<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1998
REGISTRATION NO. 333-64931
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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 06-1528142
(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:
PHILIP J. FLINK, ESQUIRE MERRILL KRAINES, ESQUIRE
BROWN, RUDNICK, FREED & GESMER FULBRIGHT & JAWORSKI L.L.P.
One Financial Center 666 Fifth Avenue - 31st Floor
Boston, Massachusetts 02111 New York, New York 10103
(617) 856-8200 (212) 318-3000
--------------------------
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 Securities 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>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE FEE(1)
<S> <C> <C> <C> <C>
Rights(2)......................................... 1,376,500(3) -- -- --
Common Stock, $.01 par value...................... 1,582,975(4) $6.00 $9,497,850 $2,782
</TABLE>
(1) Calculated pursuant to Rule 457(o). $2,436 of this fee was previously paid.
(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 $6.00 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 one-third of the number of
shares of common stock of Energy Research Corporation outstanding as of
December 11, 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 and an additional 206,475 shares which may
be issued pursuant to the Company's option to sell such shares to satisfy
oversubscriptions, if any or pursuant to the Underwriters' overallotment
option.
------------------------------
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 DECEMBER 15, 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
1,376,500 SHARES OF COMMON STOCK
EVERCEL, INC.
RIGHTS OFFERING
------------------
Evercel, Inc. (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 January
, 1999 (the "Record Date"), transferable subscription rights (the "Rights") to
subscribe for and purchase additional shares of Company Common Stock (the
"Rights Offering") at a price of $6.00 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. If any Company Common Stock underlying the Rights remains
unsubscribed after the Rights Offering, the Underwriters will purchase all such
Company Common Stock pursuant to a standby underwriting agreement.
The Rights will expire at 5:00 p.m., Eastern time, on February , 1999 at
which time they will become null and void unless extended by the Company,
subject to the consent of the Underwriters (as extended, the "Expiration Date").
The Company will not, in any event, extend the Expiration Date beyond March 31,
1999. Failure to exercise Rights could result in substantial dilution to
non-exercising stockholders. See "RISK FACTORS--Dilution from Rights Offering."
The Company was formed as a wholly-owned subsidiary of Energy Research
Corporation, a New York corporation ("ERC") on June 22, 1998. Prior to the
Record Date, 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. If the transfer were to take
place as of July 31, 1998, the total book value of the assets and liabilities to
be transferred would be $523,000 and $289,000, respectively. Included as assets
to be transferred to the Company by ERC are ERC's battery technology, including
certain intellectual property related to such technology, and the benefits and
obligations under certain license agreements pursuant to which ERC has licensed
its battery technology to third parties; these assets have been carried on ERC's
books, and will be carried on the Company's books, at zero value.
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 every three shares of Common Stock of ERC that such stockholders hold
as of January , 1999 (the "ERC Record Date"). Prior to the closing of the
Rights Offering, Company Common Stock received in the Distribution may not be
sold or otherwise disposed of pursuant to a restriction in the Company's
charter. As of December 11, 1998, 4,129,273 shares of ERC Common Stock were
outstanding; therefore, approximately 1,376,500 shares of Company Common Stock
will be distributed in the Distribution. Fractional shares will not be issued; a
cash payment will be made to ERC stockholders otherwise entitled to a fractional
share of Company Common Stock as a result of the Distribution. The Distribution
is expected to occur on or about January , 1999 (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 has applied to have its Common Stock listed for quotation on the Nasdaq
SmallCap Market under the symbol following the closing of the Rights
Offering. The Subscription Price has been determined by the Company's Board of
Directors 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 THE
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (1)(2)
<S> <C> <C> <C>
Min. $0.225 Max. $5.775
Per Share................... $6.00 Max. $0.540 Min. $5.460
Min. $309,713 Max. $7,949,287
Total(3)(4)................. $8,259,000 Max. $743,310 Min. $7,515,690
</TABLE>
- ------------------------------
(1) The minimum underwriting discount assumes that all Rights granted in the
Rights Offering are exercised and reflects the payment of a financial
advisory fee to the Underwriters equal to 3.75% of the exercise price on the
1,376,500 shares sold in this offering. In such a case, the minimum
underwriting discount would yield the maximum proceeds to the Company. The
maximum underwriting discount assumes that none of the Rights granted in the
Rights Offering are exercised and reflects the payment of an underwriting
discount of 5.25% of the exercise price on the 1,376,500 shares which would
then be purchased by the Underwriters. In such a case, the maximum
underwriting discount would yield the minimum proceeds to the Company.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has the option to sell up to an additional 206,475 shares of
Company Common Stock solely to cover exercises of excess Oversubscription
Privileges, if any (the "Oversubscription Option"). If such Oversubscription
Option is exercised in full, the Underwriting Discounts and Commissions and
Proceeds to the Company will be $356,170 and $9,141,681, respectively.
(4) The Underwriters have the option (the "Overallotment Option") to purchase up
to an additional 206,475 shares of the Company Common Stock, reduced by the
number of shares, if any, sold by the Company to holders of Rights under the
Oversubscription Option. If such Overallotment Option is exercised in full,
and assuming no exercise of the Oversubscription Option, the total
Underwriting Discounts and Commissions and Proceeds to the Company will be
increased by $111,497 and $1,127,354, respectively.
