction of new products is subject to the inherent risks of
unforeseen delays and the time necessary to achieve market success for any
individual product is uncertain. Volume production of the Company's advanced
rechargeable batteries could be delayed for any reason. The Company's
competitors may introduce new technologies or refine existing technologies which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

CONSUMER MARKETS. A substantial portion of the Company's business will
depend upon the success of products sold by original equipment manufacturers
("OEMs") that use the Company's batteries. For example, one factor determining
the quantity of purchase orders the Company may receive from a bicycle
manufacturer in the future is the success of that company's electric bicycle.
Therefore, the Company's success of being able to sell or license its products
is substantially dependent upon the acceptance and marketability of the OEMs'
products in the marketplace. The Company is subject to many risks beyond its
control that influence the success or failure of a particular product
manufactured by an OEM, including among others, competition faced by the OEM in
its particular industry; market acceptance of the OEM's product; the
engineering, sales and marketing and management capabilities of the OEM;
technical challenges unrelated to the Company's technology or products faced by
the OEM in developing its products; and the financial and other resources of the
OEM. See "BUSINESS--Business Strategy."

ELECTRIC VEHICLE MARKET AND ACCEPTANCE OF THE BATTERY SYSTEM IS
UNCERTAIN. Because vehicles powered by internal combustion engines cause
pollution, public pressure has begun to result in legislative and other mandates
in Europe, and enacted or pending legislation in the United States, to promote
or mandate the use of vehicles with no tailpipe emissions ("zero emission
vehicles") or reduced tailpipe emissions ("low emission vehicles"). The Company
believes that in order to create a significant commercial market for electric
vehicles in Europe it will be necessary for such public pressure to continue. In
addition, the Company believes that in the United States government initiatives
are important factors in creating an electric vehicle market. There can be no
assurance that such public pressure will continue or that further legislation or
other governmental initiatives will be enacted, or that current legislation will
not be repealed, amended or have its implementation delayed, as has recently
been the case in California, or that a different form of zero emission or low
emission vehicle, or other solutions to the problem of containing emissions
created by internal combustion engines, will not be invented, developed and
produced, and achieve greater market acceptance than electric vehicles. The lack
of significant market for electric vehicles could have a material adverse effect
on the ability of the Company to commercialize its technology. Even if a
significant market for electric vehicles develops, there can be no assurance
that the Company's technology will be commercially competitive within such a
market.

COMPETITION; TECHNOLOGICAL OBSOLESCENCE. The primary and rechargeable
battery industry is characterized by intense competition with a large number of
companies offering or seeking to develop technology and products similar to
those of the Company. The Company is subject to competition from manufacturers
of traditional rechargeable batteries, such as nickel-cadmium batteries, from
manufacturers of rechargeable batteries of advanced technologies, such as nickel
metal hydride, lithium-ion liquid electrolyte and lithium-metal solid-polymer
batteries, as well as from companies engaged in the development of batteries
incorporating new technologies. The Company also competes with large and small
manufacturers of alkaline, lithium, carbon-zinc, sea water, high rate and
primary batteries. There can be no assurance that the Company will be successful
in competing with these manufacturers, many of which have substantially greater
financial, technical, manufacturing, distribution, marketing, sales and other
resources. A number of companies with substantially greater resources than the
Company are pursuing the development of a wide variety of battery technologies,
including both liquid electrolyte lithium and solid electrolyte lithium

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batteries, which are expected to compete with the Company's technology. Other
companies undertaking research and development activities of solid-polymer
batteries have already developed prototypes and are constructing commercial
scale production facilities. If other companies successfully market their
batteries prior to the introduction of the Company's products, there may be a
material adverse effect on the Company's business, financial condition and
results of operations. The market for the Company's products, as well as the
products that utilize the Company's batteries and technology, is characterized
by changing technology and evolving industry standards, often resulting in
product obsolescence or short product lifecycles. Although the Company believes
that its batteries are comprised of state-of-the-art technology, there can be no
assurance that competitors will not develop technologies or products that would
render the Company's technology and products obsolete or less marketable. See
"BUSINESS-- Competition."

RISKS RELATING TO GROWTH AND EXPANSION. Rapid growth of the Company's
advanced rechargeable battery business or other segments of its business may
significantly strain the Company's management, operations and technical
resources. If the Company is successful in obtaining rapid market penetration of
its advanced rechargeable batteries, it will be desirable for the Company to
either deliver large volumes of quality products to its customers on a timely
basis at a reasonable cost to those customers or license its technology to
others who can manufacture and distribute the Company's products. The Company
currently has no high volume manufacturing capability or experience in large
scale manufacturing of its advanced rechargeable batteries and has limited
experience in automated assembly and packaging technology. There can be no
assurance, however, that the Company's business will achieve rapid growth or
that its efforts to expand its manufacturing and quality control activities (or
the efforts of those companies which are granted licenses to the Company's
technology) will be successful or that it or its licensees will be able to
satisfy commercial scale production requirements on a timely and cost-effective
basis.

RISKS RELATING TO LICENSE AGREEMENTS. The Company's growth and success will
be dependent to a substantial extent on its reputation, and because the Company
anticipates licensing its technology to others its reputation may be affected by
the performance of those companies to which the Company licenses its technology.
License agreements with foreign companies may be subject to additional risks,
such as exchange rate fluctuations, political instability or weaknesses in the
local economy. Certain provisions of the license agreements for the benefit of
the Company may be subject to restrictions in foreign laws that limit the
Company's ability to enforce such contractual provisions. In addition, it may be
more difficult to register and protect the Company's property rights in certain
foreign countries. Failure by the Company to obtain suitable licensees of its
technology or the failure of the Company's licensees to achieve the Company's
manufacturing or quality control standards or otherwise meet the Company's
expectations could have an adverse effect on the Company's business, financial
condition and results of operations. See "BUSINESS--Manufacturing and Raw
Materials" and "--Facilities and Equipment."

RELIANCE ON JOINT VENTURE PARTNERS. The Company has entered into a joint
venture in China, which is jointly owned with a Chinese partner, to develop and
manufacture the Company's batteries to be used to power electric bicycles,
scooters, off-road vehicles and miners' cap lamps to be marketed and sold in
China and Southeast Asia which will be subject to the Agency Agreement between
the Company and ERC. The Company also intends to enter into other joint venture
arrangements in the future to further commercialize its battery technology.
Currently, the Company's existing joint venture is with a foreign partner and
the Company anticipates that future joint ventures may be with foreign partners
or entities and as a result such ventures may be subject to the political
climate and economies of the foreign countries where such partners reside. There
can be no assurance that the Company's joint venture partners will provide the
Company with the support anticipated by the Company, or that any of the joint
ventures will be successful in developing batteries for use with their intended
products, or that any of the joint ventures will be successful in manufacturing
and marketing their batteries for such products once developed. Any
international operations of the Company will also be subject to certain external
business risks such as exchange rate fluctuations, political instability and a
significant weakening of a local economy in which a foreign joint

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<PAGE>
venture operates or is located. Certain provisions of the joint venture
agreements for the benefit of the Company may be subject to restrictions in
foreign laws that limit the Company's ability to enforce such contractual
provisions. Failure of these joint ventures to be successful could have a
material adverse effect on the Company's business and prospects.

DEPENDENCE ON KEY PERSONNEL. Because of the specialized, technical nature
of the Company's business, the Company is highly dependent on certain members of
its management, marketing, engineering and technical staff, the loss of whose
services could have a material adverse effect on the Company's business,
financial condition and results of operations. The ability of the Company to
pursue effectively its business strategy will depend upon, among other factors,
the successful recruitment and retention of additional highly skilled and
experienced managerial, marketing, engineering and technical personnel. There
can be no assurance that the Company will be able to retain or recruit such
personnel. See "BUSINESS--Employees" and "MANAGEMENT--Executive Officers and
Directors."

DEMANDS OF ENVIRONMENTAL AND OTHER REGULATORY COMPLIANCE. National, state
and local regulations impose various environmental controls on the manufacture,
storage, use and disposal of batteries and/or of certain chemicals used in the
manufacture of batteries. Although the Company believes that its operations are
in substantial compliance with current environmental regulations and that there
are no environmental conditions that will require material expenditures for
clean-up at its present or former facilities or at facilities to which it has
sent waste for disposal other than as described under "BUSINESS--Legal
Proceedings." There can be no assurance that conditions relating to the
Company's historical operations which require expenditures for clean-up will not
be discovered in the future or that changes in environmental laws and
regulations will not impose costly compliance requirements on the Company or
otherwise subject it to future liabilities. There can be no assurance that
additional or modified regulations relating to the manufacture, transportation,
storage, use and disposal of materials used to manufacture the Company's
batteries or restricting disposal of batteries will not be imposed or as to the
effect such regulations may have on the Company or its customers. See
"BUSINESS--Environmental, Safety and Regulatory."

DEPENDENCE ON PROPRIETARY TECHNOLOGIES. The Company believes that its
success will be dependent both on the legal protection that its patents and
other proprietary rights may or will afford and on the knowledge, ability,
experience and technological expertise of its employees. The Company claims
proprietary rights in various unpatented technologies, know how, trade secrets
and trademarks relating to its products and manufacturing processes. There can
be no assurance as to the degree of protection these various claims may or will
afford, or that the Company's competitors will not independently develop or
patent technologies that are substantially equivalent or superior to the
Company's technology. It is the policy of the Company to protect its proprietary
rights in its products and operations through contractual obligations, including
nondisclosure agreements with certain employees, customers, consultants,
licensees and strategic partners. There can be no assurance as to the degree of
protection these contractual measures may or will afford. The Company, however,
has had patents issued and patent applications pending in the U.S. and
elsewhere. There can be no assurance (i) that patents will be issued from any
pending applications, or that the claims allowed under any patents will be
sufficiently broad to protect the Company's technology, (ii) that any patents
issued to the Company will not be challenged, invalidated or circumvented, or
(iii) as to the degree or adequacy of protection any patents or patent
applications may or will afford. If the Company is found to be infringing third
party patents, there can be no assurance that it will be able to obtain licenses
with respect to such patents on acceptable terms, if at all. Failure of the
Company to obtain necessary licenses could result in delays in product shipment
or the introduction of new products, and costly attempts to design around such
patents could foreclose the development, manufacture or sale of the Company's
products. See "BUSINESS--Legal Proceedings" and "--Patents, Trade Secrets and
Trademarks."

RAW MATERIALS. The Company's principal raw materials for the production of
its battery products are nickel and zinc. Prices for both nickel and zinc are
subject to market forces beyond the control of the Company. The Company's future
profitability may be materially adversely affected by increased nickel

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<PAGE>
and/or zinc prices to the extent it is unable to pass on higher raw material
costs to its customers. However, to offset such costs, the Company may engage in
forward purchases and hedging transactions to effectively manage raw material
costs and inventory relative to anticipated production requirements for the next
six to twelve months.

AGREEMENTS WITH ERC; LACK OF ARM'S-LENGTH NEGOTIATIONS. In contemplation of
the Distribution, the Company has entered into certain agreements with ERC,
including the Distribution Agreement, the Tax Sharing Agreement, the Services
Agreement and the Agency Agreement for the purpose of defining its ongoing
relationship with ERC and to provide certain services during the transition from
it being a business group within ERC to a stand-alone company. These agreements
were entered into between the Company and ERC and were not the subject of
arm's-length negotiations, and therefore the terms in such agreements may
contain terms that are not comparable to those that would have been obtained
from negotiations between unaffiliated parties.

FUTURE CASH REQUIREMENTS. The Company believes that license fees from the
licensing of its technology and know-how, borrowings under future debt
facilities, if any, and proceeds from the Rights Offering will be necessary to
satisfy the Company's cash requirements for implementing its business plan
during the remainder of the fiscal year ending October 31, 1999. The actual cash
resources required will depend upon numerous factors, including those described
herein, and the cash requirements could be materially greater than that
currently anticipated. The Company expects to meet such cash requirements with
license fees, borrowings under future debt facilities, and proceeds from the
Rights Offering. There is no assurance that the Company will be successful in
obtaining all necessary capital from the Rights Offering, from license fees, or
from debt facilities. If the Company is unable to obtain sufficient capital from
the Rights Offering, from license fees or from debt facilities on a timely
basis, the Company may be required to significantly curtail its planned
operations and its business, financial condition and results of operations could
be materially adversely affected.

PRINCIPAL STOCKHOLDERS. Warren Bagatelle and Thomas Kempner, two directors
of the Company, and Loeb Investors Co., LXXV, a partnership in which each of
them is a general partner, collectively may be deemed to beneficially own
approximately 12.1% for Mr. Bagatelle and 8.8% for Mr. Kempner, respectively, of
the currently outstanding shares of ERC Common Stock and, therefore, will own
such amount, following the Distribution, of Company Common Stock. If these
stockholders (the "Loeb Holders") acquire Underlying Shares pursuant to the
exercise of their Oversubscription Privilege, it will increase their percentage
ownership of Common Stock after the Rights Offering. See "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Depending upon the number of shares
subscribed for by others, the percentage of the outstanding Common Stock owned
by the Loeb Holders upon completion of the Rights Offering could increase
substantially in the event that the Loeb Holders exercise their Rights for any
remaining unexercised Rights.

NO PRIOR MARKET FOR COMMON STOCK. Prior to the Distribution and the Rights
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market will develop or, if developed, that
such market will be sustained. The initial price of the Common Stock will be
determined as a result of market trading. In addition, the Company believes that
factors such as quarterly fluctuations in the financial results of the Company,
as well as developments that affect the Company's joint venture partners or
licensees, the Company's industry, the overall economy and the financial markets
in general could cause the price of the Common Stock to fluctuate substantially.

DILUTION FROM RIGHTS OFFERING. Stockholders who do not exercise their Basic
Subscription Privilege will realize a dilution of their percentage voting
interest and ownership interest in future net earnings, if any, of the Company.
The amount of dilution will depend on the number of shares of Common Stock
purchased by other stockholders in the Rights Offering. If all stockholders
fully exercise their Basic Subscription Privilege, the effective percentage
ownership of each stockholder will remain unchanged (assuming that no
outstanding stock options will be exercised).

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<PAGE>
NO MINIMUM SIZE OF RIGHTS OFFERING. The Rights Offering is being made on an
any and all basis, which means that the Company may accept any subscription
received even if all 4,128,273 Shares offered are not purchased. There is no
minimum amount of proceeds required for the Company to consummate the Rights
Offering. For example, the Company may realize no proceeds from the Rights
Offering or only a minimal amount of proceeds that would not result in a
material improvement in the Company's ability to meet its operating objectives.

POSSIBLE EXTENSION OF EXPIRATION DATE. The Company has reserved the right
to extend the Expiration Date to as late as January 31, 1999. Funds deposited in
payment of the Subscription Price may not be withdrawn and no interest will be
paid thereon to stockholders.

POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW. Certain provisions of
Delaware law, the Company's Certificate of Incorporation and its Bylaws could
delay, impede or make more difficult a merger, tender offer or proxy context
involving the Company, even if such events could be beneficial to the interests
of the stockholders. Such provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock. See
"DESCRIPTION OF SECURITIES--Anti-takeover Effects of Certain Provisions."

DIVIDEND POLICY. The Company does not expect to pay any cash dividends in
the near future. The Company's dividend policy will be established by the Board
of Directors of the Company (the "Company Board") from time to time based on the
results of operations and financial condition of the Company and such other
business considerations as the Company Board considers relevant. Subject to the
foregoing, the Company may declare and pay dividends after the Distribution,
although there can be no assurance that any dividends will be paid in the
future.

RISKS OF LOW-PRICED STOCKS. The Company will apply with The Nasdaq Stock
Market to have the Common Stock approved for listing for trading. If the Common
Stock is not approved for listing on the Nasdaq National Market System of The
Nasdaq Stock Market, the Common Stock will most likely be approved for trading
on the Nasdaq Small Cap Market. If, however, the Company does not meet the
requirements of the Nasdaq Small Cap Market, trading of the Common Stock would
be conducted on an electronic bulletin board established for securities that do
not meet the Nasdaq listing requirements or in what is commonly referred to as
the "pink sheets." As a result, an investor may find it more difficult to
dispose of, or obtain accurate quotations as to the price of, the Company Common
Stock or Rights.

In addition, if the Common Stock were delisted, it would be subject to the
so-called penny stock rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as an investor with a net
worth in excess of $1.0 million or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, delisting, if it occurs, may affect the ability of
broker-dealers to sell the Company's securities and the ability of purchasers in
this Offering to sell their securities in the secondary market.

The Securities and Exchange Commission has adopted regulations that define a
"penny stock" to be any equity security that has a market price (as defined in
the regulations) of less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information of the
limited market in penny stocks. As a result, if the Common Stock is determined
to be "penny stock," an investor may find it more difficult to dispose of the
Company's Common Stock.

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<PAGE>
THE RIGHTS OFFERING

THE RIGHTS

The Company is granting transferable Rights pursuant to this Prospectus,
which is a part of the registration statement on Form SB-2 filed with the
Securities and Exchange Commission on September 30, 1998, at no cost, to holders
of outstanding shares of Company Common Stock of record on the Record Date.
Stockholders of the Company will receive one Right for each share of Company
Common Stock held by them of record on the Record Date. Each Right will be
exercisable to purchase one share of Company Common Stock at $2.00 per share. No
fractional shares will be issued.

EXPIRATION DATE

The Rights will expire at 5:00 p.m., Eastern time, on November , 1998
unless extended by the Company (as extended, the "Expiration Date"). The Company
does not currently intend to extend the Expiration Date beyond January 31, 1999.
After the Expiration Date, unexercised Rights will be null and void. The Company
will not be obligated to honor any purported exercise of Rights received by the
Subscription Agent after the Expiration Date, regardless of when the documents
relating to such exercise were sent, except pursuant to the Guaranteed Delivery
Procedures described below. Notice of any extension of the Expiration Date will
be made through a press release issued by the Company.

SUBSCRIPTION PRIVILEGES

BASIC SUBSCRIPTION PRIVILEGE. Each Right will entitle the holder thereof to
receive, upon payment of the Subscription Price, one share of Company Common
Stock (the "Basic Subscription Privilege"). Certificates representing shares of
Company Common Stock purchased pursuant to the Basic Subscription Privilege will
be delivered to subscribers as soon as practicable after the sixth business day
following the Expiration Date.

OVERSUBSCRIPTION PRIVILEGE. Subject to the allocation described below, each
Right also carries the right to subscribe at the Subscription Price for
Underlying Shares that are not otherwise purchased pursuant to the Basic
Subscription Privilege. Underlying Shares will be available for purchase
pursuant to the Oversubscription Privilege only to the extent that any
Underlying Shares are not subscribed for through the Basic Subscription
Privilege. If the Underlying Shares not subscribed for through the Basic
Subscription Privilege ("Excess Shares") are not sufficient to satisfy all
subscriptions pursuant to the Oversubscription Privilege, the Excess Shares will
be allocated pro rata (subject to the elimination of fractional shares) among
those holders of Rights exercising the Oversubscription Privilege, in
proportion, not to the number of shares requested pursuant to the
Oversubscription Privilege, but to the number of shares of Company Common Stock
each beneficial holder exercising the Oversubscription Privilege has purchased
pursuant to the Basic Subscription Privilege; provided, however, that if such
pro rata allocation results in any Rights holder being allocated a greater
number of Excess Shares than such holder subscribed for pursuant to the exercise
of such holder's Oversubscription Privilege, then such additional shares will be
allocated among all other holders exercising the Oversubscription Privilege. All
beneficial holders who exercise the Basic Subscription Privilege will be
entitled to exercise the Oversubscription Privilege. Certificates representing
shares of Company Common Stock purchased pursuant to the Oversubscription
Privilege will be delivered to subscribers as soon as practicable after the
sixth business day following the Expiration Date and after all prorations have
been effected.

Banks, brokers and other nominee holders of Rights who exercise the Basic
Subscription Privilege and the Oversubscription Privilege on behalf of
beneficial owners of Rights will be required to certify to the Subscription
Agent and the Company, in connection with the exercise of the Oversubscription
Privilege, as to the aggregate number of Rights that have been exercised and the
number of Excess Shares that are being subscribed for pursuant to the
Oversubscription Privilege by each beneficial owner of Rights on whose behalf
such nominee holder is acting.

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<PAGE>
EXERCISE OF RIGHTS

Rights may be exercised by delivering to Continental Stock Transfer & Trust
Company (the "Subscription Agent"), at or prior to 5:00 p.m., Eastern time, on
the Expiration Date, the properly completed and executed Subscription
Certificate evidencing such Rights with any required signatures guaranteed,
together with payment in full of the Subscription Price for each Underlying
Share subscribed for pursuant to the Basic Subscription Privilege. No payment
will be required for any Underlying Shares subscribed for pursuant to the
Oversubscription Privilege until the Subscription Agent notifies the Rights
holder of the number of Underlying Shares allocated to such holder. If not all
the Rights are exercised pursuant to the Basic Subscription Privilege, the
Company currently intends to extend the Expiration Date for a period of time,
not to exceed five business days, to permit holders who have exercised their
Oversubscription Privilege to forward the Subscription Price for the Underlying
Shares to be acquired by them pursuant to the Oversubscription Privilege. Any
holder not forwarding payment for the Excess Shares allocated to them within the
time required by the Subscription Agent will forfeit the right to acquire such
Excess Shares. Holders are therefore encouraged to forward payment for Excess
Shares subscribed for with the Subscription Price paid with respect to the
exercise of their Basic Subscription Privilege, if possible. Payments of the
Subscription Price must be by (a) check or bank draft drawn upon a United States
bank or postal, telegraphic or express money order payable to Continental Stock
Transfer & Trust Company, as Subscription Agent, or (b) wire transfer of funds
to the account maintained by the Subscription Agent for such purpose at Chase
Manhattan Bank, 52 Broadway, New York, New York 10004, Account No. ________, ABA
No. 021000021. Any wire transfer of funds should clearly indicate the identity
of the subscriber who is paying the Subscription Price by the wire transfer. The
Subscription Price will be deemed to have been received by the Subscription
Agent only upon (i) clearance of any uncertified check, (ii) receipt by the
Subscription Agent of any certified check or bank draft drawn upon a United
States bank or of any postal, telegraphic or express money order or (iii)
receipt of good funds in the Subscription Agent's account designated above. IF
PAYING BY UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY
MAY TAKE UP TO FIVE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS OF RIGHTS WHO
WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE
URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE
THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER
PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER
OF FUNDS.

The address to which the Subscription Certificates and payment of the
Subscription Price should be delivered is:

Continental Stock Transfer & Trust Company

Two Broadway

New York, New York 10004

Telephone: (212) 509-4000 ext. 535

If a Rights holder wishes to exercise Rights, but time will not permit such
holder to cause the Subscription Certificate or Subscription Certificates
evidencing such Rights to reach the Subscription Agent on or prior to the
Expiration Date, such Rights may nevertheless be exercised if all of the
following conditions (the "Guaranteed Delivery Procedures") are met:

(i) such holder has caused payment in full of the Subscription Price for
each Underlying Share being subscribed for pursuant to the Basic
Subscription Privilege to be received (in the manner set forth above) by the
Subscription Agent on or prior to the Expiration Date;

(ii) the Subscription Agent receives, on or prior to the Expiration
Date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially
in the form provided and distributed with the Subscription Certificates,
from a member firm of a registered national securities exchange or a member
of the National Association of Securities Dealers, Inc. (the "NASD"), or
from a commercial bank or trust company having an office or correspondent in
the United States (each, an "Eligible Institution"), stating the name of the
exercising Rights holder, the number of Rights represented by

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<PAGE>
the Subscription Certificate or Subscription Certificates held by such
exercising Rights holder, the number of Underlying Shares being subscribed
for pursuant to the Basic Subscription Privilege and the number of
Underlying Shares, if any, being subscribed for pursuant to the
Oversubscription Privilege, and guaranteeing the delivery to the
Subscription Agent of any Subscription Certificate evidencing such Rights
within five Nasdaq trading days following the date of the Notice of
Guaranteed Delivery; and

(iii) the properly completed Subscription Certificate evidencing the
Rights being exercised, with any required signatures guaranteed, is received
by the Subscription Agent within five Nasdaq trading days following the date
of the Notice of Guaranteed Delivery relating thereto. The Notice of
Guaranteed Delivery may be delivered to the Subscription Agent in the same
manner as Subscription Certificates at the address set forth above, or may
be transmitted to the Subscription Agent by telegram or facsimile
transmission (telecopy no. (212) 509-5150). Additional copies of the form of
Notice of Guaranteed Delivery are available upon request from the
Subscription Agent, at the address set forth above.

Funds received in payment of the Subscription Price for Excess Shares
subscribed for pursuant to the Oversubscription Privilege prior to notification
by the Subscription Agent of the allocation of the Excess Shares will be held in
a segregated account pending issuance of such Excess Shares. If a Rights holder
exercising the Oversubscription Privilege is allocated less than all of the
shares of Company Common Stock which such holder wished to subscribe for
pursuant to the Oversubscription Privilege, the excess funds paid by such holder
in respect of the Subscription Price for shares not issued will be returned by
mail without interest or deduction as soon as practicable after the Expiration
Date.

A holder of Rights who purchases less than all of the shares of Company
Common Stock represented by his Subscription Certificate will receive from the
Subscription Agent a new Subscription Certificate representing the balance of
the unsubscribed Rights, to the extent the Subscription Agent is able to reissue
a Subscription Certificate prior to the Expiration Date.

Unless a Subscription Certificate (i) provides that the shares of Company
Common Stock to be issued pursuant to the exercise of Rights represented thereby
are to be delivered to the record holder of such Rights or (ii) is submitted for
the account of an Eligible Institution, signatures on such Subscription
Certificate must be guaranteed by an Eligible Institution.

Holders who hold shares of Company Common Stock for the account of others,
such as brokers, trustees or depositories for securities, should provide a copy
of this Prospectus to the respective beneficial owners of such shares as soon as
possible, ascertain such beneficial owners' intentions and obtain instructions
with respect to the Rights. If the beneficial owner so instructs, the record
holder of such Rights should complete Subscription Certificates and submit them
to the Subscription Agent with the proper payment. In addition, beneficial
owners of Company Common Stock or Rights held through such a holder should
contact the holder and request the holder to effect transactions in accordance
with the beneficial owner's instructions. Beneficial holders should be aware
that brokers or other record holders may establish deadlines for receiving
instructions from beneficial holders significantly in advance of the Expiration
Date and may also establish a requirement that payment for subscriptions for
Excess Shares be made at the same time as payment of the Subscription Price for
the Underlying Shares to be acquired pursuant to the Basic Subscription
Privilege.

The instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE
COMPANY OR TO ERC.

THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT AT OR PRIOR TO 5:00 P.M.,
EASTERN TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED, PERSONAL CHECKS MAY
TAKE UP TO FIVE BUSINESS DAYS TO

17
<PAGE>
CLEAR, HOLDERS OF RIGHTS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.

All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
will be final and binding. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted until
all irregularities have been waived or cured within such time as the Company
determines in its sole discretion. The Company reserves the right to reject any
purchases not properly submitted or the acceptance of which would, in the
opinion of its counsel, be unlawful. Neither the Company nor the Subscription
Agent will be under any duty to give notification of any defect or irregularity
in connection with the submission of Subscription Certificates or incur any
liability for failure to give such notification.

Any questions or requests for assistance concerning the method of exercising
Rights or requests for additional copies of this Prospectus, the Instructions or
the Notice of Guaranteed Delivery should be directed to the Subscription Agent
at (212) 509-4000 ext. 535.

NO REVOCATION

ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE
AND/OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED.

METHOD OF TRANSFERRING RIGHTS

Rights may be purchased or sold through usual investment channels, including
banks and brokers. The Company will apply to have the Common Stock listed on The
Nasdaq Stock Market.

The Rights evidenced by a single Subscription Certificate may be transferred
in whole by endorsing the Subscription Certificate for transfer in accordance
with the accompanying instructions. A portion of the Rights evidenced by a
single Subscription Certificate (but not fractional Rights) may be transferred
by delivering to the Subscription Agent a Subscription Certificate properly
endorsed for transfer, with instructions to register such portion of the Rights
evidenced thereby in the name of the transferee (and to issue a new Subscription
Certificate to the transferee evidencing such transferred Rights). In such
event, a new Subscription Certificate evidencing the balance of the Rights will
be issued to the Rights holder or, if the Rights holder so instructs, to an
additional transferee. However, notwithstanding the foregoing, the Subscription
Agent will reissue Subscription Certificates for the transferred Rights to the
transferee, and will reissue Subscription Certificates for the balance, if any,
to the holder of the Rights, only to the extent it is able to do so before the
Expiration Date. To transfer Rights to any person other than a bank or broker,
signatures on the Subscription Certificate must be guaranteed by an Eligible
Institution.

Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow a sufficient amount of time prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained Rights, if any, and (iii) the
Rights evidenced by such new Subscription Certificates to be exercised or sold
by the recipients thereof. None of the Company, ERC, nor the Subscription Agent
will have any liability to a transferee or transferor of Rights if Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.

Except for the fees charged by the Subscription Agent (which will be paid by
the Company), all commissions, fees and other expenses (including brokerage
commissions and transfer taxes) incurred in connection with the purchase, sale
or exercise of Rights will be for the account of the transferor of the Rights,
and none of such commissions, fees or expenses will be paid by the Company or
the Subscription Agent.

18
<PAGE>
The Company anticipates that the Rights will be eligible for transfer
through, and that the exercise of the Basic Subscription Privilege (but not the
Oversubscription Privilege) may be effected through, the facilities of The
Depository Trust Company ("DTC"). Rights exercised through DTC are referred to
as "DTC Exercised Rights." The holder of a DTC Exercised Right may exercise the
Oversubscription Privilege in respect of such DTC Exercised Right by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
Eastern time, on November , 1998, a DTC Participant Oversubscription
Exercise Form, together with payment of the appropriate Subscription Price for
the number of Underlying Shares for which the Oversubscription Privilege is to
be exercised. Copies of the DTC Participant Oversubscription Exercise Form may
be obtained from the Subscription Agent.

FEDERAL INCOME TAX CONSEQUENCES

The following summary describes the material United States federal income
tax considerations affecting holders of Company Common Stock receiving Rights in
the Rights Offering. This summary is based upon laws, regulations, rulings, and
decisions currently in effect. This summary does not discuss all aspects of
federal taxation that may be relevant to a particular investor or to certain
types of investors subject to special treatment under the federal tax laws (for
example, banks, dealers in securities, life insurance companies, tax-exempt
organizations, and foreign persons), nor does it discuss any aspect of state,
local, or foreign tax laws.

HOLDERS OF COMPANY COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THEIR INDIVIDUAL TAX SITUATIONS AND THE TAX CONSEQUENCES OF THE
RIGHTS OFFERING UNDER THE INTERNAL REVENUE CODE OF 1986 AND UNDER ANY APPLICABLE
STATE, LOCAL, OR FOREIGN TAX LAWS.

DISTRIBUTION OF THE RIGHTS TO HOLDERS OF COMPANY COMMON STOCK. A holder of
Company Common Stock will not recognize taxable income for federal income tax
purposes as a result of the issuance to such holder of Rights in respect of the
Company Common Stock. Except as provided in the following sentence, the basis of
such Rights will be zero. If either (i) the fair market value of the Rights on
the date of distribution is 15% or more of the fair market value of the Company
Common Stock in respect of which they are received on such date, or (ii) the
stockholder elects, in the stockholder's federal income tax return for the
taxable year in which the Rights are received, to allocate part of the basis of
such Company Common Stock to the Rights, then the stockholder's basis in such
Company Common Stock will be allocated between such Company Common Stock and
such Rights in proportion to their respective fair market values on the date of
distribution. The holding period of a stockholder with respect to Rights
received as a distribution on such stockholder's Company Common Stock will
include the stockholder's holding period for the Company Common Stock in respect
of which the Rights were issued.

EXERCISE OF RIGHTS. A holder of Rights will not recognize gain or loss upon
the exercise of the Rights. A holder of Rights who receives shares of Company
Common Stock upon such exercise will acquire a tax basis in those shares equal
to the sum of the price paid on exercise and the holder's tax basis in the
Rights. The holding period of Company Common Stock received on exercise of the
Rights will begin on the date the Rights are exercised.

TRANSFER OR LAPSE OF RIGHTS. A holder who sells a Right will recognize
taxable gain or loss equal to the difference between the holder's basis in the
Right and the amount received in exchange for the Right. Gain or loss from the
sale of a Right will be capital gain or loss if the Common Stock into which the
Right is convertible would have been a capital asset in the hands of the holder,
and will be long-term capital gain or loss if the holding period of the Right in
the hands of the holder is more than one year (see "-- Distribution of the
Rights to Holders of Company Common Stock" for a discussion of the determination
of the holding period of the Rights). If a Right expires unexercised, the holder
will recognize a loss on the day the Right expires equal to the holder's basis
in the Right. Such loss will be a capital loss if the sale of the Right would
have generated capital gain or loss for the holder.

NO BOARD RECOMMENDATION. AN INVESTMENT IN THE COMMON STOCK MUST BE MADE
PURSUANT TO EACH INVESTOR'S EVALUATION OF ITS, HIS OR HER BEST INTERESTS.
ACCORDINGLY, ALTHOUGH THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY APPROVED
THE RIGHTS OFFERING, IT MAKES NO RECOMMENDATION TO HOLDERS REGARDING WHETHER
THEY SHOULD EXERCISE THEIR RIGHTS.

19
<PAGE>
THE DISTRIBUTION

INTRODUCTION

The Board of Directors of Energy Research Corporation, a New York
corporation ("ERC"), has declared a special distribution (the "Distribution") of
one share of Company Common Stock, for each share of ERC Common Stock, held of
record as of the close of business on October , 1998 (the "Record Date").
Prior to the Distribution, ERC owned all of the outstanding shares of Company
Common Stock. ERC will effect the Distribution on or about November , 1998
(the "Distribution Date") by delivering all of the issued and outstanding shares
of Company Common Stock to Continental Stock Transfer & Trust Company, as the
Distribution Agent, for transfer and distribution to the holders of record of
ERC Common Stock as of the Record Date. It is expected that the shares of
Company Common Stock will be transferred to ERC stockholders beginning on or
about November , 1998. Holders of ERC Common Stock on the Record Date will not
be required to make any payment or to take any other action to receive their
portion of the Distribution.

The principal effect of the Distribution will be to separate ERC's Battery
Business Group and operations from its fuel cell business and related
activities. After the Distribution, each business will be conducted by a
separate, publicly held corporation. The Company will own and operate the
battery business, and ERC will retain and continue to own and operate the fuel
cell business.