------------------------------
LOEB PARTNERS CORPORATION BURNHAM SECURITIES INC.
------------------
The date of this Prospectus is .
<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 (the "Securities Act"), 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 to 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, D.C. 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).
FORWARD-LOOKING STATEMENTS
Investors are cautioned that forward-looking statements in this Prospectus,
including without limitation statements relating to the adequacy of the
Company's resources, expansion plans and licensing opportunities 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
set forth herein under "RISK FACTORS."
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 BUSINESS 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 LICENSE ASSISTANCE AGREEMENT DESCRIBED HEREIN, (III) THE
DISTRIBUTION TO THE STOCKHOLDERS OF ERC OF ONE SHARE OF COMPANY COMMON STOCK FOR
EVERY THREE SHARES OF COMMON STOCK OF ERC HELD BY THEM, (IV) THE FILING OF AN
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION (THE "CERTIFICATE") AND THE
ADOPTION OF THE RESTATED BY-LAWS (THE "BY-LAWS") OF THE COMPANY REFLECTING THE
PROVISIONS DESCRIBED HEREIN AND (V) NO EXERCISE OF THE OVERSUBSCRIPTION OPTION
OR THE OVERALLOTMENT OPTION. SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THE DISTRIBUTION AND THE RIGHTS OFFERING
The Company was formed as a wholly-owned subsidiary of Energy Research
Corporation, a New York corporation ("ERC") on June 22, 1998. Prior to the
Record Date, ERC expects to transfer to the Company the principal assets related
to its Battery Business Group, and the Company will assume certain liabilities
related to those assets; if the transfer were to take place as of July 31, 1998,
the total book value of the assets and liabilities to be transferred would be
$523,000 and $289,000, respectively. Included as assets to be transferred to the
Company by ERC are ERC's battery technology, including certain intellectual
property related to such technology, and the benefits and obligations under
certain license agreements pursuant to which ERC has licensed its battery
technology to third parties; these assets have been carried on ERC's books, and
will be carried on the Company's books, at zero value.
Immediately prior to the grant of the Rights by the Company, ERC will
distribute to its stockholders one share of Company Common Stock for every three
shares of common stock, $.0001 par value of ERC ("ERC Common Stock") that such
stockholders hold (the "Distribution") as of January , 1999 (the "ERC Record
Date"). As of December 11, 1998, 4,129,273 shares of ERC Common Stock were
outstanding; therefore, approximately 1,376,500 shares of Company Common Stock
will be distributed in the Distribution. Fractional shares will not be issued; a
cash payment will be made to ERC stockholders otherwise entitled to a fractional
share of Company Common Stock as a result of the Distribution. The Distribution
is expected to occur on or about January , 1999 (the "Distribution Date"). See
"THE DISTRIBUTION."
Immediately after the Distribution, the Company is granting at no cost to
holders of its Common Stock, transferable subscription rights to subscribe for
and purchase additional shares of Company Common Stock (a "Right") at a purchase
price of $6.00 per share. Each holder of Common Stock of the Company will
receive one transferable Right for each share of Company Common Stock held of
record at the close of business on January , 1999 (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 believes
that its 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 has been used on a limited test basis in a range of rechargeable
battery applications, including bicycles, scooters, electric vehicles, trolling
motors for boats, and lawn mowers. The Company also believes its Ni-Zn battery
may be used in
3
<PAGE>
other rechargeable battery applications including electric wheelchairs,
golfcarts, power tools, and consumer and electronic products.
The Company's strategic goals are to rapidly commercialize its Ni-Zn
technology, maintain and increase its technological 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 intends to
commercialize its Ni-Zn technology through a combination of direct sales,
licensing agreements and joint venture relationships. See "RISK FACTORS."
The Company's executive offices are located at 3 Great Pasture Road,
Danbury, Connecticut 06813, telephone: (203) 825-6000.
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 (the "Rights"). 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
1,376,500 Rights will be distributed to the holders of
Common Stock (based upon one-third of the number of shares
of ERC Common Stock outstanding as of December 11, 1998).
Each Right will be exercisable to purchase one share of
Common Stock of the Company at a purchase price of $6.00
per share. An aggregate of approximately 1,376,500 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..................... January , 1999
Expiration Date................. February , 1999, 5:00 p.m., Eastern time, or such later
date to which the Company may extend the expiration of the
Rights, subject to the consent of the Underwriters, at
which time the Rights will become null and void. The
Company will not, in any event, extend the Expiration Date
beyond March 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."
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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. Any excess
funds paid 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. See "THE RIGHTS OFFERING--Subscription
Privileges--Oversubscription Privilege." The Company has
the option to sell up to an additional 206,475 shares of
Company Common Stock solely to cover exercises of
Oversubscription Privileges which exceed the available
Underlying Shares.
Subscription Price.............. $6.00 in cash per share of Company Common Stock subscribed
for pursuant to the Basic Subscription Privilege or the
Oversubscription Privilege.