The Distribution does not require stockholder approval and the ERC Board may
abandon, defer or modify the Distribution prior to the Distribution Date. The
Company's stockholders will not be entitled to appraisal rights in connection
with the Distribution.

After the Distribution, ERC Common Stock will continue to be traded on the
American Stock Exchange. As a result of the Distribution, the trading prices of
ERC Common Stock are likely to be lower than the trading prices of ERC Common
Stock immediately prior to the Distribution. The aggregate trading prices of ERC
Common Stock and Common Stock of the Company after the Distribution may be less
than, equal to or greater than the trading prices of ERC Common Stock prior to
the Distribution. In addition, until the market has fully analyzed the
operations of ERC without the battery business, the prices at which ERC Common
Stock trades may fluctuate significantly.

REASONS FOR THE DISTRIBUTION

The Board of Directors of ERC has determined, for the reasons set forth
below, to separate ERC into two publicly held companies: the Company, a newly
formed corporation which will own and operate the battery business and
operations, and ERC, which will continue to own and operate its fuel cell
business.

The battery business of the Company and the fuel cell business of ERC have
distinctly different investment, operating and financial characteristics. For
instance, the battery markets are mature markets in which the Company expects to
introduce a new product, while the fuel cell market is in its preliminary stage;
currently, there are widespread commercial markets for batteries, while no such
markets exist for fuel cells; battery products require mass production, while
fuel cell products are expected to be much more customized depending on their
use; batteries have different retail market segments ranging from electronic
equipment such as cell phones and computers to electric cars, while fuel cells
are mainly geared towards stationary electric power. The two businesses attract
investors having different investment criteria, and operation of the two
businesses by the same corporation or affiliated group of corporations may
reduce the ability of each business to attract equity capital.

The Board therefore considers it to be in the best interests of both the
battery business and fuel cell business that they be separated, which will allow
management of each company to more appropriately undertake capital requirements
and investment decisions, as well as to allow investors to invest in either
business without consideration of the other.

20
<PAGE>
In addition, the Distribution will allow the Company to offer its employees
an effective equity-based employee compensation package as well as to allow ERC
to provide its employees with incentive plans that more appropriately relate to
the performance of its fuel cell business. Furthermore, the Board of Directors
of ERC believes that the Company's post-Distribution capital structure and
business focus should help it better compete with other battery companies while
enabling ERC to devote its capital and personnel solely to the development of
its fuel cell technology.

Pursuant to the Distribution, a stockholder will have an ownership interest
in both ERC and the Company after the Distribution. However, as a result of the
Distribution, current stockholders and prospective investors will have the
ability to make separate investment decisions regarding each business.
Notwithstanding the foregoing, holders of Company Common Stock who do not
exercise their Basic Subscription Privileges pursuant to the Rights Offering
will experience dilution of their percentage voting interest and ownership
interest in future net earnings, if any, of the Company. See "RISK FACTORS--
Dilution from Rights Offering."

The Distribution will be reflected in ERC's financial statements as a charge
against stockholders' equity. The pro forma consolidated effect on ERC of the
Distribution, if it had occurred on July 31, 1998, would have been to reduce
ERC's assets by approximately $3.6 million and stockholders' equity by
approximately $.3 million.

MANNER OF EFFECTING THE DISTRIBUTION

In connection with the Distribution, all of the outstanding shares of
Company Common Stock will be delivered to the Distribution Agent for transfer
and distribution to the holders of record of ERC Common Stock as of the Record
Date. It is expected that shares of Company Common Stock will be transferred by
the Distribution Agent to ERC stockholders beginning on or about November ,
1998.

The Board of Directors of ERC has reserved the right to abandon, defer or
modify the Distribution and related transactions described in this Information
Statement at any time prior to 11:59 p.m., New York time, on the day immediately
preceding the Distribution Date.

No holder of ERC Common Stock will be required to pay any cash or other
consideration for the shares of Company Common Stock received in the
Distribution or surrender or exchange shares of ERC Common Stock. The
Distribution will not affect the number of, or the rights attaching to,
outstanding shares of ERC Common Stock. All shares of Company Common Stock will
be fully paid and non-assessable and the holders of those shares will not be
entitled to preemptive rights. See "DESCRIPTION OF SECURITIES--Company Common
Stock."

LISTING AND TRADING OF COMPANY COMMON STOCK

There is not currently a public market for Company Common Stock. Prices at
which Company Common Stock may trade prior to the Distribution on a
"when-issued" basis or after the Distribution cannot be predicted. Until the
Company Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which Company Common Stock trades will be determined by the
marketplace and may be influenced by many factors, among others, the depth and
liquidity of the market for Company Common Stock, investor perception of the
Company and the industries in which the Company or its customers participate,
and other general economic and market conditions. See "RISK FACTORS--No Prior
Market for Common Stock."

The Company expects to seek approval for trading of the Common Stock and the
Rights on The Nasdaq Stock Market under the symbol " ." The Company initially
will have approximately 1,800 stockholders based upon the number of beneficial
stockholders of ERC as of October , 1998.

21
<PAGE>
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION

The Company has been advised by its counsel, Brown, Rudnick, Freed & Gesmer,
that the Distribution will qualify as a tax free spin-off under Sections 355 and
368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Distribution is conditioned upon receipt of an opinion of counsel satisfactory
to the ERC Board to the same effect. So long as the Distribution qualifies under
Sections 355 and 368(a)(1)(D) of the Code, in the opinion of Brown, Rudnick,
Freed & Gesmer, the principal Federal income tax consequences of the
Distribution will be as follows:

(1) No gain or loss will be recognized by (and no amount will be
included in the income of) a holder of ERC Common Stock upon the receipt of
Common Stock in the Distribution.

(2) The aggregate basis of the ERC Common Stock and the Company Common
Stock in the hands of the stockholders of ERC immediately after the
Distribution will be the same as the aggregate basis of the ERC Common Stock
held immediately before the Distribution, allocated in proportion to the
fair market value of each.

(3) The holding period of the Company Common Stock received by the
stockholders of ERC will include the holding period of ERC Common Stock with
respect to which the Distribution will be made, provided that such
stockholder held the ERC Common Stock as a capital asset on the Distribution
Date.

(4) No gain or loss will be recognized by ERC upon the Distribution.

THE FOREGOING IS ONLY A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW, AND DOES NOT TAKE INTO
ACCOUNT ANY SPECIAL CIRCUMSTANCES THAT MAY APPLY TO PARTICULAR SHAREHOLDERS.
EACH SHAREHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR
CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION
OF STATE, LOCAL AND FOREIGN TAX LAWS, AND AS TO POSSIBLE CHANGES IN TAX LAWS
THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE. THIS SUMMARY MAY NOT BE
APPLICABLE TO SHAREHOLDERS WHO RECEIVED THEIR ERC COMMON STOCK PURSUANT TO THE
EXERCISE OF EMPLOYEE STOCK OPTIONS, UNDER AN EMPLOYEE STOCK PURCHASE PLAN OR
OTHERWISE AS COMPENSATION OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES.

The opinions of counsel referred to above would not be binding upon the
Internal Revenue Service (the "IRS") and would be subject to certain factual
representations and assumptions. ERC is not aware of any present facts or
circumstances which should cause such representations and assumptions to be
untrue. However, certain future events not within the control of ERC or the
Company, including certain extraordinary purchases of ERC Common Stock or
Company Common Stock, could cause the Distribution not to qualify as tax-free.
Depending on the event, the Company may be liable for some or all of the taxes
resulting from the Distribution not qualifying under Sections 355 and
368(a)(1)(D) of the Code as tax-free. See "THE DISTRIBUTION--Relationship
Between ERC and the Company after the Distribution--Tax Sharing Agreement." If
the Distribution were taxable, then (i) each holder of ERC Common Stock who
receives shares of Company Common Stock in the Distribution would be treated as
if such shareholder received a taxable distribution, taxed as a dividend to the
extent of such shareholder's pro rata share of ERC's current and accumulated
earnings and profits and then treated as a return of capital to the extent of
the holder's basis in the ERC Common Stock and finally as gain from the sale or
exchange of ERC Common Stock and (ii) corporate level taxes would be payable by
the affiliated group of which ERC is the common parent, based upon the excess of
the fair market value of the Company Common Stock on the date of the
Distribution over ERC's tax basis therein. ERC does not intend to effect the
Distribution if, prior to the Distribution Date, ERC becomes aware of
circumstances that would result in the Distribution being a taxable transaction.

Information with respect to the allocation of tax basis between Company
Common Stock and ERC Common Stock will be provided to shareholders at the time
of distribution of the account statements reflecting ownership of shares of
Company Common Stock.

22
<PAGE>
RELATIONSHIP BETWEEN ERC AND THE COMPANY AFTER THE DISTRIBUTION

For purposes of governing certain relationships between ERC and the Company
after the Distribution and providing for an orderly transition, ERC and the
Company have entered into or will enter into various agreements, including those
described below. Copies of certain of the agreements are included as exhibits to
the Company's Registration Statement on Form SB-2 under the Securities Act of
1933, as amended (the "Act"), relating to the Company Common Stock, and the
following discussions with respect to such agreements are qualified in their
entirety by reference to the agreements as filed.

DISTRIBUTION AGREEMENT

ERC and the Company have entered into a Distribution Agreement (the
"Distribution Agreement"), which provides for, among other things, the principal
corporate transactions required to effect the Distribution, the transfer to the
Company of the assets of the battery business, the division between ERC and the
Company of certain liabilities and obligations, the distribution by ERC of all
outstanding shares of the Company Common Stock to ERC stockholders and certain
other agreements governing the relationship between ERC and the Company after
the Distribution.

Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of obligations and liabilities and
cross-indemnities designed to allocate financial responsibility for the
obligations and liabilities arising out of or in connection with the battery
business to the Company and financial responsibility for the obligations and
liabilities arising out of or in connection with the fuel cell business to ERC.

The Distribution Agreement also provides that each of the Company and ERC
will be granted access to certain records and information in the possession of
the other, and requires the retention by each of the Company and ERC for a
period of ten years following the Distribution of all such information in its
possession, and thereafter requires that each party give the other prior notice
of its intention to dispose of such information. In addition, the Distribution
Agreement provides for the allocation of shared privileges with respect to
certain information (including, for example, the attorney-client privilege) and
requires each of the Company and ERC to obtain the consent of the other prior to
waiving any shared privilege.

The Distribution Agreement provides that, except as otherwise set forth
therein or in any related agreement, all costs and expenses in connection with
the Distribution will be charged to the party for whose benefit the expenses are
incurred.

TAX SHARING AGREEMENT

ERC and Company have entered into a tax sharing agreement (the "Tax Sharing
Agreement") that defines the parties' rights and obligations with respect to
filing of returns, payments, deficiencies and refunds of federal, state and
other income, franchise or certain other taxes relating to ERC's business for
periods prior to and including the Distribution and with respect to certain tax
attributes of ERC after the Distribution. In general, with respect to periods
ending on or before the last day of the taxable year in which the Distribution
occurs, ERC is responsible for (i) filing both consolidated federal tax returns
for the ERC affiliated group and combined or consolidated state tax returns for
any group that includes a member of the ERC affiliated group, including, in each
case, the Company for the relevant periods of time that the Company was a member
of the applicable group, and (ii) paying the taxes relating to such returns
(including any subsequent adjustments resulting from the redetermination of such
tax liabilities by the applicable taxing authorities). The Company is
responsible for filing returns and paying taxes relating to it for periods that
begin before and end after the Distribution and for periods that begin after the
Distribution. ERC and the Company have agreed to cooperate with each other and
to share information in preparing such tax returns and in dealing with other tax
matters.

23
<PAGE>
SERVICES AGREEMENT

Pursuant to the terms of the Distribution Agreement, and as a condition
precedent to the consummation of the transactions contemplated thereby, ERC and
the Company have entered into a Services Agreement (the "Services Agreement"),
under the terms of which ERC will provide to the Company certain management and
administrative services, as well as the use of certain office, research and
development, manufacturing and support facilities and services of ERC. The
Services Agreement shall continue until terminated by either party upon 120
days' notice. In addition, the Company may terminate the Services Agreement as
to one or more of the services, upon 60 days' notice to ERC.

The types of services to be provided pursuant to the Services Agreement by
ERC, through its employees, include financial reporting, accounting, auditing,
tax, office services, payroll, human resources, analytical lab, microscopic
analysis, machine shop and drafting, as well as the part time management
services of Jerry Leitman and Louis Barth. ERC will also provide office,
research and development and manufacturing space for the Company. The method of
calculating the applicable charges to be paid by the Company for each type of
service are set forth in the Services Agreement; such charges are payable
quarterly.

The Company estimates that the net fees to be paid to ERC for services
performed will initially be approximately $212,000 per quarter, excluding
certain services billed on the basis of usage, such as purchasing, analytical
lab, microscopic analysis, machine shop and drafting, which amount takes into
account ERC's additional costs related to providing such services, and will
decline as the services performed decrease. The Company presently expects that
most of such services will be provided by ERC for approximately one year.

AGENCY AGREEMENT

The Company and ERC have entered into a Transfer and Agency Agreement
("Agency Agreement") pursuant to which ERC has transferred to the Company all of
its right, title and interest in and to the joint venture contracts and license
agreements between ERC and certain Chinese entities as described in
"BUSINESS--Partnerships, Joint Ventures and Licenses" subject to receipt of
certain necessary approvals. Pending receipt of these approvals, ERC has
appointed the Company as its agent for all purposes under these agreements.
Pursuant to this agency relationship, the Company will receive all of the
benefits and assume all of the obligations under these agreements as ERC's agent
until such time as ERC obtains necessary approvals to the assignment of the
agreements to the Company.

ADDITIONAL INFORMATION

Shareholders of ERC with inquiries related to the Distribution should
contact Louis P. Barth, Corporate Secretary, Energy Research Corporation, 3
Great Pasture Road, Danbury, Connecticut 06813, telephone (203) 825-6000; or the
Company's stock transfer agent, Continental Stock Transfer & Trust Company, Two
Broadway, New York, New York 10004, telephone: (212) 509-4000 ext. 535.

USE OF PROCEEDS

The net proceeds to be received by the Company from the Rights Offering
depends on the number of Rights exercised. The maximum net proceeds to be
received by the Company are estimated to be $7,756,546, assuming the exercise of
4,128,273 Rights at the Subscription Price of $2.00 per share and after
deducting the estimated offering expenses payable by the Company.

The Company intends to use the net proceeds from the Rights Offering
primarily to lease and equip a new facility for limited production and
manufacturing purposes, for working capital purposes, for possible investments
in joint ventures, and for general corporate purposes. In addition, the Company
may acquire other businesses or technologies or products which are compatible
with the Company's business for the purpose of expanding its business, however
the Company has no current agreements, commitments or arrangements with respect
to any proposed acquisition and no assurance can be given that any acquisition
will be made in the future. Pending such applications, net proceeds are expected
to be invested by the Company primarily in high quality interest or dividend
bearing instruments.

24
<PAGE>
DILUTION

Stockholders who do not exercise their Basic Subscription Privilege will
realize a dilution of their percentage voting interest and ownership interest in
future net earnings, if any, of the Company. The amount of dilution will depend
on the number of shares of Common Stock purchased by other stockholders in the
Rights Offering. If all stockholders fully exercise their Basic Subscription
Privilege, the effective percentage ownership of each stockholder will remain
unchanged (assuming that no outstanding stock options are exercised).

DIVIDEND POLICY

The payment and amount of cash dividends on Company Common Stock after the
Distribution will be subject to the discretion of the Company Board. The
Company's dividend policy will be reviewed by the Company's Board of Directors
from time to time as may be appropriate and payment of dividends as the Company
Board deems relevant. Subject to the foregoing, the Company does not intend to
declare and pay any dividends after the Distribution for the foreseeable future.

CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
at July 31, 1998, (ii) the pro forma adjustments giving effect to the
combination of Evercel, Inc. and the Battery Business Group of ERC, the proposed
amendment and restatement of the Company's Certificate of Incorporation to
increase the authorized capital stock to 21,000,000 shares, and the Distribution
as if it had been completed at that date and (iii) the pro forma capitalization
of the Company as adjusted to give effect to the Rights Offering of 4,128,273
Rights and the net proceeds therefrom.

<TABLE>
<CAPTION>
PRO FORMA
ACTUAL ------------- AS ADJUSTED
----------- (000'S) -----------
<S> <C> <C> <C>
Stockholders' Equity:
Preferred stock, $.01 par value; authorized-1,000,000 shares; issued and
outstanding-none............................................................ $ -- $ -- $ --
Common stock, $.01 par value; authorized-3,000 shares, actual; 20,000,000
shares, pro forma and as adjusted; issued and outstanding-100 shares,
actual; and 4,128,273 shares, pro forma; 8,256,546, as adjusted............. -- 41 83
Additional paid in capital.................................................... 1 274 7,989
--- ----- -----------

Total stockholders' equity and capitalization............................. $ 1 $ 315 $ 8,072
--- ----- -----------
--- ----- -----------
</TABLE>

25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Historically, the Company has supported a portion of its activities with
revenues from government funded research and development contracts. United
States Government contracts, which represent the bulk of these contracts, are
generally multi-year, cost reimbursement type contracts. Their continuation is
dependent upon the government's continued allocation of funds. Under a
cost-reimbursement contract, the Company is reimbursed for reasonable and
allocable costs of materials, subcontracts, direct labor, overhead, general and
administrative expenses, independent research and development costs and bid and
proposal preparation costs, provided the total of such costs do not exceed the
reimbursement limits set by the contract. In addition, the contract may bear a
fixed fee or profit. The Company's only remaining government contract, a cost
reimbursement contract with the National Institute of Health, is expected to be
completed in the near term as it has substantially reached its funding
limitation.

In early 1997, the Company commenced the first stages of commercialization
of its Ni-Zn battery technology, by entering into a license agreement with
Corning, Inc. to continue to develop the technology and to manufacture and
market batteries worldwide. The Corning license was exclusive for all
applications with the exception of electric vehicles and hybrid electric
vehicles ("EV/HEVs") for which the Company retained all rights. During the
latter part of 1997 and early 1998, Corning verified the Company's Ni-Zn battery
performance. During fiscal 1998, Corning, terminated the license with the
Company for strategic business reasons.

In 1998, the Company entered into a license agreement (the "NanYa License
Agreement") with a joint venture between NanYa Plastics Corporation of Taiwan,
Formosa Plastics Group Company and Xiamen Three Circles Co., Ltd. (formerly
Xiamen Daily Use Chemicals Co., Ltd.) of Xiamen, China for the use of the
Company's Ni-Zn batteries in EV/HEVs in China on an exclusive basis and for
certain countries in Southeast Asia on a non-exclusive basis. The NanYa License
Agreement calls for payment of $5,000,000 in three stages and a royalty for the
exclusive and non-exclusive territories. See "BUSINESS-- Partnerships, Joint
Ventures and Licenses."

Also in 1998, the Company entered into a license agreement (the "Three
Circles License Agreement") with Xiamen Three Circles-ERC Battery Corp., Ltd.
for the use of the Company's Ni-Zn batteries in electric bicycles, scooters and
other applications. The Three Circles License Agreement included an initial
payment to the Company of $3,000,000. In connection with the Three Circles
License Agreement, the Company entered into a joint venture agreement with
Xiamen Three Circles Corp., Ltd. and has obtained a 50.5% ownership of the
Xiamen Three Circles-ERC Battery Corp., Ltd. for an investment of approximately
$3,000,000. This joint venture will manufacture batteries, sell batteries and
pay royalties to the Company under the terms of the Three Circles License
Agreement. See "BUSINESS--Partnerships, Joint Ventures and Licenses."

26
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain items from the Company's statement of
operations for the fiscal years ended October 31, 1996, and 1997, respectively,
and for the nine months ended July 31, 1997 and 1998, respectively:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED
OCT. 31, JULY 31,
-------------------- --------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Contracts................................................................ $ 355 $ 144 $ 128 $ 2
License fee income....................................................... -- 292 167 419
--------- --------- --------- ---------
Total revenues............................................................. 355 436 295 421
--------- --------- --------- ---------
Cost and expenses:
Cost of revenues......................................................... 246 98 117 30
Depreciation and amortization............................................ 34 40 26 37
Administrative and selling............................................... 199 268 180 1,076
Research & development................................................... 644 897 480 1,283
--------- --------- --------- ---------
1,123 1,303 803 2,426
--------- --------- --------- ---------
Loss from operations before income tax..................................... $ (768) $ (867) $ (508) $ (2,005)
Provision (benefit) for income taxes....................................... (261) (295) (173) (682)
--------- --------- --------- ---------
Net loss................................................................... $ (507) $ (572) $ (335) $ (1,323)
--------- --------- --------- ---------
</TABLE>

NINE MONTHS ENDED JULY 31, 1998 COMPARED WITH NINE MONTHS ENDED JULY 31,
1997.

Contract revenue decreased 98% to $2,000 in the 1998 period from $128,000 in
the 1997 period. The decrease was due primarily to the funding limitation of the
National Institute of Health contract.

License fee income increased 194% to $419,000 in the 1998 period from
$167,000 in the 1997 period. The increase was due substantially to license fees
received under the NanYa License Agreement. 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 will not include payments from Corning, Inc.

Cost of revenue decreased 74% to $30,000 in the 1998 period from $117,000 in
the 1997 period. The decrease was due primarily to the lower contract revenue
mentioned above.

Administrative and selling expense increased 498% to $1,076,000 in the 1998
period from $180,000 in the 1997 period. The administrative and selling expense
includes approximately $571,000 of costs associated with the commercialization
of the battery business group. Approximately 35% of these costs included
expenses associated with several agreements in China, including the Three
Circles License Agreement and the related joint venture. An additional 35% of
these costs were associated with negotiations undertaken by the Company 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 Distribution and the Rights Offering. The administrative and
selling expense also includes approximately $325,000 of ERC's administrative and
selling expenses allocated to the Company due to expanded battery activities.
The administrative and selling expenses were allocated based upon revenue,
research and development activity and bid and proposal activity. Depreciation
increased 42% to $37,000 in the 1998 period from $26,000 in the 1997 period. The
increase was due primarily to the purchase of machinery, equipment and tooling
to support the expanded battery activities. Research and development expense
increased 167% to $1,283,000 in the

27
<PAGE>
1998 period from $480,000 in the 1997 period. The increase was substantially due
to expanded battery activities including the manufacture and successful testing
of a Ni-Zn electric vehicle battery. A second electric vehicle battery is
currently being manufactured.

The loss from operations increased 295% to $2,005,000 in the 1998 period
from $508,000 in the 1997 period. The loss was due primarily to the reasons
mentioned above.

FISCAL 1997 COMPARED WITH FISCAL 1996

Contract revenue decreased 59% to $144,000 in fiscal 1997 from $355,000 in
fiscal 1996. The expected decrease was primarily due to the contract funding
limit with the National Institutes of Health.

License fee income was $292,000 in fiscal 1997 compared to no license fee
income in fiscal 1996. During fiscal 1997 the Company entered into a nickel-zinc
battery license with Corning, Inc.

Cost of revenue decreased 60% to $98,000 in fiscal 1997 from $246,000 in
fiscal 1996. The decrease was due to the decline in revenue mentioned above.

Administrative and selling expenses increased 35% to $268,000 in fiscal 1997
period from $199,000 in fiscal 1996. The increase is due primarily to expanded
battery activities resulting in the allocation to the Company of a greater
portion of the administrative and selling expenses of ERC. Depreciation
increased 18% to $40,000 in fiscal 1997 period from $34,000 in fiscal 1996. The
increase in depreciation is primarily due to the purchase of machinery and
equipment in fiscal 1997. Research and development expenses increased 39% to
$897,000 in fiscal 1997 from $644,000 in fiscal 1996 . The increase was due
primarily to expanded battery manufacturing and test activities for electric
vehicle applications.

The loss from operations increased 13% to $867,000 in the 1997 period from
$768,000 in the 1996 period. The increase was due primarily to the reasons
mentioned above.

INCOME TAXES

The Company has recorded a tax benefit for its losses to the extent such
losses have been recognized in the consolidated tax return of ERC.

Subsequent to the Distribution, the Company's income tax provision will be
recorded on a separate company basis, pursuant to the requirements of Financial
Accounting Standard No. 109 "Accounting for Income Taxes."

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 130 requires companies to report
comprehensive income and SFAS No. 131 requires companies to report segment
information as it is used internally to evaluate segment performance. These
statements merely provide for additional disclosure requirements. The Company is
required to adopt these new standards in fiscal 1999. In June 1998 the FASB
issued SFAS #133 "Accounting for Derivative Instruments and Hedging Activity"
which is required to be adopted in all fiscal quarters in all fiscal years
beginning after June 15, 1999. SFAS #133 is not expected to have a material
impact on the Company at this time.

During 1998, the American Institute of Certified Public Accountants
("AICPA") released its Statement of Position No. 98-1 ("SOP 98-1") "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" and
Statement of Position No. 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities", both of which are effective for fiscal years beginning after
December 15, 1998. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be

28
<PAGE>
capitalized and amortized over the estimated useful life of the software. SOP
98-1 also requires that the costs related to the preliminary project stage and
the post-implementation stage of an internal-use computer software development
project be expensed as incurred. SOP 98-5 requires that the costs of start-up
activities be expensed as incurred. SOP 98-5 requires companies to report the
initial application of the standard as a cumulative effect of an accounting
change. The Company is not required to adopt these standards until fiscal 2000.
Management believes that the adoption of these standards will not have a
material effect on the Company's results.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has obtained all of its financial needs from its
parent, ERC. ERC has provided funding for all battery research activities under
its research and development expense budget. ERC has also provided all of the
funding for capital expenditures for the purchase of machinery and equipment for
all battery activities.

The Company has entered into a Services Agreement with ERC to provide
certain management and administrative services and office, research and
development and manufacturing support facilities and services to the Company.
See "THE DISTRIBUTION--Relationship Between ERC and the Company after the
Distribution--Services Agreement."

The Company will be dependent in part upon sufficient funds provided by the
Rights Offering to continue research and development activities, to pay for
administrative and selling expenses and to purchase machinery and equipment as
well as to fund all employment related expenses.

Under the NanYa License Agreement, the Company expects to receive license
fee income upon the successful completion of a battery test required by that
Agreement. The Company expects to receive a portion of this license fee income
during the second fiscal quarter of 1999, assuming the test's successful
completion, and the remainder of the license fee income in fiscal year 2000. The
amount of these payments is expected to be $2,000,000 and $1,500,000 in fiscal
years 1999 and 2000, respectively.

The Company expects to continue to enter into license agreements, to
participate in joint manufacturing ventures and to expand its battery
manufacturing facilities. To participate in joint manufacturing ventures and to
expand its manufacturing facilities it may require additional capital.

Working capital at October 31, 1997 was $10,000 compared to a negative
working capital at October 31, 1996 of $10,000. To date, ERC has provided all of
the working capital needs of the Company.

YEAR 2000 COMPLIANCE

The Year 2000 issue is a computer programming concern that may adversely
effect the Company's information technology systems. The Company believes that
it has taken reasonable steps to implement a Year 2000 compliance program
designed to ensure that the Company's computer systems and applications will
function properly beyond 1999. The Company believes that adequate resources have
been allocated for this purpose and expects the Company's Year 2000 date
conversion programs to be completed on a timely basis. The Company does not
expect to incur significant expenditures to address this issue. However, there
can be no assurance that the Company will identify all Year 2000 problems in its
computer and other systems in advance of their occurrence or that the Company
will be able to successfully remedy any problems that are discovered. The
expenses of the Company's efforts to address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the revenue stream
and financial stability of existing or future licensees, joint venture partners
or customers may be adversely impacted by Year 2000 problems, which could cause
fluctuations in the Company's revenues and operating profitability.

29
<PAGE>
BUSINESS

THE COMPANY

The Company is engaged in the development and commercialization of an
innovative, patented, Nickel-Zinc ("Ni-Zn") rechargeable battery, as well as the
research and design of other advanced battery technologies. The Company's Ni-Zn
battery technology offers high energy density and low material costs, resulting
in a low weight, high power battery with a substantial price advantage over
other comparable technologies. The Company's Ni-Zn battery may be used in a
range of rechargeable battery applications, including electric vehicles, golf
carts, electric wheelchairs, scooters, bicycles, powertools, boats and consumer
and electronic products. The Company intends to fully commercialize its Ni-Zn
technology through a combination of direct sales, licensing agreements and joint
venture relationships.

The Company has operated as the battery group of ERC since 1970. Since its
inception, ERC has exclusively focused on the development and engineering of
electricity production and storage by electrochemical means. The technologies
which the Company, as part of ERC, has developed are appropriate for large
advanced rechargeable batteries for electric vehicles as well as small
rechargeable batteries for consumer products.

As part of ERC, the Company's product sales emphasized very high performance
cells for submarine, aerospace and military markets where application needs and
engineering excellence outweighed low cost as the greatest concern. Several
battery technologies were pursued, including silver-zinc ("Ag-Zn"), nickel
cadmium ("Ni-Cd"), and Ni-Zn. During the mid 1970's to early 1980's, the Company
manufactured high energy-density Ag-Zn batteries for submarines and submersibles
for both main propulsion and auxiliary power. During the 1980's considerable
development work was carried out for the US Navy to develop Ni-Cd batteries for
nuclear submarines and for the U.S. Department of Energy ("DOE") to develop
Ni-Zn batteries for electric vehicles. Historically, the Company's development
activities were funded through corporate and government contracts as well as
internal research and development funds.

At present, the Company is focusing its efforts on the development,
demonstration and commercialization of its advanced Ni-Zn rechargeable battery.
The Company has developed patented technologies for use in its Ni-Zn batteries
which permits the manufacture of batteries that have long cycle life and are
lighter in weight and lower in cost than comparable batteries currently
available. The Company believes its batteries can compete cost-effectively with
Ni-Cd and NiMH batteries and with lead acid batteries in certain applications.
Use of the Company's proprietary process in the construction of Ni-Zn batteries
has the additional advantage of having very low environmental impact compared to
lead-acid or Ni-Cd batteries.

The Company believes that its Ni-Zn batteries represent a potential source
of significant revenue once commercialization of such products is fully
undertaken. The Company has begun the commercialization of its Ni-Zn technology
within the past year and currently has two license agreements, the Nan Ya
License Agreement, for the use of the Company's technology in batteries
developed for EV/HEVs in China, Taiwan and certain other countries in Southeast
Asia, and the Three Circles License Agreement for the use of the Company's
technology in batteries to be used in miners' cap lamps and two and three wheel
vehicles, including bicycles, scooters and off-road vehicles in China and
Southeast Asia. In connection with the Three Circles License Agreement, the
Company has also entered into a joint venture agreement with Xiamen Three
Circles Co., Ltd. and has received a 50.5% ownership interest in the Xiamen
Three Circles-ERC Battery Corp., Ltd., for the manufacture and sale of batteries
under the terms of the Three Circles License Agreement.

To further commercialize its Ni-Zn technology, the Company intends to pursue
a range of battery markets, each of which has performance requirements aligned
with the benefits Ni-Zn offers. However, since these markets range from
moderately-sized, current battery applications to large future markets, such as
electric vehicles, the Company intends to pursue a range of business strategies.
To capitalize on these

30
<PAGE>
opportunities, the Company will manufacture and sell directly to OEMs, as well
as continue to enter into joint venture agreements, and license its technology
to larger organizations with established manufacturing or distribution
capabilities in specific markets.

BATTERY TECHNOLOGY

BACKGROUND

A battery is an electrochemical apparatus used to store energy and release
it in the form of electricity. There are two types of batteries, primary and
rechargeable batteries, also known as secondary batteries. A primary, or
disposable, battery is used until discharged and then discarded. A rechargeable,
or secondary, battery can, after discharge, be recharged and used again. The
Company's Ni-Zn batteries are designed to be rechargeable.

Rechargeable batteries can often be used in battery applications where
primary batteries are most commonly employed. The Company is conducting research
and development of an advanced, rechargeable zinc-manganese dioxide battery
designed to compete with the most common consumer AA, C, D, etc. batteries.
Primary batteries are, in most cases, too costly for widespread use in
applications currently utilizing rechargeable batteries.

No one battery system is ideal for all rechargeable applications. There are
numerous performance variables which vary in importance by application. Each
commercially available battery system is stronger in certain areas and weaker in
others. Important variables include: voltage; energy capacity per unit weight
(energy density); energy capacity per unit of volume (volumetric energy
density); power or discharge rate capability (how rapidly energy can be drawn
from the battery or specific power); cycle life and how this varies with
discharge rate and depth of discharge; response to ambient temperatures; rate of
self-discharge; shelf life in charged and discharged states; size, shape and
design flexibility; time and other constraints on recharging; safety,
environmental and disposal considerations; and various application-specific
considerations. The needs of various battery applications place a different
priority on these characteristics, and, thus, require different solutions. In
addition, for each anode/cathode combination there are many alternative ways to
design a battery, involving choices of electrolyte and electrode materials and
how components are shaped and manufactured. Design choices involve trade-offs,
and as a result improvement in one element of a battery's performance often
comes at a sacrifice of another characteristic. A battery optimized for just one
characteristic may not be competitive if its performance in other areas is
inferior.

The Company selected Ni-Zn for development because of its potential to
compete well in several large rechargeable battery markets. The following chart
compares Ni-Zn to certain other competitive battery technologies.

BATTERY PERFORMANCE CHARACTERISTICS

<TABLE>
<CAPTION>
NICKEL-ZINC LEAD-ACID NICKEL-CADMIUM NICKEL-MH LITHIUM-ION
-------------- ------------ ------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Energy Density (Wh/kg)......... 60--80 35-40 45--55 60--80 100--150
Specific Power (W/kg).......... 500 >200 500 100--185 100
Cycle Life (deep discharge).... 600 200--300 700--1200 700--1200 400--1200
Cost ($/Wh).................... 0.15--0.50 0.10--0.30 0.5--1.50 1.00--3.00 1.50--5.00
</TABLE>

The following explains some of the key characteristics by which battery
systems are measured and compared:

ENERGY DENSITY measures the capability of the battery to store energy, in
watt-hours per kilogram, which is critical to a battery's competitiveness. Ni-Zn
has about twice the energy density of lead-acid systems and

31
<PAGE>
is superior to Ni-Cd. Ni-MH has an energy density comparable to Ni-Zn, and is
currently being used for electric vehicle applications.

SPECIFIC POWER measures the ability to deliver power on demand and satisfy
the needs of a high current-drain device. Lead-acid is typically the best known
for starting a car. This is one of Ni-Zn's strongest capabilities, with
instantaneous power equal to Ni-Cd and significantly greater than Ni-MH. In
power tools and EV applications, this characteristic is as important as energy
density or total capacity. In lower current-drain applications like laptops or
hearing aids, energy density and practical run-time are more important and
lithium-ion and high energy-density, low current-drain zinc-air systems are
commonly used.