Company Common Stock Outstanding
after Rights Offering......... Approximately 2,753,000 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. It is
anticipated that the Rights will trade in the
over-the-counter market until the close of business on the
last trading day prior to the Expiration Date. There can
be no assurance that a market for the Rights will develop
or as to the prices at which the Rights will trade. Prior
to the closing of the Rights Offering, pursuant to a
restriction in the Company's Certificate, the Company
Common Stock received in the Distribution may not be sold
or otherwise disposed of. The Company has applied for
listing of the Company Common Stock for quotation on the
Nasdaq SmallCap Market following the Rights Offering.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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), with payment of the Subscription
Price for each Underlying Share subscribed for pursuant to
the Basic Subscription Privilege and, except as set forth
herein, the Oversubscription Privilege to the Subscription
Agent on or prior to the Expiration Date. 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."
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 following
the Expiration Date. See "THE RIGHTS
OFFERING--Subscription Privileges."
Use of Proceeds................. The Company intends to use the net proceeds of the Rights
Offering to lease and equip a new facility for production
and manufacturing purposes, for working capital purposes,
and for general corporate purposes. See "USE OF PROCEEDS."
Subscription Agent.............. Continental Stock Transfer & Trust Company (the
"Subscription Agent").
Standby Underwriting............ If any Underlying Shares remain unsubscribed after the
Rights Offering, the Underwriters will purchase all such
Underlying Shares pursuant to a standby underwriting
agreement. The Underwriters have the option to purchase up
to an additional 206,475 shares of the Company Common
Stock, reduced by the number of shares, if any, sold by
the Company to holders of Rights under the
Oversubscription Option. See "THE STANDBY UNDERWRITING."
Proposed Nasdaq Symbol..........
Risk Factors.................... See "RISK FACTORS" 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 January ,
1999, owned and operated the Battery Business 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 every three shares of ERC Common Stock held of record
on the ERC Record Date. Shares of Company Common Stock
received in the Distribution may not be sold or otherwise
disposed of prior to the closing of the Rights Offering.
Until such closing occurs, the Company Common Stock will
be uncertificated. Following the closing, 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 ERC Record Date. See "THE
DISTRIBUTION--Manner of Effecting the Distribution."
Shares to be Distributed........ Based on one-third of the number of shares of ERC Common
Stock outstanding on December 11, 1998, approximately
1,376,500 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.
Fractional Shares............... Fractional shares of Company Common Stock will not be
issued in the Distribution. A cash payment will be made to
ERC stockholders otherwise entitled to a fractional share
of Company Common Stock as a result of the Distribution.
The amount of such payment will be based upon the average
bid price on the first day of trading of the Company
Common Stock. Such payment will, therefore, not be made
until the Company Common Stock begins trading after the
closing of the Rights Offering.
ERC Record Date................. January , 1999.
Distribution Date............... January , 1999.
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 shares in 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, except for cash
received in lieu of fractional shares. See "THE
DISTRIBUTION--Federal Income Tax Aspects of the
Distribution."
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth the summary operating data and balance sheet
data of the Company for the periods and as of the date indicated. The summary
financial data were 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.
<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 87 30
Depreciation and amortization..................................... 34 40 26 37
Administrative and selling........................................ 199 268 210 1,076(1)
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)(2)............... $(0.42) $(0.96)
---------- ----------
---------- ----------
Pro forma weighted average shares (basic and diluted)(2).......... 1,376,500 1,376,500
---------- ----------
---------- ----------
Pro forma net loss per share (basic and diluted), as
adjusted(3)..................................................... $(0.21) $(0.48)
---------- ----------
---------- ----------
Pro forma weighted average shares (basic and diluted), as
adjusted(3)..................................................... 2,753,000 2,753,000
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31, 1998
ACTUAL(4) AS ADJUSTED(5)
<S> <C> <C>
---------------------------
Balance Sheet Data:
Total assets......................................................................... $ 524 $ 7,973
----------- -------
Working capital...................................................................... (255) 7,194
----------- -------
Stockholders' equity/net assets...................................................... 235 7,684
----------- -------
</TABLE>
- ------------------------
(1) Includes charges of approximately $376,000 related to an uncompleted
acquisition.
(2) Pro forma to reflect the Distribution.
(3) As adjusted to reflect the Distribution and the Rights Offering.
(4) Reflects the combination of Evercel, Inc. and the Battery Business Group of
ERC as if the combination was effective as of July 31, 1998.
(5) As adjusted to reflect the Rights Offering 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,
there has been no public market for the Common Stock. The Subscription Price has
been determined 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. The Board
of Directors of the Company believes that the Subscription Price may be lower
than the actual value of the Common Stock of the Company. However, the Board of
Directors believes that any valuation of the Company, given its early stage of
development, is highly speculative. The actual value or resale value of the
Common Stock may be higher or lower than the Subscription Price. See "THE RIGHTS
OFFERING-- Determination of 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 independent 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 and its 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.
Likewise Joseph G. Mahler, the Chief Financial Officer of ERC, will serve as the
acting Chief Financial Officer of the Company until a new chief financial
officer is appointed. There can be no assurance that the Company will be able to
recruit and retain a highly qualified chief executive officer and chief
financial officer to replace Messrs. Leitman and Mahler. In addition, there can
be no assurance that the Company will be able to operate profitably as an
independent company.