CYCLE LIFE is a measure of how many times the battery can be recharged
before it is replaced, which is important in affecting the cost in use and, to
an extent, convenience. Discharge and recharge cycles can be repeated a number
of times in rechargeable batteries, but the achievable number of cycles (cycle
life) varies among technologies and is an important competitive factor. All
rechargeable batteries experience a small, but measurable loss in energy with
each cycle. The industry commonly measures cycle life in number of cycles a
battery can achieve until 80% of the battery's initial energy capacity remains.
With only a modest 10% discharge, a Ni-Zn battery would be capable of over
11,000 (shallow discharge) cycles. Cycle life is application-specific,
temperature-dependent and driven by several other factors.

The deep discharge cycle life of the Company's current Ni-Zn battery is
competitive for its intended applications. However, gradual improvement from
over 600 cycles currently to 1000 deep discharge cycles in the future is one
research objective. This will increase the life-span in use for motive power
applications and make the cells even more cost-competitive.

COST is obviously important to the success of a battery system. With
automated production lines, lead-acid is the lowest cost rechargeable battery
today. In volume production the Company believes its Ni-Zn's cost will be close
to that of lead-acid and will offer higher performance. Competing
high-performance battery systems, such as Ni-Cd or Ni-MH, are unlikely to match
Ni-Zn's cost even with mass production, due to substantially higher material
costs.

ENVIRONMENTAL AND SAFETY ISSUES surround most battery systems. Both nickel
and zinc, while not entirely harmless, are relatively benign compared to other
high-performance, rechargeable electrode materials. Lead is toxic, however there
are currently systems in place in the developed world to recycle lead. There is
pressure in Europe to ban or require recycling of Ni-Cd batteries due to the
poisonous nature of cadmium. It would be desirable, but difficult, to recycle
metal hydrides, given their high cost. Recharging batteries produces heat and,
in some systems, hydrogen. Li-ion batteries have caught fire. The Company's
Ni-Zn design appears to have no intrinsic safety problems. The prospect of
stricter environmental legislation relating to the manufacture, disposal and
recycling of batteries containing lead or cadmium, both of which are hazardous
and toxic, if enacted, could enhance the attractiveness of the Company's Ni-Zn
battery.

COMPANY PRODUCTS

NI-ZN BATTERIES

The Company believes that its Ni-Zn battery represents a promising
commercial battery technology because of its long cycle life, high energy
density, and low material costs. Additionally, the low environmental impact of
materials contained in the Company's batteries compared to that of lead-acid or
Ni-Cd batteries provides advantages from an environmental standpoint. The
Company's Ni-Zn battery combines a low-cost, light-weight nickel electrode with
the high-energy of environmentally benign zinc to produce a rechargeable battery
having a voltage 30% higher and an energy density per unit weight approximately
30% greater than that of conventional Ni-Cd batteries. At present, the Company's
batteries have approximately 600 deep discharge cycles and approximately 11,000
shallow discharge cycles. The Company's Ni-Zn batteries are suited to a wide
range of applications including, among other things, electric

32
<PAGE>
vehicles, electric wheelchairs, scooters and bicycles, boats, power tools,
consumer and electronic products, emergency and other portable lighting systems
and automobile starting, lighting and ignition ("SLI").

The rechargeable Ni-Zn battery was first patented in 1923. During the early
1980's extensive research and development efforts were made by others to develop
a Ni-Zn battery with a satisfactory cycle life; these efforts were not
successful. More recently, the Company has solved many of the problems which had
been associated with the short cycle life. Patents have been granted to ERC and
transferred to the Company in which the zinc electrode solubility (shape change)
has been greatly reduced and construction features provide for a sealed
maintenance-free construction. The Company's batteries achieve over 600
charge-discharge cycles with only a 20% loss in capacity.

The Ni-Zn cell developed by the Company consists of layers of positive
(nickel) electrodes and negative (zinc) electrodes separated by both electrolyte
absorptive layers and microporous separator layers. The Company plans to
manufacture a range of cells in various energy capacities. These cells can then
be arranged in series and packaged to produce convenient voltages, such as a
typical 12 volt blocks. The Company is supplying demonstration batteries to
various potential customers for evaluation and is conducting in-house testing of
its batteries for electric vehicles, electric bicycles and scooters. The EV
batteries are being evaluated in a European vehicle produced in Germany and are
also being supplied to another European vehicle produced in Norway. Also,
batteries are being supplied to an Italian company for electric scooters and to
several start-up electric bicycle companies in the United States. The Company is
also working with bicycle companies in China through its joint venture
partnership in Xiamen, China (Xiamen Three Circles-ERC Battery Corp., Ltd.) to
begin manufacture of the Company's batteries.

The Company operates an extensive test facility for evaluation of all the
various size cells and modules being manufactured. At any given time there are
usually over 300 cells and batteries being life-tested by the Company.

OTHER ZINC BATTERIES

The Company is also developing another rechargeable zinc battery which is
intended to compete in the primary battery market. The Company believes that it
can provide batteries at a price close to that of a primary battery and less
expensive than the high cost of Ni-Cd rechargeables. This product is not fully
developed but, if successfully developed, has the potential to open up a
different, large consumer market for the Company. See "--Markets--Primary
Batteries" herein. This opportunity is being pursued in conjunction with the
Company's joint venture partner in Xiamen (China), Xiamen Three Circles Co.,
Ltd. which has both research and manufacturing capability.

The Company also plans to continue to develop zinc electrodes for use in
primary and secondary zinc-air, zinc-manganese dioxide, and zinc-silver oxide
alkaline batteries.

BUSINESS STRATEGY

The Company's strategic goals are to rapidly commercialize its Ni-Zn
technology, maintain and increase its technical leadership in Ni-Zn, develop new
battery businesses which build on its Ni-Zn technology and continue to develop
other advanced battery technologies. The Company is implementing a business
strategy with the following components:

MANUFACTURE AND SELL RECHARGEABLE BATTERIES TO OEMS: The Company plans to
build a small-scale manufacturing plant in the United States to make Ni-Zn
batteries for sale to OEMs. This plant is intended to supply the lower volume,
more specialized target markets which are expected to be early users of Ni-Zn
such as wheelchairs, lawn mowers, marine and other motorized products.

LICENSE NI-ZN TECHNOLOGY: The Company has, and intends to continue to,
license its technology to entities who have the capability to develop
geographical markets for Ni-Zn batteries. License agreements are expected to be
restricted for selected application markets and geographical territories.
Licensing

33
<PAGE>
arrangements will require licensees to pay the Company royalties on sales and,
where feasible and appropriate, up-front fees for technology transfer.

ENTER INTO JOINT VENTURES AND EQUITY PARTICIPATIONS WITH LICENSEES: The
Company has and may continue to seek equity participation in the battery
businesses of its licensees. Ownership positions in such licensees may be part
of the license structure. Cash payments for ownership positions negotiated to
date have been made from the proceeds license fee payments payable to the
Company.

IDENTIFY LICENSEES TO PRODUCE SPIRAL-WOUND NI-ZN BATTERIES: The Company
does not currently plan to invest in the manufacture of standard-sized, small,
spiral-wound rechargeable batteries comparable to the AA, Sub-C and C
conventional batteries used in high-volume applications such as consumer and
electronic products. The Company intends to pursue one or more licensees to
produce and market these cells. These licensee partners may be established
battery manufacturers rather than OEMs or new entrants into the battery
business.

IMPROVE NI-ZN BATTERY AND DEVELOP ALKALINE BATTERY: The Company intends to
continue its research and development efforts to improve its Ni-Zn battery, most
notably with respect to cycle life. In addition, the Company plans to devote
substantial research and development efforts to developing another related
alkaline battery technology.

MARKETS

The Company believes that markets for the Ni-Zn battery include the existing
markets for Ni-MH and Ni-Cd, such as power tools, high-end portable lighting,
and consumer and electronic products. In addition, the Ni-Zn battery has the
potential to compete in the upper cost segment of the lead acid battery markets
where it would enjoy a substantial weight advantage. Electric vehicles and
hybrid electric vehicles and a range of motive power applications are
significant potential markets for the Company's Ni-Zn battery.

SIZE AND GROWTH

The world battery industry totals approximately $33 billion of
manufacturers' shipments, growing at 6-8% per year. This total includes primary
batteries ($9.8 billion), motive power batteries ($2.1 billion), high
performance rechargeable batteries ($6.1 billion) and starting, lighting and
ignition batteries ($15 billion). These four major types of batteries are sold
into a wide array of different markets, some of which the Company does not
intend to enter. These different markets frequently require different battery
systems and have different competitors and are most meaningfully discussed
separately.

REQUIREMENTS

EVS AND MOTIVE: The Company estimates that the total worldwide market for
EVs/HEVs and other motive power that could use the Company's batteries was $700
million in 1997; however, precise statistics are not available. The market for
electric vehicles is now in the early stages of development and many of the
vehicles on the road are prototypes. The market for EVs is predicted to grow
rapidly past the year 2000, and projections for annual growth rates for EV's and
motive batteries is expected to accelerate from 7% annually from 1997-2002 to
approximately 22% annually, reaching $8 billion of sales in 2007.

Successful battery development has been a barrier to the emergence of a
large EV market. Lead-acid batteries, while potentially cost effective, are too
heavy to give adequate vehicle range. Other higher energy density battery
systems including Ni-MH, Ni-Cd, lithium-ion ("Li-ion") as well as Ni-Zn are
being tested in vehicles. The Company believes that its Ni-Zn battery has
adequate energy density to permit acceptable vehicle range and has the potential
to be produced at lower cost than the most likely other contenders for the EV
market.

Recently, HEVs have also received more interest and development efforts. An
HEV combines a battery/electric motor drive, which is typically used for
acceleration to a predetermined speed, with an

34
<PAGE>
alternative drive system, such as a small internal combustion engine, which
takes over when the power requirements are lower at steady highway speed. Toyota
has reported mileages of greater than 60 mpg for its Prius HEV. HEVs are likely
to use similar battery systems to EVs, albeit in smaller capacity battery packs.

The other motive power applications for rechargeable batteries include
industrial trucks; neighborhood vehicles; golf carts; electric wheelchairs,
scooters and bicycles; and marine batteries. These markets are primarily
supplied by lead-acid (and some Ni-Cd) batteries today. These markets have been
grouped with EVs rather than automotive batteries because of their need for the
deeper discharge (deep cycle) capability which is required in the EV/HEV
markets.

The motive power markets differ in their requirements, however. The
deep-cycle marine market values the benefit Ni-Zn offers in providing a
multi-year life; the industrial truck market, in contrast, sees little benefit
to weight savings as lead-acid batteries are used as counterweights. Target
markets for the Company's battery include the electric bicycle market,
particularly in China and the electric wheelchair market; however, there can be
no assurance that these markets will develop as projected. The Company believes
its Ni-Zn technology is particularly well suited to motive power applications
due to its combination of low weight, high specific power and acceptable cost.

HIGH PERFORMANCE AND OTHER RECHARGEABLE BATTERIES: The worldwide market for
rechargeable batteries, excluding automotive, motive power and specialty battery
systems is approximately $6.1 billion, growing at 7% to 8% per year. The
following chart details the market size and growth of this market. The growth
rate of individual application markets varies widely, with the small cell,
portable rechargeable markets generally representing the faster-growing sectors,
resulting primarily from the continued development and proliferation of new
portable electronic products.

<TABLE>
<CAPTION>
1997 SALES GROWTH RATE
($ BILLION) (% PER YEAR)
------------- ---------------
<S> <C> <C>
Power Tools......................................................... 2.0 8
Emergency Power & Light............................................. 1.5 7
Telephones & Communications......................................... .8 10
Military/Aerospace.................................................. .5 4
Computers & Electronics............................................. .4 12
Medical............................................................. .3 15
Toys................................................................ .3 6
Power Condition..................................................... .15 5
Signaling........................................................... .15 5
Total............................................................... 6.1 7-8
</TABLE>

The market for portable rechargeable batteries, consists of three major
technologies, and is measured on a per unit basis as follows: 1) Ni-Cd,
presently approximately 62% of the market, 2) Ni-MH, approximately 31% of the
market and 3) lithium-ion ("Li-ion"), 7% of the market. Approximately 75% of all
cells are assembled into battery packs for use in a variety of portable devices.
Increasingly, these packs contain sophisticated electronics for power management
and safety.

Ni-Cd is the oldest commercialized rechargeable system in the market. Ni-Cd
cells can be employed in battery packs without high-cost electronics and safety
devices and enjoy a substantial price advantage over Ni-MH and Li-ion cells. In
the last decade, Ni-Cd has increasingly been the subject of tightening
environmental and workplace regulations and related pressures for recycling and
mandatory collection due to the toxicity of cadmium as a principal component.
However, pressures to enforce mandatory collection schemes or even to ban Ni-Cd
have partially abated due to industry-wide recycling efforts. Although Ni-Cd
will remain attractive in certain applications which do not experience a
significant performance benefit

35
<PAGE>
from other technologies and are sensitive to their higher cost, industry
analysts believe growth in this segment will remain relatively flat.

Ni-MH technology, which typically offers a 25% to 40% advantage in energy
density relative to Ni-Cd, was commercialized in the early 1990's. Because it
employs a metal hydride electrode rather than a cadmium electrode, Ni-MH is
considered an environmentally preferred technology and has increased its market
penetration in several applications and geographic regions as a result of this
attribute. However, Ni-MH cells and batteries typically carry a substantial cost
premium relative to Ni-Cd.

Li-ion battery technology was also commercialized in the early 1990's.
Production of Li-ion cells has increased from 15 million cells in 1994 to an
estimated 200 million cells in 1997. Li-ion technology offers the highest energy
density of all commercial rechargeable technologies on the market today. On a
weight basis, the technology offers 2 to 3 times the energy content of Ni-Cd and
offers higher voltage (3.6 volts per cells) than Ni-MH or Ni-Cd (1.2 volt)
technologies. Lithium-based technologies are expected to experience high growth
rates. Li-ion cells and batteries are expected to continue to be more expensive
than the Company's Ni-Zn cells.

Ni-Zn technology is in the early stages of commercialization by the Company.
Ni-Zn cells can be employed in battery packs without high-cost electronics and
safety devices. Ni-Zn cells are considered the safest and most environmentally
benign of the rechargeable technologies available today. The Company expects
Ni-Zn to enjoy a substantial price advantage over Ni-Cd, as well as Ni-MH and
Li-ion battery system. Ni-Zn cells offer a 30% volts per cell advantage over
Ni-MH and Ni-Cd. The Company believes that Ni-Zn's greatest benefits will be in
rechargeable battery markets that require a high specific power ever (i.e., a
high wattage capability per unit of weight), high specific energy (i.e., a high
capacity per unit) and a favorable cost such as EV/HEV, power tools, bicycles
and neighborhood transportation.

Ni-Zn also offers a weight advantage over current starting, lighting and
ignition batteries, due to its higher specific energy, as well as other
performance advantages which the Company believes may be of only of minor
benefit to automotive OEMs. The Company's Ni-Zn batteries are being tested by a
European automotive OEM for use in higher voltage electrical systems for
vehicles. These benefits may offset the moderately higher cost of Ni-Zn. The
success of the Company in capturing a market share in the starting, lighting and
ignition market will depend on, among other factors, the timing and degree to
which automotive manufacturers adopt these higher voltage electrical systems.

PRIMARY BATTERIES: Primary battery sales were estimated to be $9.8 billion
in 1997 on a worldwide basis. This market is estimated to be growing at an
annual rate of 7-8%, resulting primarily from sales growth of consumer and
electronic products.

The portable primary battery industry consists primarily of three major
technologies: alkaline 69% of the market; carbon-zinc or chloride-zinc, 7% of
the market; and lithium, 7% of the market. An additional 7% of the market is
comprised of other primary chemistries including silver-oxide, zinc-air and
mercury batteries.

Alkaline batteries, with a growth rate of approximately 9% annually, are
expected to continue to dominate the consumer market. Consumer applications
range widely, from flashlights to products such as motorized toys, electronic
games, tape players, compact disk players, radios and other portable electronics
products. Industrial applications include battery powered equipment used in the
workplace and for OEM applications including computer clock power supplies and
various portable products packaged with batteries.

Portable rechargeable batteries compete for many of the same markets as
primary batteries, particularly in those applications which require a relatively
high current drain where disposable batteries can be costly. Ni-Cd rechargeables
have the largest share of these markets. The Company does not intend to compete
with its Ni-Zn batteries for the primary battery market, other than through
licensees, although research is being conducted by the Company with respect to
other zinc rechargeable batteries which may

36
<PAGE>
offer consumers the economic savings of rechargeability at a modest initial cost
premium over an alkaline battery. See "--Research and Development."

COMPETITION

Competition in the battery industry is, and is expected to remain, intense.
Competitors range from development stage companies to major domestic and
international companies, many of which have financial, technical, manufacturing,
marketing, sales and other resources significantly greater than those of the
Company. There are at least two, and possibly more, other battery manufacturers
in the world who have demonstrated interest in developing and marketing Ni-Zn
rechargeable batteries. The Company does not perceive these competitors, who are
significant battery producers, to be its prime competition as their technology
development is believed to be less advanced than that of the Company. The
Company expects to be competing against suppliers of lead-acid, Ni-Cd, and Ni-MH
rechargeables, as well as other rechargeables and potentially primary battery
technologies. The Company is competing on the basis of battery performance, the
price and economics of its batteries, as well as usage considerations
(stability, safety, environmental).

Lead-acid rechargeable batteries are mass produced at low cost for the
automotive starting, lighting and ignition market. Ni-Zn batteries are likely to
remain more costly than lead-acid batteries but offer advantages in performance.
The Company only intends to compete against lead-acid batteries in the more
specialized markets willing to pay a price premium for superior performance.
Major suppliers of such batteries include Johnson Controls and Exide. Several
other battery manufacturers are attempting to develop and market higher
performance versions of lead-acid batteries. The Company believes it is unlikely
that those developments will match the performance of Ni-Zn.

Most of the world's major automotive companies are engaged in electric
vehicle development and limited production. Vehicles vary from prototypes to
commercial offerings. Many automotive companies, as well as major battery
manufacturers, are sponsoring the development of higher performance batteries
for EV's. For example, General Motors, Ford and Chrysler are members of the US
Advanced Battery Consortium. Numerous battery chemistries are being pursued so
that there is uncertainty over the system of choice long term. Ni-MH appears to
currently be the most popular choice amongst technologies which can broadly
match Ni-Zn's performance. Because of significantly higher material costs the
Company believes Ni-MH batteries will be more costly to produce than Ni-Zn.

Ni-Cd and Ni-MH rechargeable batteries are mass produced. The Company
believes that its Ni-Zn batteries can be made at lower cost in volume production
and offer generally comparable to superior performance. Ni-Cd and Ni-MH
batteries are currently supplied to consumer products and consumer electronics
OEMs by battery manufacturers who are frequently affiliated with the OEMs. These
relationships and the substantial lead times OEMs require to incorporate new
battery designs into their products, could hinder the Company's attempt to
substitute for Ni-Cd and Ni-MH batteries.

Lithium-based battery systems offer significant performance advantages over
many other rechargeable battery technologies. Lithium batteries are currently
substantially more costly than Ni-Cd and even Ni-MH cells but have found
applications willing to pay the price premium for enhanced performance. The
Company only intends to compete with Ni-Zn against lithium in those applications
where there is a value-conscious sector of the market. Several manufacturers
currently offer lithium batteries to consumers and to OEMs in substantial
volumes, and have announced that they are increasing manufacturing capacity.

SALES AND MARKETING

The Company intends to build a sales and marketing organization to focus on
the following;

- To generate direct sales to OEMs and distributors in selected applications
and geographical territories.

37
<PAGE>
- To develop joint venture partnerships for manufacturing and distribution
in applications and geographical territories for which the Company
believes strategic partners can improve its chances of success.

- To license its technology and know-how to strategic partners in
applications and geographical territories for which the above two business
models are not appropriate.

The Company will focus its direct marketing efforts on those applications
which represent specialty niches where the Ni-Zn battery technology has
significant competitive advantages and where the channels of distribution are
relatively narrow. An example of such an application is the electric wheelchair
market. For those areas where broad distribution is required, the Company
believes a joint venture manufacturing and/or sales partnership with companies
who have a position in the distribution channels will be a more effective way to
exploit the technology in a shorter amount of time. An example of such an
application and a geographical area is the company's license and joint venture,
manufacturing and sales agreement with Xiamen Three Circles Co., Ltd. for China
and Southeast Asia. The Company intends to license its technology for those
applications which require very large capital investment in manufacturing and
very broad distribution channels, such as consumer electronics and power tools.
See "--Partnerships, Joint Ventures and Licenses."

Upon establishment of the core joint venture manufacturing and sales
agreements, the Company expects to use the manufacturing capability of the joint
ventures to sell directly to OEMs in other geographical territories. An example
may be to use the China joint venture production capability for batteries for
bicycles to satisfy the North American and/or European markets for these
products.

The Company expects to employ an initial sales and marketing organization
consisting of a marketing and sales manager and three sales engineers, each
specializing on one or more applications. The Company has hired a new Director
of Marketing and Sales. See "MANAGEMENT--Key Employees." The Company currently
employs a sales representative for Europe, MATEC GmbH, and the representative
arrangement is expected to continue.

PARTNERSHIPS, JOINT VENTURES AND LICENSES

In January 1997 ERC entered into a license agreement with Corning, Inc. to
continue the development of the Ni-Zn battery and to manufacture and market
batteries worldwide. This license was exclusive for all applications with the
exception of EV/HEVs for which ERC, the parent of the Company, retained all
rights.

After approximately one and one-half years and having successfully validated
the Company's technology, Corning decided for strategic business reasons to
discontinue its development of certain energy related products, including the
Company's batteries, and as a result discontinued the license agreement with
ERC. This has allowed the Company to seek business opportunities which had
previously been reserved exclusively for Corning.

In 1998, the Company entered into a license agreement (the "NanYa License
Agreement") with a joint venture between NanYa Plastics Corporation of Taiwan, a
Formosa Plastics Group company and Xiamen Three Circles Co., Ltd. of Xiamen,
China for the use of the Company's Ni-Zn batteries in EV/HEVs in China on an
exclusive basis and for Southeast Asia on a non-exclusive basis. The license
agreement calls for the payment of $5 million dollars in three stages and a
royalty for the exclusive and non-exclusive territories. The payments include
$1.5 million dollars received in 1998, a further $2 million dollars to be paid
to the Company upon completion of certain conditions which the Company expects
will occur in the second fiscal quarter of 1999, and a final payment of $1.5
million dollars to be paid to the Company upon completion of duplication of the
battery at its facilities in China. The Company has the right to invest the
final payment in equity in the joint venture manufacturing and sales
organization formed between NanYa Plastics and Xiamen Three Circles Co., Ltd.

38
<PAGE>
In 1998, the Company also entered into a license agreement (the "Three
Circles License Agreement") with Xiamen Three Circles-ERC Battery Corp., Ltd.
for the use of the Company's Ni-Zn batteries in electric bicycles, scooters,
three-wheel vehicles, off-road vehicles, and miner's safety lamps in China on an
exclusive basis and in Southeast Asia on a non-exclusive basis. The license
included an initial payment to the Company of $3 million. In connection with the
Three Circles License Agreement, the Company entered into a joint venture
agreement with Xiamen Three Circles Co., Ltd., used this $3 million as its
initial investment in the joint venture, and received a 50.5% share of the joint
venture called Xiamen Three Circles-ERC Battery Corp. (the "Joint Venture"). The
Joint Venture will manufacture and sell batteries under the terms of the Three
Circles License Agreement. The Company also reserves exclusive rights for
exporting batteries from the Joint Venture to other territories outside of the
exclusive and non-exclusive field territories. The Company expects to use the
production capability of this Joint Venture to produce batteries to sell to OEMs
and distributors.

The NanYa License Agreement, the Three Circles License Agreement and the
joint venture agreement will each be subject to the Agency Agreement. See "THE
DISTRIBUTION--Relationship Between ERC and the Company after the
Distribution--Agency Agreement."

MANUFACTURING AND RAW MATERIALS

All the materials required to manufacture the Company's Ni-Zn battery are
readily available from multiple sources in North America. The Company's
principal raw materials for the production of its battery products are nickel
and zinc. Prices for both nickel and zinc, as commodities, are subject to market
forces beyond the control of the Company.

FACILITIES AND EQUIPMENT

CURRENT FACILITIES

The current battery group's facilities occupy 7,300 square feet of space
within an ERC building, comprising research and development laboratories, an
electrical cycling/testing area, a prototype battery building area and 1000
square feet of office space. The Services Agreement provides for the use of this
space for the payment of the Company's pro rata portion of all building related
costs and expenses.

Capital equipment currently in use by the battery group will be transferred
at its depreciated book value to the Company. This includes six electrical
formation and test systems, four Schultz French rolling machines, an Amtech
Advanced Ultrasonic welding system, a metal perforating system, and an
electrochemistry laboratory.

NEW FACILITIES

The Company is planning to locate its small-scale manufacturing plant for
Ni-Zn battery production in a leased facility of approximately 25,000 square
feet. The small-scale Ni-Zn manufacturing plant will be designed to be flexible
enough to produce batteries for the different markets which will be pursued.
Different size batteries will be produced by combining different numbers of a
common cell design into varying combinations of cells in series and parallel
arrangements. The intended flexibility precludes investment in a completely
automated facility which would have the potential for the lowest direct labor
cost per unit. As the markets for higher volume batteries are proven, the
Company intends to progressively automate production to reduce production costs.

ENVIRONMENTAL, SAFETY AND REGULATORY

Ni-Zn batteries are more environmentally acceptable than other commonly
available rechargeable battery systems. Ni-Zn batteries contain no cadmium,
mercury or other highly toxic materials which are difficult to dispose of under
current environmental regulation. The Company anticipates very little waste

39
<PAGE>
generation due to the simple manufacturing technology utilized. There are no
effluents in waste water. Electrode materials in dough form can be reprocessed
and reutilized in the process, thereby producing low levels of waste. The
solvent used in the electrode production process can be reclaimed, purified and
reintroduced into the manufacturing process with low levels of waste.

PATENTS, TRADE SECRETS AND TRADEMARKS

The Company has nine US patents with an average of 11 years left before
expiration. The Company's patents will expire during the period from 1998
through 2017. The Company does not believe that the expiration of any of its
earlier patents will have a material adverse effect on the Company's business.
The Company has NiVolt and Illuma as registered trademarks at this time and the
Company has applied to use "Evercel" as a trademark.

The Company seeks to protect its technology through U.S. patents and trade
secrets and other agreements. Many of these patents are also filed in Canada,
Europe, Japan, and China. The Company has received one new U.S. battery patent
in fiscal year 1997. Also, the Company applied for one battery patent in fiscal
year 1997 and one in fiscal year 1998.

Many of the Company's United States patents were the result of
government-funded research programs. The Government does not impose significant
restrictions on the Company's use of government-sponsored patents, except that
military and national security applications of technology remain the property of
the United States Government. Patents of the Company that were the result of
government-funded research prior to January 1988 (the date the Company qualified
as a small business under applicable government regulations) belong to the
Government unless the Government waives its rights to these patents. In most of
these cases, the Company's patents are owned by the United States Government.
The Company has received a license to use these patents, which is revocable only
in the limited circumstances where it has been demonstrated that the Company is
not making an effort to commercialize the invention. Patents resulting from
government-funded research after January 1988 automatically belong to the
Company because of ERC's small business status. In both instances, however, the
Government retains a royalty free right to use the patents for government
purposes and "march-in" rights with respect to the patents. March-in rights
allow the Government to take title to the patents and to license the patented
technology to others if the Government believes that the Company is not
utilizing the patents. A number of the Company's patents are subject to march-in
rights. The Company believes, however, that the likelihood of the Government
exercising these rights is very small and would only occur if the Company ceased
its commercialization efforts.

There can be no assurance that the issued patents or the licensing rights of
the Company will fully, or even partially, protect the Company's technology from
competitors' approaches, or that new patent applications will be allowed. There
can be no assurance that the Company would be successful if any challenges are
made by the Company to the patents of other parties or that other parties will
not be successful in asserting infringement claims against the Company. Further,
because of the intense competition in battery technology and the large number of
patents filed, or being filed, no assurance can be given that the Company will
not need another Company's patent under a license agreement, if such an
agreement could be reached or what the terms of that agreement might be. Any
determination that the Company's products or manufacturing processes have
infringed on the product or process rights held by others could have a material
adverse effect on the Company's business and results of operation. Additionally,
adverse determinations could result in the Company's loss of proprietary rights,
subject the Company to liability to third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
negative effect on the Company's business and hinder the Company's
commercialization initiatives.

40
<PAGE>
The Company has not filed for patent protection in certain potential major
markets such as India and Southeast Asia. Agreements reached with partners in
these areas would have to be based on trade secrets and know-how. In the future,
the Company may seek patent protection in those areas.

The Company also relies on know-how and trade secrets to establish its
battery technologies for commercial applications and there is no assurance it
can adequately protect this information in its dealings with other entities.
There can be no assurance that other organizations will not develop similar or
better information through their own efforts.

RESEARCH AND DEVELOPMENT

DEVELOPMENT OF NI-ZN

The Company expects to continue working on improving the characteristics of
its Ni-Zn batteries to provide a longer cycle life and higher energy density,
including the following research objectives:

SUPPORT FOR POTENTIAL AND CURRENT LICENSEES: New applications for Ni-Zn
offer the opportunity to optimize the cell design to better meet the customer's
desired specifications. Troubleshooting and general technical service for
existing licensees will be conducted by the research and development group.

TESTING OF NI-ZN IN EV'S, ELECTRIC BICYCLES AND SCOOTERS: The Company
started to conduct performance testing with vehicles from several different EV
manufacturers during the second quarter of 1998. Goals include measuring range
and other performance characteristics as a function of varied vehicle duty
cycles. Electric bicycles from Golden Dragon Bicycle Company in Xiamen have also
been received for testing, along with a scooter from another company.

BATTERY MANAGEMENT SYSTEM DEVELOPMENT (BMS): One of the primary reasons for
the Company conducting the EV tests in-house is to be able to monitor the way
individual cells, as well as the vehicle, behave during discharge/recharge
cycles. Finalizing the Ni-Zn BMS design is important to ensure customers get the
performance the cells are designed to provide and that the practical cycle-life
matches design. This task also will be completed by the ZSW Institute in Germany
under contract to ERC.

PERFORMANCE IMPROVEMENT: The performance of all batteries varies with
temperature; with specific power declining as temperature declines. The Company
plans to conduct research to improve the low temperature performance of its
Ni-Zn battery. Other technical goals include increasing cycle life from over 600
to 1000 and further improving energy density. The work will center on improved
electrode materials and separator systems.

ADVANCED RESEARCH

The research and development of other rechargeable zinc battery technologies
is the main non-Ni-Zn battery research being pursued. The Company is developing
a rechargeable zinc battery which if successful has the potential to compete for
the primary cell market at a price close to that of a common primary cells,
using the Company's zinc electrode technology. This opportunity is being pursued
in a cooperative technology joint venture which includes the company, Xiamen
Three Circles Co., Ltd. and assistance from Xiamen University. The overall
near-term goals for the program are to achieve greater than 100 cycles with only
a 20% decay in capacity and achieve a potential production cost that is not
significantly higher than that of commonly available alkaline cells.

EMPLOYEES

At present the Company employs a staff of twenty-two including a manager of
manufacturing, manager of engineering, manager of research and development,
support engineers and technicians and cell assemblers. The Company has recently
hired a manager of marketing and three additional engineers to support
manufacturing, development, testing and quality control.

41
<PAGE>
When the small-scale manufacturing facility is completed about approximately
25 production employees, and three quality control support inspectors will be
hired. Additional employees may be hired if the facility operates a second or
third work shift.

LEGAL PROCEEDINGS

ERC is one of approximately thirty-nine (39) potentially responsible parties
at the Gallups Quarry Superfund Site in Plainfield, Connecticut. ERC was one of
approximately twenty-four (24) parties that settled with the Environmental
Protection Agency ("EPA") (the "PRP group") to undertake remedial
investigation/feasibility studies leading to a record of decision ("ROD")
regarding the Gallups Quarry Superfund Site. EPA concluded in the ROD that the
remedial activity necessary for the Gallups Quarry was a "natural attenuation,
groundwater monitoring" remedy.

In June of 1998, EPA sent a special notice letter to ERC and approximately
thirty-eight (38) other potentially responsible parties to undertake the
approved ROD remedy. Gallups Quarry and the PRP Group are currently negotiating
with EPA to undertake the remedial action. All liabilities in connection with
this matter have been assumed by the Company.

Although these negotiations have not yet concluded, the Company believes
that its total future liability in this matter will not exceed $30,000.

The Company is not a party to any material pending legal proceeding.

42
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Jerry D. Leitman..................................... 56 Chairman and Acting President and Chief Executive
Officer
Bernard S. Baker..................................... 62 Director
Thomas L. Kempner.................................... 70 Director
William A. Lawson.................................... 64 Director
Warren D. Bagatelle.................................. 59 Director
Richard M.H. Thompson................................ 63 Director
James D. Gerson...................................... 54 Director
Allen Charkey........................................ 57 Executive Vice President, Chief Operating Officer and
Director
Louis P. Barth....................................... 53 Acting Chief Financial Officer
</TABLE>

JERRY D. LEITMAN has been President, Chief Executive Officer and a Director
of ERC since August 1997. Mr. Leitman was previously President of ABB Asea Brown
Boveri's global air pollution control businesses from 1992 to 1995. Prior to
joining ABB Mr. Leitman was Group Executive Vice President of FLAKT AB, a
Swedish multinational, responsible for FLAKT's worldwide industrial businesses
from 1989 to 1992. Mr. Leitman is also a Director and a member of the Audit
Committee of Esterline Technologies Inc.

BERNARD S. BAKER joined ERC in 1970 and was President of ERC from 1973 to
August 1997 when he became Chairman of the Board of Directors and a consultant
to ERC. He was Chief Executive Officer and a Director of ERC from March 1992 to
August 1997. He received a Ph.D from the Illinois Institute of Technology in
1969, and was a Fulbright Fellow at the Laboratory for Electrochemistry at the
University of Amsterdam subsequent to his receiving his Master of Science in
Chemical Engineering from the University of Pennsylvania in 1959.

THOMAS L. KEMPNER has been Chairman and Chief Executive Officer of Loeb
Partners Corporation since 1979 and a general partner of Loeb Investors Co.
LXXV, an affiliate of Loeb Partners Corporation and an investment partnership.
Mr. Kempner is a director of Alcide Corporation, The Arlen Corporation,
Cybernetics Services, Inc. (Formerly Silent Radio, Inc.), IGENE Biotechnology,
Inc., Intermagnetics General Corporation, CCC Information Group, Northwest
Airlines, Inc. and Roper Starch Worldwide, Inc. Mr. Kempner is a director of ERC
and was the Chairman of the Board of Directors of ERC from March 1992 to August
1997.