9
<PAGE>
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. To date the Company has received no revenues from product sales of its
Ni-Zn battery. The Company believes that its dependence on revenues related to
its 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.
Since the Company intends to focus its manufacturing, research and
development and marketing efforts on its Ni-Zn batteries, it will be dependent
upon the market acceptance of its Ni-Zn batteries. The Company's Ni-Zn batteries
have not yet achieved market acceptance, and 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.
RISKS RELATING TO TRANSFER OF JOINT VENTURE AND RELATED LICENSE
AGREEMENT. ERC has entered into a joint venture in China (the "Joint Venture")
with Xiamen Three Circles Co., Ltd, a Chinese entity, 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. The Joint Venture and ERC have entered into a Technology
Transfer and License Contract (the "Three Circles License Agreement") pursuant
to which ERC has licensed certain of its Ni-Zn battery technology to the Joint
Venture. See "BUSINESS--Partnerships, Joint Ventures and Licenses." In order for
ERC to transfer its interest in the Joint Venture and the Three Circles License
Agreement to the Company, ERC intends to obtain the consent of Xiamen Three
Circles Co., Ltd. and the Joint Venture and the approval of the appropriate
examination and approval authority of the People's Republic of China ("China" or
the "PRC"). However, there can be no assurance that these consents and approvals
will be obtained on a timely basis or at all. Pending receipt of these consents
and approvals, ERC and the Company have entered into a License Assistance
Agreement pursuant to which ERC has retained the Company to provide all services
and assistance necessary for the Company to effectively fulfill, on behalf of
ERC, all of ERC's obligations under the Joint Venture contract and Three Circles
License Agreement in exchange for payment to the Company by ERC of all
remuneration paid and other benefits accruing to ERC pursuant to such
agreements. See "THE DISTRIBUTION--Relationship Between ERC and the Company
after the Distribution--License Assistance Agreement." A failure to obtain or a
delay in obtaining these consents and approvals could have a material adverse
effect on the Company because the Company will be able to enforce its rights
under these agreements only through ERC. In addition, ERC's Chinese partner
could take exception to the License Assistance Agreement and claim that ERC is
in default under these agreements. Any such event or resulting termination of
these agreements could have a material adverse effect on the Company. See
"--Risks of Relying on ERC."
RISKS PERTAINING TO CHINA. Currently, the Company's two major license
agreements, the Nan Ya License Agreement and the Three Circles License Agreement
(the "China Licenses") are with entities located in the PRC. ERC has established
the Joint Venture in the PRC to build a manufacturing plant that the Company
intends to use as its primary production facility. ERC also plans to transfer
its interest in the Joint Venture to the Company. See "--Risks Relating to
Transfer of Joint Venture and Related License Agreement." The following risk
factors relating to conducting business in the PRC could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
Potential Adverse Effects of Internal Political Changes. The Company's
business operations in China, its interest in the Joint Venture and its rights
under the China Licenses may be adversely affected by the political environment
in China. The PRC is a socialist state which, since 1949 has been, and is
expected to continue to be, controlled by the Communist Party of China. Changes
in the political leadership of the PRC may have a significant adverse effect on
policies related to China's current economic reform program,
10
<PAGE>
other policies affecting business and the general political, economic and social
environment in the PRC. Any such changes in the political leadership or current
economic reform policies or the imposition of additional restrictions on foreign
owned enterprises could have a material adverse effect on the business of the
Joint Venture, the Company's interest in the Joint Venture and the Company's
rights and revenues under the China Licenses.
Proprietary Rights. The Company protects its intellectual property rights
in the PRC through a combination of patent applications, contractual
arrangements and trade secrets. Patent and intellectual property right
protection in the PRC affords substantially less protection than is available in
the United States. There can be no assurance that the Company will be able to
effectively protect its proprietary rights in China. The unauthorized use by
others in the PRC of the Company's technology could have a material adverse
effect on the Company's business, financial condition and results of operations.
Restrictions on Repatriation of Foreign Currency Exchange, Other Foreign
Currency Exchange Restrictions and Volatility of Exchange Rates. The PRC
regulates the expatriation of foreign currencies as payments to foreigners,
including investors and licensors, and the conversion of Renminbi (the currency
of the PRC) into foreign currencies, such as the U.S. Dollar. In addition, there
has been significant volatility in the exchange rate of Renminbi to U.S.
Dollars. The Company expects that the Joint Venture and the Company's other
licensee in the PRC will receive a substantial portion of their revenues in
Renminbi. A portion of such revenues will have to be converted to other
currencies to meet foreign currency obligations (such as payment obligations to
suppliers) or for purposes of remittance to the Company as return of capital,
dividends or license payments. The Joint Venture and the Company's other
licensee in China may be unable to convert sufficient Renminbi into foreign
currency to enable them to comply with any foreign currency payment obligations
they have, including distributions to the Company. In the event of a depressed
market in Renminbi, the cost of foreign currency could be sufficiently high to
preclude joint ventures from meeting any foreign financial obligations incurred
in the future or from paying distributions and license fees to the Company.
Moreover, fluctuations in the exchange rate of the Renminbi into U.S. Dollars
could have an adverse effect on the license fees to be paid to the Company. Even
if the Joint Venture or any other licensee of the Company is able to convert
their Renminbi into foreign currencies there can be no assurance that the PRC
will not impose restrictions on the ability of these entities to remit out of
the PRC amounts due to the Company in U.S. Dollars or otherwise.
PRC Laws; Uncertainty Arising from Evolving Regulations and Policies. The
PRC does not have a well-developed, consolidated body of laws governing foreign
investment-enterprises. As a result, the administration of laws and regulations
by government agencies may be subject to considerable discretion and variation.
As the legal system in the PRC develops with respect to these new types of
enterprises, foreign investors may be adversely affected by new laws, changes to
existing laws (or interpretations thereof) and preemption of provincial or local
laws by national laws. In circumstances where adequate laws exist, it may not be
possible to obtain timely and equitable enforcement thereof.
Uncertainty of Most Favored Nation Trading Status. A significant portion
of the economic activity in China is export-driven and, therefore, is affected
by developments in the economies of the PRC's principal trading partners. The
United States Congress considers annually the renewal of "Most Favored Nation"
trading status for the PRC, and may attach conditions to such renewal. There can
be no assurance that Congress will renew such status or that future renewal will
not be linked to human rights issues or other requirements which the PRC may
decline or be unable to meet. Revocation or conditional extension by the United
States of the PRC's "Most Favored Nation" trading status could have a material
adverse effect upon the Company.
Recent Conditions in Asia. Recently, economic conditions and markets have
been unstable throughout Asia. Currencies in several countries have been
devalued, and there has been political instability in certain countries.
Economic or political instability in China or a significant devaluation of the
Renminbi could have a material adverse effect upon the Company.
Expropriation of Property. Following the formation of the PRC in 1949,
the PRC government renounced various debt obligations incurred by predecessor
governments, which obligations remain in
11
<PAGE>
default, and expropriated assets without compensation. There can be no assurance
that the PRC government will not in the future expropriate or nationalize the
assets of the Joint Venture or any assets of the Company in China. Such an
expropriation would result in a total loss of the Company's investment in China.
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 License Assistance 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.
The Distribution Agreement provides for the transfer to the Company of the
business and principal assets of the Battery Business Group, the assumption by
the Company of certain liabilities and obligations relating to that business,
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. See "THE DISTRIBUTION-- Relationship Between ERC and the
Company after the Distribution."
The Tax Sharing Agreement defines the rights and obligations of ERC and the
Company with respect to filing of returns, payments, deficiencies and refunds of
federal, state and other income, franchise or certain other taxes relating to
the Company's operations after the transfer of the Battery Business Group to the
Company. This Agreement is intended to allocate the tax liability of ERC between
ERC and the Company as if they were separate taxable entities.
The Services Agreement sets forth the terms under which ERC will provide to
the Company certain management and administrative services, as well as the use
of certain office, research and development, and manufacturing and support
facilities and services.
The License Assistance Agreement is intended to transfer to the Company
ERC's benefits and obligations under the Joint Venture contract and the Three
Circles License Agreement while the Company and ERC seek formal approval for
that transfer. The License Assistance Agreement provides that the Company will
provide the services and assistance necessary for the Company to effectively
fulfill, on behalf of ERC, all of ERC's obligations under the Joint Venture
contract and the Three Circles License Agreement in exchange for payment to the
Company by ERC of all remuneration paid and other benefits accruing to ERC
pursuant to such agreements. ERC has also agreed to act in accordance with the
instructions of the Company in connection with matters of Joint Venture
governance and agreed not to permit the amendment of the related documents
without the consent of the Company. See "RISK FACTORS--Risks of Relying on ERC"
and "--Risks Relating to Transfer of Joint Venture and Related License
Agreement."
In addition to the foregoing relationships, the Company has agreed to issue
options to purchase up to 183,332 shares of Common Stock to officers and
directors of ERC in connection with the Distribution. See "MANAGEMENT--Director
Compensation" and "--Stock Options."
The agreements between the Company and ERC, and the Company and officers and
directors of ERC, 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. In addition, questions regarding the resolution of any
issues arising under these arrangements will be resolved by the Company and ERC.
Initially, the Acting Chief Executive Officer, Acting Chief Financial Officer
and a majority of the directors of the Company will also be officers and
directors of ERC. As a result of these conflicts of interest, the Company's
management may not make decisions that are in the best interests of the Company
and its stockholders. The failure to do so could have a material adverse affect
on the Company's business, results of operations and financial position.
RISKS OF RELYING ON ERC. While the Services Agreement is in effect between
the Company and ERC, the Company will be relying on ERC to provide to it many
essential services, including management and administrative services, as well as
the use of office, research and development, and manufacturing and support
facilities and services. The officers and employees of ERC may have conflicts of
interest in allocating their time and efforts between their activities on behalf
of ERC and their activities on behalf of
12
<PAGE>
the Company and enforcing contractual rights and obligations between ERC and the
Company. In addition, ERC could decide to terminate one or more of the services
provided under the Services Agreement upon 60 days' notice to the Company. Any
failure of ERC to provide quality services on a timely basis or to continue to
provide services to the Company could have a material adverse effect on the
Company to the extent that the Company is unable to replace such services.