WILLIAM A. LAWSON has been President since 1987 of W.A. Lawson Associates,
an industrial and financial consulting firm. Mr. Lawson has been Chairman of the
Board of Directors of Newcor, Inc. since March 1991, and Chairman and Chief
Executive Officer of Bernal International Inc. since March 1997 (formerly
Atlantic Eagle Inc.). Mr. Lawson is a director of ERC.

WARREN D. BAGATELLE has been a Managing Director of Loeb Partners
Corporation since 1988. Mr. Bagatelle is a director of ERC and of Genisys
Reservation Systems, Inc. (formerly Corporate Travel Link, Inc.) which owns and
operates a computer reservation system for ground transportation.

RICHARD M.H. THOMPSON was the President and Director of Rotary Power
International, Inc., a company that designed and built rotary engines for
military and commercial uses from November 1991 through December 1997. Mr.
Thompson has been a director and Chairman of the Executive Committee of ERC
since January 1988. Since March 1987, he has been President of Richard M.H.
Thompson &

43
<PAGE>
Associates, Inc., a private investment company and financial advisor serving a
variety of technology and emerging growth companies.

JAMES D. GERSON has been Senior Vice President of Fahnestock & Co., Inc.
since March 1993 and is currently Portfolio Manager of the Hudson Capital
Appreciation Fund, a mutual fund. Mr. Gerson also serves as a director of ERC,
Ag Services of America, Inc., American Power Conversion Corp., Arguss Holdings,
Inc., and Hilite Industries, Inc.

ALLEN CHARKEY joined ERC in 1970, has held various positions of increasing
responsibility at ERC and has been Vice President of ERC's battery business
group since January 1997. Prior to joining ERC, Mr. Charkey was employed by
Yardney Electric Corporation from 1963 to 1970 as a battery scientist.

LOUIS P. BARTH joined ERC in 1976 as the Assistant Controller and Assistant
Secretary. He became the Vice President of Finance of ERC in 1981, the Secretary
of ERC in 1998, and the Senior Vice President and Chief Financial Officer of ERC
in 1993.

KEY EMPLOYEES

The Company has recently hired Glen V. Bowling as its new Director of
Marketing and Sales. Prior to joining the Company, he was Vice President of
Sales for the Saft Lithium and Military Battery Division of the Saft Group from
1997 to 1998, responsible for worldwide sales efforts for a $55 million dollar
business. From 1991 to 1997, he was Director of Sales and Marketing for the
Lithium Battery Division in Valdese, NC, where he was responsible for all
commercial actions for the facility and the LiSO(2) and LiSOCI(2) product. Mr.
Bowling received his MBA from Wright State University in 1982 and a BS from the
University of Florida in 1979.

COMMITTEES OF THE BOARD OF DIRECTORS

There will be two standing committees of the Board of Directors of the
Company: the Audit Committee and the Compensation Committee, each comprised of
one or more directors. The members of these committees will be appointed on or
about the Distribution Date.

The primary purpose of the Audit Committee will be to (i) select the firm of
independent accountants that will audit the consolidated financial statements of
the Company, (ii) discuss the scope and the results of the audit with the
accountants and (iii) discuss the Company's financial accounting and reporting
principles. The Audit Committee will also examine the summary reports of the
internal auditors of the Company and discuss the adequacy of the Company's
financial controls with the independent accountants and with management.

The functions of the Compensation Committee are to review, approve and
recommend to the Board of Directors the terms and conditions of incentive bonus
plans applicable to corporate officers and key management personnel, to review
and approve the annual salary of the chief executive officer, and to administer
the Company's 1998 Equity Incentive Plan.

DIRECTOR COMPENSATION

Directors will be compensated for their services according to a standard
arrangement authorized by resolution of the Company Board. An annual retainer
fee of $12,000 will be paid to each director. Directors who are employees of the
Company will not receive retainers. The Company will also reimburse certain
directors for reasonable expenses incurred in connection with the performance of
their duties as directors.

In accordance with the terms of the Option Agreement (the "Leitman Option
Agreement") entered into by ERC and Mr. Leitman at the time that Mr. Leitman
joined ERC, the Distribution Agreement provides that the Company will issue to
Mr. Leitman one share of Company Common Stock for each share

44
<PAGE>
of ERC Common Stock which he purchases pursuant to his exercise of stock options
granted to him by ERC.

The Company has also agreed to issue to Mr. Leitman a non-transferable
option (the "Company Option") to acquire 250,000 shares of Company Common Stock
exercisable at the Subscription Price. This Company Option will be exercisable
to acquire 100,000 vested shares and 150,000 restricted (unvested) shares during
the Rights Offering and will terminate on the Expiration Date. The restricted
(unvested) shares acquired pursuant to the Company Option will vest in
accordance with the vesting terms and conditions set forth in the Leitman Option
Agreement, i.e. an additional 50,000 shares become vested in each of August
1999, 2000, and 2001.

Mr. Leitman may exercise the Company Option with respect to the 150,000
restricted (unvested) shares by issuing to the Company a nonrecourse note (the
"Note") in the amount of the total exercise price. The Note shall provide that,
at such time as these restricted (unvested) shares vest, Mr. Leitman can either
forfeit the shares back to the Company or he can pay the applicable installment
of the Note (i.e. the Note shall be payable in three installments corresponding
to the three remaining vesting dates set forth in the Leitman Option Agreement).

The Company has also agreed to register under the Securities Act of 1933, as
amended, the shares of Common Stock to be issued to Mr. Leitman pursuant to the
exercise of the options granted by the Leitman Option Agreement and the Company
Option.

EXECUTIVE COMPENSATION

The following table sets forth, as to the acting Chief Executive Officer of
the Company and the other two most highly compensated individuals who will
become executive officers of the Company (the "named executive officers")
immediately after the Distribution, information concerning the compensation paid
by ERC for services in all capacities to ERC and its subsidiaries to or for the
benefit of such persons during the periods indicated. Mr. Leitman, the acting
President and Chief Executive Officer of the Company, and Mr. Barth, the acting
Chief Financial Officer of the Company, are both employees of ERC and not of the
Company. Their compensation, therefore, is paid by ERC; the Company will pay to
ERC its pro rata portion of such compensation allocated based upon the relative
number of employees of the Company and ERC (currently 11%).

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------- SECURITIES
------------------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTION COMPENSATION(2)
- --------------------------------------- --------- --------- --------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Jerry D. Leitman(1) 1997 73,848 0 -- 0 0
Acting President, Chief Executive
Officer

Louis P. Barth 1997 148,171 26,000 13,993
Acting Chief Financial Officer 1996 138,174 29,000 14,455
1995 128,884 26,000 13,878

Allen Charkey 1997 116,168 9,000 11,265
Executive Vice President, 1996 101,300 9,000 10,289
Chief Operating Officer 1995 99,360 6,500 9,527
</TABLE>

- ------------------------------

(1) Mr. Leitman joined ERC as President and Chief Executive Officer on August 4,
1997.

(2) Represents employer contributions to the ERC Defined Contribution Pension
Plan of approximately 4% of total annual compensation and employer
contributions to the ERC Section 401(k) Plan of approximately 5% of total
annual compensation.

45
<PAGE>
STOCK OPTIONS

The Company has adopted the 1998 Equity Incentive Plan (the "Plan") pursuant
to which it has awarded and may in the future award stock options and equity
incentive awards to its officers, directors, key employees and consultants.
800,000 shares of Common Stock have been reserved for issuance pursuant to the
Plan. See "--Director Compensation" for a description of certain stock options
to be issued to Mr. Leitman.

LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY

The amended and restated Certificate of Incorporation of the Company
provides that a director of the Company will not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the Delaware General Corporation Law ("DGCL") as the same exists
or may thereafter be amended. Based on the DGCL as presently in effect, a
director of the Company will not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, which concerns unlawful payments of dividends, stock
purchases or redemptions, or (iv) for any transactions from which the director
derived an improper personal benefit.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The By-laws of the Company ("By-laws") provide that the Company will
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may thereafter be amended, any person (an
"Indemnitee") who was or is made or is threatened to be made a party or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he,
she, or a person for whom he or she is the legal representative, is or was a
director or officer of the Company or, while a director or officer of the
Company, is or was serving at the request of the Company as a director, officer,
employee or agent of another company or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee.

The By-laws further provide that the Company will pay the expenses
(including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided however, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding will be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under the
relevant section of the By-laws or otherwise.

The By-laws also provide (i) that the rights conferred on any Indemnitee
thereby are not exclusive of any other rights which such Indemnitee may have or
thereafter acquire under any statute, provision of the Certificate, the By-laws,
agreement, vote of stockholders or disinterested directors or otherwise, (ii)
that the Company's obligation, if any, to indemnify or to advance expenses to
any Indemnitee who was or is serving at its request as a director, officer,
employee or agent of another company, partnership, joint venture, trust,
enterprise or nonprofit entity will be reduced by any amount such Indemnitee may
collect as indemnification or advancement of expenses from such other company,
partnership, joint venture, trust, enterprise or nonprofit enterprise, and (iii)
that any repeal or modification of the relevant provisions of the By-laws will
not adversely affect any right or protection thereunder of any Indemnitee in
respect of any act or omission occurring prior to the time of such repeal or
modification.

46
<PAGE>
The By-laws also expressly state that the provisions thereof will not limit
the right of the Company, to the extent and in the manner permitted by law, to
indemnify and to advance expenses to persons other than Indemnitees when and as
authorized by appropriate corporate action.

47
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the shares of Common Stock of the Company to
be beneficially owned by the officers, directors and 5% shareholders of the
Company following the Distribution, but prior to the consummation of the Rights
Offering, based upon the beneficial ownership of such individuals of the Common
Stock of ERC as of September 28, 1998 and assuming that no vested ERC options
have been exercised.

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------------------------- ------------------------- -----------
<S> <C> <C>
Warren Bagatelle 501,284(2) 12.1%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006

Thomas L. Kempner 361,667(2) 8.8%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006

Loeb Investors Co., LXXV 361,667(2) 8.8%
61 Broadway
New York, NY 10006

James D. Gerson 210,333(3) 5.1%
c/o Fahnestock and Co.
780 3rd Avenue
New York, NY 10017

Bernard S. Baker 22,299(4) *

Richard M.H. Thompson 88,000(5) 2.1%

William A. Lawson 55,666 1.3%

Louis P. Barth 17,650 *

Jerry D. Leitman 250,000(6) 6.1%

Allen Charkey -- *

Daimler Benz affiliate MTU-Friedrichshafen GmbH (MTU) 457,758 11.1%
Abt. VC, Gebaude 6.1
Zimmer 102A D-85521
Ottobrunn Germany

All Directors and Executive Officers as a Group (9 persons) 1,506,899 36.5%
</TABLE>

- ------------------------------

* Less than one percent

(1) Unless otherwise noted, each person identified possesses sole voting and
investment power with respect to the shares listed.

(2) Warren Bagatelle and Thomas L. Kempner, by virtue of being general partners
of Loeb Investors Co. LXXV, may each be deemed to beneficially own the
shares of Loeb Investors Co. LXXV. Each of Mr. Kempner and Mr. Bagatelle is
a member of a group, as that term is used in Section 13(d) of the Exchange
Act, which group, in the aggregate, owns 501,284 shares of Common Stock.

(3) Mr. Gerson's shareholdings include 36,400 shares held by his wife, Barbara
Gerson as Custodian for two minor children and also includes 15,800 shares
held by a private foundation, of which Mr. Gerson is President and a
Director, Mr. Gerson disclaims beneficial ownership of the securities held
by his wife and of the private foundation.

(4) Includes 6,900 shares owned by Dr. Baker's wife Cornelia Baker.

48
<PAGE>
(5) Mr. Thompson's shareholdings include 61,000 shares owned by his wife,
Elizabeth Thompson. Mr. Thompson disclaims beneficial ownership of the
shares owned by Mrs. Thompson. Mr. Thompson's shareholdings do not include
(i) 2,777 shares owned beneficially by Intervalora Investments Inc.
("Intervalora"), a company owned by a trust, the sole beneficiaries of which
are Mr. Thompson's children or (ii) 96,000 shares owned beneficially by
Malbena Foundation Vaduz ("Malbena"), a trust, the sole beneficiaries of
which are Mr. Thompson's children. Mr. and Mrs. Thompson disclaim beneficial
ownership in the Common Stock owned by Intervalora and Malbena.

(6) Mr. Leitman's shareholdings include currently exercisable options to
purchase 250,000 shares of Common Stock, 150,000 of which shares would be
restricted (unvested) shares. See "--Director Compensation".

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Rights Offering, if all Rights are exercised the
Company will have 8,256,546 shares of Common Stock outstanding (assuming no
exercise of outstanding options). Of these shares, the 4,128,273 shares issued
in the Distribution and the 4,128,273 shares sold in the Rights Offering will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except that any
shares issued to or purchased by "affiliates" of the Company, as that term is
defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may
generally only be sold in compliance with the limitations of Rule 144 described
below beginning 90 days after the date of this Prospectus.

In general, under Rule 144 as currently in effect, an Affiliate is entitled
to sell, within any three-month period, a number of shares (other than
"restricted securities" as defined in Rule 144 as to which a holding period is
applicable) that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (approximately 82,000 shares immediately
after this Offering, assuming all rights are exercised) or (ii) the average
weekly trading volume in the Common Stock on The Nasdaq Stock Market during the
four calendar weeks preceding the date on which notice of such sale is filed.
Sales under Rule 144 are also subject to certain limitations on manner of sale,
notice requirements, and availability of current public information about the
Company.

OPTIONS

As of October , 1998, options to purchase a total of shares of
Common Stock were outstanding, options for shares being not yet
exercisable. An additional shares of Common Stock are available for
future grants under the Company's stock option plan.

The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options. The Company expects to file these registration
statements promptly following the closing of the Offering, and such registration
statements are expected to become effective upon filing. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets.

49
<PAGE>
DESCRIPTION OF SECURITIES

AUTHORIZED CAPITAL STOCK

Prior to the Distribution Date, the Company Board and ERC, as sole
stockholder of the Company, will amend and restate the Certificate of the
Company, and ERC, as sole stockholder of the Company, will amend and restate the
By-laws of the Company. Under the Certificate, the Company's authorized capital
stock will consist of 20,000,000 shares of Company Common Stock.

COMPANY COMMON STOCK

The holders of Company Common Stock will be entitled to one vote for each
share on all matters on which stockholders generally are entitled to vote, and
except as otherwise required by law or provided in any resolution adopted by the
Company Board. The holders of Company Common Stock will possess 100% of the
voting power. The Certificate does not provide for cumulative voting.

Under the Certificate, the holders of Company Common Stock will be entitled
to such dividends as may be declared from time to time by the Company Board and
paid from funds legally available therefor, and the holders of Company Common
Stock will be entitled to receive pro rata all assets of the Company available
for distribution upon liquidation. All shares of Company Common Stock received
in the Distribution will be fully paid and nonassessable, and the holders
thereof will not have any preemptive rights.

There is no established public trading market for Company Common Stock,
although a "when issued" market is expected to develop prior to the Distribution
Date. The Company expects to apply to The Nasdaq Stock Market for trading of the
Company Common Stock.

The declaration of dividends on Company Common Stock will be at the
discretion of the Company Board. The Company Board has not adopted a dividend
policy as such. Subject to legal and contractual restrictions, its decisions
regarding dividends will be based on all considerations that in its business
judgment are relevant at the time, including past and projected earnings, cash
flows, economic, business and securities market conditions and anticipated
developments concerning the Company's business and operations. For additional
information concerning the payment of dividends by the Company, see "RISK
FACTORS--Dividends Policy."

The Company's cash flow and the consequent ability of the Company to pay any
dividends on Company Common Stock will be substantially dependent upon the
earnings and cash flow of the Company available after its debt service.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS

The Certificate, the By-laws, and the DGCL contain certain provisions that
could make the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise more difficult. The description set forth below is intended
as a summary only and is qualified in its entirety by reference to the
Certificate, the By-laws which are attached as exhibits to the Company's
Registration Statement on Form 10 under the Exchange Act relating to Company
Common Stock.

CLASSIFIED BOARD OF DIRECTORS The Certificate provides that the Company
Board will be divided into three classes of directors, with the classes to be as
nearly equal in number as possible. The Company Board consists of the persons
referred to in "MANAGEMENT--Executive Officers and Directors" above. The
Certificate provides that, of the initial directors of the Company,
approximately one-third will continue to serve until the first succeeding annual
meeting of the Company's stockholders, approximately one-third will continue to
serve until the second succeeding annual meeting of the Company's stockholders
and approximately one-third will continue to serve until the third succeeding
annual meeting of the Company's stockholders. Of the initial directors, Messrs.
Baker, Kempner and Lawson will serve until the first

50
<PAGE>
succeeding annual meeting of the Company's stockholders, Messrs. Bagatelle,
Thompson and Gerson will serve until the second succeeding annual meeting of the
Company's stockholders and Messrs. Leitman and Charkey will serve until the
third succeeding annual meeting of the Company's stockholders. At each annual
meeting of the Company's stockholders, one class of directors will be elected
for a term expiring at the third succeeding annual meeting of stockholders.