The Company will be relying upon ERC to realize the benefits of the Joint
Venture and the Three Circles License Agreement until all consents and approvals
to the transfer and assignment of these agreements are obtained. Conflicts of
interest between ERC and the Company could arise in connection with these
agreements. A bankruptcy or insolvency of ERC could prevent the Company's
receipt of funds due to it under the agreements, even if the funds were paid to
ERC. The Chinese parties to the agreements could take exception to the License
Assistance Agreement and claim that ERC is in default under one or more of the
agreements, resulting in a termination of such agreements. Any of these events,
a delay in obtaining or the failure to obtain the consents and approvals to the
transfer and assignment of these agreements could have a material adverse effect
on the Company to the extent that the Company is unable to fully realize the
benefits of these agreements.
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 in 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 problems 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 with 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
13
<PAGE>
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 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 limited manufacturing capability and no experience in large scale
manufacturing of its advanced rechargeable batteries and has no experience in
automated assembly and packaging technology. There can be no assurance 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 proprietary 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 a material 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 intends to enter into other
joint venture arrangements in the future to further commercialize its battery
technology. 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 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
14
<PAGE>
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, including Allen
Charkey, the Executive Vice President and Chief Operating Officer of the
Company, 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, 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. ERC, however, has had
battery-related patents issued and patent applications pending in the U.S. and
elsewhere which patents and patent applications will be assigned to the Company
in the Distribution. 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 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
15
<PAGE>
manage raw material costs and inventory relative to anticipated production
requirements for the next six to twelve months.
FUTURE CASH REQUIREMENTS. Although the Company believes that the net
proceeds from this offering will be sufficient to fund its working capital needs
for at least the next twelve months, there can be no assurance that this will be
the case. The Company's cash requirements will vary depending upon a number of
factors, many of which may be beyond the control of the Company, including
demand for the Company's products, the efforts and success of the Company and
its 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. If
and when the Company is required to raise additional funds, there can be no
assurance that the Company will be able to do so on favorable terms, if at all.
Failure of the Company to raise funds required to support its operations would
have a material adverse effect on the Company's business, financial condition
and results of operations and could result in a loss to the investors in the
Rights Offering of their entire investment. See "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
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% of the currently outstanding shares of ERC Common Stock and,
therefore, may be deemed to beneficially own approximately 12.1% of Company
Common Stock following the Distribution. If these stockholders (the "Loeb
Holders") exercise their Basic Subscription Privilege and acquire Underlying
Shares pursuant to the exercise of their Oversubscription Privilege, it will
increase their percentage ownership of Common Stock after the Rights Offering.
In addition, Loeb Partners Corporation, a corporation of which Thomas Kempner is
Chairman and Chief Executive Officer and Warren Bagatelle is a Managing
Director, is serving as a co-standby underwriter for the Rights Offering. James
Gerson, a director of the Company, may be deemed to beneficially own
approximately 5.1% of the currently outstanding shares of ERC Common Stock and,
therefore, may be deemed to beneficially own approximately 5.1% of Company
Common Stock following the Distribution. In addition, Mr. Gerson and a colleague
entered into an agreement with another principal shareholder of ERC to purchase
from such shareholder all of the Rights issued to such shareholder in the Rights
Offering. See "MANAGEMENT--Certain Transactions." If Mr. Gerson exercises his
Basic Subscription Privilege with respect to all of these Rights and the Rights
he receives with respect to his shares and acquires Underlying Shares pursuant
to the exercise of his Oversubscription Privilege, it will increase his
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 and/or Mr. Gerson upon completion of the
Rights Offering could increase substantially in the event that the Loeb Holders
and/or Mr. Gerson exercise their Oversubscription Privileges.
NO PRIOR MARKET FOR COMMON STOCK; RESTRICTION ON TRANSFER DURING RIGHTS
OFFERING. 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. While the Rights may be transferred prior to the Expiration Date,
they will not be listed or traded on any national securities exchange or
automated quotation system. Prior to the closing of the Rights Offering, the
Company Common Stock received in the Distribution may not be sold or otherwise
disposed of pursuant to a restriction in the Company's Certificate. The Company
has applied to have the Company Common Stock listed for quotation on the Nasdaq
SmallCap Market following the closing of the Rights Offering, however, there can
be no assurance that such listing will be obtained. 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.
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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.
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).
POSSIBLE EXTENSION OF EXPIRATION DATE. The Company has reserved the right
to extend the Expiration Date to as late as March 31, 1999, subject to the
consent of the Underwriters. 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 CHARTER PROVISIONS AND DELAWARE
LAW. Certain provisions of Delaware law and the Company's Certificate of
Incorporation 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 has applied to The Nasdaq Stock
Market to have the Common Stock listed for quotation on the Nasdaq SmallCap
Market following the closing of the Rights Offering. If the Common Stock is not
approved for listing on the Nasdaq SmallCap 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.