The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Company Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the members of the Company Board.
Such a delay may help ensure that the Company's directors, if confronted by a
stockholder attempting to force a proxy contest, a tender or exchange offer, or
an extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Company Board would be
beneficial to the Company and its stockholders and whether or not a majority of
the Company's stockholders believe that such a change would be desirable.

The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. The classification of the
Company Board could thus increase the likelihood that incumbent directors will
retain their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of the Company's stock by purchasers
whose objective is to take control of the Company and remove a majority of the
members of the Company Board, the classification of the Company Board could tend
to reduce the likelihood of fluctuations in the market price of Company Common
Stock that might result from accumulations of large blocks for such a purpose.
Accordingly, stockholders could be deprived of certain opportunities to sell
their shares of Company Common Stock at a higher market price than might
otherwise be the case.

NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES The Certificate provides
that the business and affairs of the Company will be managed by and under the
direction of a Board of Directors. The By-laws provide that the Company Board
shall consist of not less than three nor more than sixteen directors, the exact
number thereof to be determined from time to time by affirmative vote of a
majority of the Company Board. In addition, the By-laws provide that any vacancy
on the Company Board that results from an increase in the number of directors
may be filled by a majority of the Company Board then in office, provided that a
quorum is present, and any other vacancy occurring in the Company Board may be
filled by a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director.

Under the DGCL, unless otherwise provided in the Certificate, directors
serving on a classified board may only be removed by the stockholders for cause.
The Certificate does not provide that directors may be removed without cause.

SPECIAL MEETINGS The By-laws provide that special meetings of stockholders
will be called by the Company Board. Moreover, the business permitted to be
conducted at any special meeting of stockholders is limited to the purposes
specified in the notice of meeting given by the Company.

STOCKHOLDER MEETINGS The By-laws provide that the Company Board and the
chairman of a meeting may adopt rules for the conduct of stockholder meetings
and specify the types of rules that may be adopted (including the establishment
of an agenda, rules relating to presence at the meeting of persons other than
stockholders, restrictions on entry at the meeting after commencement thereof
and the imposition of time limitations for questions by participants at the
meeting).

PREFERRED STOCK The Certificate authorizes the Company to issue 1,000,000
shares of Preferred Stock. Pursuant to the Certificate, the Company Board may
provide for series of Preferred Stock and, with

51
<PAGE>
respect to each such series, to fix the number of shares constituting such
series and the designation of such series, the voting powers (if any) of the
shares of such series, the dividend rate (if any) of the shares of such series,
whether or not the shares of such series shall be redeemable, and, if
redeemable, the price, terms and manner of redemption, the preferences (if any)
and the special and relative rights of the shares of such series upon
liquidation of the Company, whether or not the shares of such series shall be
subject to the operation of a sinking or purchase fund, and, if so, the terms
and provisions of such fund, whether or not the shares of such series shall be
convertible into shares of any class of stock of the corporation and, if so, the
conversion price or ratio and other conversion rights, and the preferences and
relative, participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series.

The Company believes that the ability of the Company Board to issue one or
more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs which might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded.

Although the Board has no intention at the present time of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The Board will make any determination to issue such shares based on its
judgment as to the best interests of the Company and its stockholders. The
Board, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt through which an acquiror may be able to
change the composition of the Board, including a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock.

ANTI-TAKEOVER LEGISLATION Section 203 of the DGCL provides that, subject to
certain exceptions specified therein, a corporation shall not engage in any
"business combination" with any "interested stockholder" for a three-year period
following the time that such stockholder becomes an interested stockholder
unless (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares) or (iii) on or subsequent to such time, the business combination
is approved by the board of directors of the corporation and by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Section 203 of the DGCL generally defines an
"interested stockholder" to include (x) any person that is the owner of 15% or
more of the outstanding voting stock of the corporation, or is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years immediately prior
to the relevant date and (y) the affiliates and associates of any such person.
Section 203 of the DGCL generally defines a "business combination" to include
(1) mergers and sales or other dispositions of 10% or more of the assets of the
corporation with or to an interested stockholder, (2) certain transactions
resulting in the issuance or transfer to the interested stockholder of any stock
of the corporation or its subsidiaries, (3) certain transactions which would
result in increasing the proportionate share of the stock of the corporation or
its subsidiaries owned by the interested stockholder and (4) receipt by the
interested stockholder of the benefit (except proportionately as a stockholder)
of any loans, advances, guarantees, pledges, or other financial benefits.

Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
certificate of incorporation or stockholder-adopted by-laws may exclude a

52
<PAGE>
corporation from the restrictions imposed thereunder. Neither the Certificate
nor the By-laws exclude the Company from the restrictions imposed under Section
203 of the DGCL. It is anticipated that the provisions of Section 203 of the
DGCL may encourage companies interested in acquiring the Company to negotiate in
advance with the Company Board since the stockholder approval requirement would
be avoided if the Company Board approves, prior to the time the stockholder
becomes an interested stockholder, either the business combination or the
transaction which results in the stockholder becoming an interested stockholder.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is the Continental
Stock Transfer & Trust Company.

LEGAL MATTERS

Certain legal matters in connection with the Rights Offering will be passed
upon for the Company by Brown, Rudnick, Freed & Gesmer, Boston, Massachusetts.

EXPERTS

The financial statements of the Battery Business Group of ERC as of October
31, 1997, and for each of the years in the two-year period ended October 31,
1997 and the balance sheet of Evercel, Inc. as of June 30, 1998, have been
included herein and in the registration statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.

The report of KPMG Peat Marwick LLP covering the October 31, 1997 financial
statements of the Battery Business Group of ERC contains an explanatory
paragraph that states that the Company's recurring losses from operations raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.

53
<PAGE>
EVERCEL, INC.
INDEX TO FINANCIAL STATEMENT

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheet at June 30, 1998............................................................................. F-3
</TABLE>

BATTERY BUSINESS GROUP OF ERC
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-4
Balance Sheets as of October 31, 1997 and July 31, 1998 (unaudited).................. F-5
Statements of Operations for the years ended October 31, 1996 and 1997 and Nine
Months ended July 31, 1997 and 1998 (unaudited)..................................... F-6
Statements of Cash Flows for the years ended October 31, 1996 and 1997 and Nine
Months ended July 31, 1997 and 1998 (unaudited)..................................... F-7
Notes to Financial Statements........................................................ F-8
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Evercel, Inc. and
Energy Research Corporation ("ERC")

We have audited the accompanying balance sheet of Evercel, Inc. (a wholly-owned
subsidiary of ERC, hereafter referred to as the Company) as of June 30, 1998.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in that balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Evercel, Inc. as of June 30, 1998
in conformity with generally accepted accounting principles.

Stamford, Connecticut
September 28, 1998

F-2
<PAGE>
EVERCEL, INC.
BALANCE SHEET
JUNE 30, 1998

<TABLE>
<S> <C>
Cash................................................................................ $ 1,000
---------
---------
Common stock, $.01 par value, 3,000 shares authorized, 100 shares issued and
outstanding........................................................................ 1
Additional paid-in capital.......................................................... 999
---------
Total equity................................................................ $ 1,000
---------
---------
</TABLE>

NOTE TO BALANCE SHEET

Evercel, Inc. was organized on June 22, 1998 under the laws of the State of
Delaware as a wholly-owned subsidiary of Energy Research Corporation. The only
transaction to date has been the initial capitalization of $1,000. Evercel, Inc.
will be used to receive the net assets of the Battery Business Group of ERC in
connection with the proposed spin-off by Energy Research Corporation.

F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Energy Research Corporation ("ERC"):

We have audited the accompanying balance sheet of the Battery Business Group
of ERC (the Company) as of October 31, 1997, and the related statements of
operations and cash flows for the years ended October 31, 1996 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Battery Business Group
of ERC as of October 31, 1997, and the results of its operations and its cash
flows for the years ended October 31, 1996 and 1997 in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in paragraph 4 of Note 1
to the financial statements, the Company has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
paragraph 4 of Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Stamford, Connecticut
September 28, 1998

F-4
<PAGE>
BATTERY BUSINESS GROUP OF ERC

BALANCE SHEETS
($000'S)

<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1997 1998
----------- -------------
<S> <C> <C>
(UNAUDITED)
ASSETS

CURRENT ASSETS:
Cash.................................................................................. $ -- 3,100
Accounts receivable................................................................... 33 20
Other receivable...................................................................... 42 --
----------- -----
Total current assets.................................................................... 75 3,120
----------- -----

PROPERTY, PLANT AND EQUIPMENT:
Gross costs........................................................................... 1,160 1,376
Accumulated depreciation.............................................................. 942 873
Net................................................................................... 218 503
----------- -----
TOTAL ASSETS............................................................................ $ 293 3,623
----------- -----

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES:
Accrued liabilities................................................................... $ 48 67
Accounts payable...................................................................... 17 47
Due to ERC............................................................................ -- 162
----------- -----
Total current liabilities............................................................... 65 276
----------- -----
Deferred income tax liability......................................................... 13 13
Total liabilities....................................................................... 78 289
Minority interest....................................................................... -- 3,020

Net assets of Battery Business Group of ERC............................................. 215 314
----------- -----
TOTAL LIABILITIES AND NET ASSETS........................................................ $ 293 3,623
----------- -----
----------- -----
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE>
BATTERY BUSINESS GROUP OF ERC

STATEMENTS OF OPERATIONS
($000'S)

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED OCTOBER ENDED
31, JULY 31,
---------------------- --------------------
1996 1997 1997 1998
--------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Contracts................................................................ $ 355 144 128 2
License fee income....................................................... -- 292 167 419
--------- ----- --------- ---------

Total revenues............................................................. 355 436 295 421
--------- ----- --------- ---------

Cost & expenses:
Cost of revenues......................................................... 246 98 117 30
Depreciation & amortization.............................................. 34 40 26 37
Administrative and selling expenses...................................... 199 268 180 1,076
Research & development................................................... 644 897 480 1,283
--------- ----- --------- ---------
1,123 1,303 803 2,426
--------- ----- --------- ---------
(Loss) from operations before provision (benefit) for income taxes......... (768) (867) (508) (2,005)
Provision (benefit) for income taxes....................................... (261) (295) (173) (682)
--------- ----- --------- ---------
Net (loss)................................................................. $ (507) (572) (335) (1,323)
--------- ----- --------- ---------
--------- ----- --------- ---------
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>
BATTERY BUSINESS GROUP OF ERC

STATEMENTS OF CASH FLOWS

($000'S)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED OCTOBER ENDED
31, JULY 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
--------- --------- --------- ---------

<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss).............................................................. $ (507) $ (572) $ (335) $ (1,323)
Depreciation and amortization......................................... 34 40 26 37
Changes in operating assets and liabilities:
Accounts receivable................................................. 3 9 3 13
Other current assets................................................ -- (42) -- 42
Accounts payable.................................................... -- 12 9 30
Accrued liabilities................................................. 19 1 -- 19
Due to ERC.......................................................... -- -- -- 162
--------- --------- --------- ---------
Net cash provided by/(used in) operating activities............... (451) (552) (297) (1,020)
--------- --------- --------- ---------

Cash flows from investing activities--
Capital expenditures.................................................... (51) (120) (90) (322)
--------- --------- --------- ---------
Net cash provided by/(used in) investing activities............... (51) (120) (90) (322)

Cash flows from financing activities:
Sale of minority interest in joint venture.............................. -- -- -- 3,020
Contributions from ERC.................................................. 502 672 387 1,422
--------- --------- --------- ---------
Net cash provided by /(used in) financing activities.............. 502 672 387 4,442
--------- --------- --------- ---------
Net increase/(decrease) in cash................................... -- -- -- 3,100
Cash, beginning of period................................................. -- -- -- --
--------- --------- --------- ---------
Cash, end of period....................................................... $ -- $ -- $ -- $ 3,100
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

See accompanying notes to financial statements

F-7
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY U.S. UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Additional Information............... 2
<S> <C>
"Safe Harbor" Statement under Private
Securities Litigation Reform Act of
1995................................ 2
Prospectus Summary................... 3
Summary Financial Data............... 8
Risk Factors......................... 9
The Rights Offering.................. 15
Distribution......................... 20
Use of Proceeds...................... 24
Dilution............................. 25
Dividend Policy...................... 25
Capitalization....................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business............................. 30
Management........................... 43
Security Ownership of Certain
Beneficial Owners and Management.... 48
Shares Eligible for Future Sale...... 49
Description of Securities............ 50
Legal Matters........................ 53
Experts.............................. 53
Index to Financial Statements........ F-1
</TABLE>

4,128,273 SHARES
EVERCEL, INC.
COMMON STOCK

---------------------

PROSPECTUS

---------------------

OCTOBER , 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Ninth of the Registrant's Amended and Restated Certificate of
Incorporation eliminates the personal liability of directors to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty to the
full extent permitted by Delaware law. Article VII of the Registrant's Bylaws
provides that the Registrant may indemnify its officers and directors to the
full extent permitted by the Delaware General Corporation Law. Section 145 of
the Delaware General Corporation Law authorizes a corporation to indemnify
directors, officers, employees and agents of the corporation if such party acted
in good faith in a manner he believed to be in or not opposed to the best
interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, as
determined in accordance with the Delaware General Corporation Law. Section 145
further provides that indemnification shall be provided if the party in question
is successful on the merits or otherwise. The effect of these provisions is to
permit such indemnification by the Registrant for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant also
expects to obtain directors and officers liability insurance.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The costs of issuance and distribution which will be borne by the Registrant
are as follows:

<TABLE>
<S> <C>
SEC Registration Fee............................................. $2,436.00
Nasdaq Filing Fee................................................
Nasdaq Listing Fee...............................................
Blue Sky Fees and Expenses.......................................
Subscription Agent, Transfer Agent and Registrar Fees............
Accounting Fees and Expenses.....................................
Legal Fees and Expenses..........................................
Printing and Engraving...........................................
Miscellaneous....................................................
Total........................................................
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

None

ITEM 27. EXHIBITS

Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ -------------------------------------------------------------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation
of the Company*
3.2 Restated By-laws of the Company*
4.1 Form of Specimen Stock Certificate*
4.2 Form of Subscription Certificate for the Rights*
5 Opinion of Brown, Rudnick, Freed & Gesmer*
8 Opinion of Brown, Rudnick, Freed & Gesmer
regarding Tax Matters*
10.1 Distribution Agreement between the Company and
ERC*
10.2 Services Agreement between the Company and ERC*
</TABLE>

II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
- ------ -------------------------------------------------------------
<C> <S> <C>
10.3 Transfer and Agency Agreement between the Company
and ERC*
10.4 Tax Sharing Agreement between the Company and ERC*
10.5 Evercel, Inc. 1998 Equity Incentive Plan*
10.6 Lease between the Company and ERC*
23.1 Consent of KPMG Peat Marwick LLP**
23.2 Consent of Brown, Rudnick, Freed & Gesmer
(contained in Exhibit 5)*
24 Power of Attorney (contained in the signature page
to this Registration Statement)**
27 Financial Data Schedule**
</TABLE>

- ------------------------

* To be filed by amendment.

** Filed herewith.

ITEM 28. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 1.--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-2
<PAGE>
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the Town of Danbury,
State of Connecticut, on September 29, 1998.

EVERCEL, INC.

By: /s/ JERRY D. LEITMAN
-----------------------------------------
Jerry D. Leitman
Acting President and
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerry D. Leitman and James D. Gerson his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, and, in connection with any
registration of additional securities pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, to sign any abbreviated registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, in each case, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES STATED.

SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JERRY D. LEITMAN
- ------------------------------ Principal Executive September 29, 1998
Jerry D. Leitman Officer and Director

/s/ LOUIS P. BARTH
- ------------------------------ Principal Financial and September 29, 1998
Louis P. Barth Accounting Officer

/s/ BERNARD S.BAKER
- ------------------------------ Director September 29, 1998
Bernard S. Baker

/s/ THOMAS L. KEMPNER
- ------------------------------ Director September 29, 1998
Thomas L. Kempner

/s/ WILIAM A. LAWSON
- ------------------------------ Director September 29, 1998
Wiliam A. Lawson

/s/ WARREN D. BAGATELLE
- ------------------------------ Director September 29, 1998
Warren D. Bagatelle

/s/ RICHARD M.H. THOMPSON
- ------------------------------ Director September 29, 1998
Richard M.H. Thompson

/s/ JAMES D. GERSON
- ------------------------------ Director September 29, 1998
James D. Gerson

/s/ ALLEN CHARKEY
- ------------------------------ Director September 29, 1998
Allen Charkey

II-3

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTS

The Board of Directors
Evercel, Inc. and
Energy Research Corporation:

We consent to the use of our reports included herein and to the references
to our firm under the heading "Experts" in the prospectus.

Our report dated September 28, 1998, contains an explanatory paragraph that
states that the Battery Business Group of ERC has suffered recurring losses from
operations, which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.

/s/ KPMG PEAT MARWICK LLP
----------------------------------------------------------------------

KPMG Peat Marwick LLP

Stamford, Connecticut
September 28, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVERCEL,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BATTERY
BUSINESS GROUP, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 75
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 75
<PP&E> 1,160
<DEPRECIATION> 942
<TOTAL-ASSETS> 293
<CURRENT-LIABILITIES> 65
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 215
<TOTAL-LIABILITY-AND-EQUITY> 293
<SALES> 0
<TOTAL-REVENUES> 436
<CGS> 98
<TOTAL-COSTS> 1,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (867)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (867)
<INCOME-TAX> (295)
<INCOME-CONTINUING> (572)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (572)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)

</TABLE>