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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THE RIGHTS OFFERING
THE RIGHTS
The Company is granting transferable Rights 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 $6.00 per share. No
fractional shares will be issued.
DETERMINATION OF THE SUBSCRIPTION PRICE
Prior to the Rights Offering, there has been no public market for the Common
Stock. The Subscription Price has been determined by the Company's Board of
Directors based upon a number of factors, including the anticipated initial
capital requirements of the Company, market valuations of development stage
companies in related businesses, the early stage of the Company's business
development, the business potential and prospects of the Company and other
factors deemed relevant. In making its determination, the Board of Directors did
not obtain an independent valuation of the Company or its assets. Moreover, the
Subscription Price bears no direct relation to the book value, earnings, assets
or other generally accepted valuation criteria of the Company. The Board of
Directors believes that the Subscription Price may be lower than the actual
value of the Common Stock of the Company, primarily based upon the valuation of
publicly traded development stage companies in related businesses. However, the
Board of Directors believes that any valuation of the Company, given its early
stage of development, is highly speculative. The actual value or resale value of
the Common Stock may be significantly higher or lower than the Subscription
Price.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., Eastern time, on February , 1999
unless extended by the Company, subject to the consent of the Underwriters (as
extended, the "Expiration Date"). The Company will in no event extend the
Expiration Date beyond March 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 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, plus any shares which the Company elects to sell
pursuant to the Oversubscription Option (collectively, "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
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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 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.
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 and, except as
described below in accordance with the Guaranteed Payment Procedures, the
Oversubscription Privilege. 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;
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(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 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.
If a Rights holder wishes to delay payment of the Subscription Price with
respect to such holder's exercise of the Oversubscription Privilege, the
Oversubscription Privilege may nevertheless be exercised if both of the
following conditions (the "Guaranteed Payment Procedures") are met:
(i) the Subscription Agent receives, on or prior to the Expiration Date
a Notice of Guaranteed Delivery by facsimile or otherwise, substantially in
the form provided and distributed with the Subscription Certificates, from a
member firm of a registered national securities exchange or a NASD member
firm or from an Eligible Institution, stating the name of the exercising
Rights holder, the number of Rights represented by 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 being
subscribed for pursuant to the Oversubscription Privilege, and guaranteeing
delivery of payment in full of the Subscription Price for each Underlying
Share being subscribed for pursuant to the Oversubscription Privilege by
5:00 p.m., Eastern time, on February , 1999; and
(ii) payment in full of the Subscription Price for each Underlying Share
being subscribed for pursuant to the Oversubscription Privilege has been
received (in the manner set forth above) by the Subscription Agent by 5:00
p.m., Eastern time, on February , 1999.
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.
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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.
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 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.
OVERSUBSCRIPTION OPTION
The Company has the option to sell up to an additional 206,475 shares of
Company Common Stock solely to cover exercises of Oversubscription Privileges
which exceed the available Underlying Shares.
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
It is anticipated that the Rights will trade in the over-the-counter market
until the close of business on the last trading day prior to the Expiration
Date. There can be no assurance that a market for the Rights will develop or as
to the prices at which the Rights will trade.
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
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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.
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 January , 1999, 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
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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 which holding period will, in turn, include the
stockholder's holding period for ERC Common Stock, provided that such
stockholder held the ERC Common Stock as a capital asset on the Distribution
Date.
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 STOCKHOLDERS REGARDING WHETHER THEY SHOULD EXERCISE THEIR
RIGHTS.
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THE DISTRIBUTION
INTRODUCTION
The Board of Directors of Energy Research Corporation, a New York
corporation ("ERC"), has declared a special distribution (the "Distribution") to
its stockholders of one share of Company Common Stock for every three shares of
ERC Common Stock held of record as of the close of business on January , 1999
(the "ERC 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 January , 1999 (the "Distribution Date") by delivering all of the
issued and outstanding shares of Company Common Stock to Continental Stock
Transfer & Trust Company (the "Distribution Agent"), for transfer and
distribution to the holders of record of ERC Common Stock as of the ERC Record
Date. Shares of Company Common Stock received in the Distribution may not be
sold or otherwise disposed of prior to the closing of the Rights Offering. Until
such closing occurs, the Company Common Stock will be uncertificated. Following
such closing, the Distribution Agent will begin to mail stock certificates
representing the shares of Company Common Stock to ERC stockholders as of the
ERC Record Date. Holders of ERC Common Stock on the ERC 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 ERC 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
24
<PAGE>
undertake capital raising requirements and investment decisions, as well as to
allow investors to invest in either business without consideration of the other.
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 $500,000 and stockholders' equity by approximately
$200,000.
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 ERC
Record Date. Shares of Company Common Stock received in the Distribution may not
be sold or otherwise disposed of prior to the closing of the Rights Offering
pursuant to a restriction on transfer contained in the Company's Certificate.
Until such closing occurs, the Company Common Stock will be uncertificated. It
is expected that shares of Company Common Stock will be delivered by the
Distribution Agent to ERC stockholders promptly following the closing of the
Rights Offering.
Fractional shares of Company Common Stock will not be issued in the
Distribution. A cash payment will be made to ERC stockholders otherwise entitled
to a fractional share of Company Common Stock as a result of the Distribution.
The amount of such payment will be based upon the average bid price on the first
day of trading of the Company Common Stock. Such payment will, therefore, not be
made until the Company Common Stock begins trading after the closing of the
Rights Offering.
The Board of Directors of ERC has reserved the right to abandon, defer or
modify the Distribution and related transactions described herein 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 the Company Common Stock. Prior
to the closing of the Rights Offering, the Company Common Stock received in the
Distribution may not be sold or otherwise disposed of pursuant to a restriction
on transfer contained in the Company's Certificate. Prices at which
25
<PAGE>
Company Common Stock may trade on a "when-issued" basis or after the closing of
the Rights Offering cannot be predicted. Until the Company Common Stock is fully
distributed, the Rights Offering is closed 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, including 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 has applied to have the Company Common Stock listed for
quotation on The Nasdaq SmallCap Market under the symbol " " following the
closing of the Rights Offering. The Company initially will have approximately
1,800 stockholders based upon the number of beneficial stockholders of ERC as of
December 11, 1998.
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, other than on account of cash received in
lieu of fractional shares. A stockholder who receives cash in lieu of
fractional shares will recognize gain or loss equal to the difference
between the amount of cash received and the allocated basis of the
fractional share deemed surrendered in exchange for such cash. Provided the
fractional share is a capital asset in the hands of the stockholder, such
gain or loss will be capital gain or loss.
(2) The aggregate basis of the ERC Common Stock and the Company Common
Stock (including fractional shares in lieu of which cash will be issued) 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 (including fractional
shares in lieu of which cash will be issued) 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 STOCKHOLDERS.
EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR
CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDER, 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 STOCKHOLDERS 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.
26
<PAGE>
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.
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
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 principal assets of the Battery Business Group, 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.
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 provides that ERC will retain a limited license
to use the technology transferred by ERC to the Company until all consents and
approvals to the transfer to the Company of the Three Circles License Agreement
and related Joint Venture have been obtained.
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
27
<PAGE>
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 the Company
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.
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, and manufacturing and support facilities and services. 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 Joseph Mahler. 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 $215,000 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.
LICENSE ASSISTANCE AGREEMENT
The Company and ERC have entered into a License Assistance Agreement (the
"License Assistance Agreement") pursuant to which ERC has retained the Company
to provide all services and assistance necessary for the Company to effectively
fulfill, on behalf of ERC, all of ERC's obligations under the Joint
28
<PAGE>
Venture contract and the Three Circles License Agreement, pending the receipt of
certain consents and approvals to be obtained prior to the transfer of this
contract and agreement to the Company, in exchange for payment to the Company by
ERC of all future remuneration paid and other benefits accruing to ERC pursuant
to such contract and agreement. See "BUSINESS--Partnerships, Joint Ventures and
Licenses." The intent of the License Assistance Agreement is to provide that the
Company will bear the obligations and receive the benefits of ERC under the
Joint Venture contract and license agreement. In addition, until such consents
and approvals are obtained, ERC has agreed that should any vacancy occur in the
Board of Directors of the Joint Venture relating to a directorship which ERC is
entitled to appoint, ERC will request a nominee from the Company to fill such
vacancy. In addition, in the event that the transfer of the Joint Venture
contract and the license agreement to the Company has not taken place within six
months from the date of the License Assistance Agreement, upon the request of
the Company, ERC will replace its appointees to the Board of Directors of the
Joint Venture with nominees specified by the Company. ERC also agrees to
exercise its residual rights and powers in the Joint Venture interests including
voting rights, in accordance with the Company's instructions.
ADDITIONAL INFORMATION
Stockholders of ERC with inquiries related to the Distribution should
contact Joseph G. Mahler, Acting Chief Financial Officer, Evercel, Inc., 3 Great
Pasture Road, Danbury, Connecticut 06813, telephone (203) 825-6000; or the
Company's Distribution 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 approximately $7,449,000 assuming
the exercise of 1,376,500 Rights at the Subscription Price of $6.00 per share
and after deducting underwriting discounts and commissions and the estimated
offering expenses payable by the Company.
The Company intends to use the net proceeds from the Rights Offering as
follows:
<TABLE>
<S> <C>
Leasing and equipping a new facility for limited production and
manufacturing purposes........................................ $3,000,000
Working capital and other general corporate purposes (1)........ $4,449,000
</TABLE>
- ------------------------
(1) Working capital and other general corporate purposes includes inventory,
accounts receivable, selling expenses, general and administrative expenses
and research and development expenses.
The foregoing amounts represent estimates only, and there can be no
assurance that the net proceeds will be used as anticipated. In addition, the
Company may invest in additional joint ventures and 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.
29
<PAGE>
DILUTION
The net tangible book value of the Company as of July 31, 1998 was
approximately $235,000, or approximately $0.17 per share of Common Stock. Net
tangible book value per share represents the amount of the Company's tangible
assets, less total liabilities, divided by 1,376,500 shares of Common Stock
outstanding.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by investors purchasing shares of
Common Stock at the Subscription Price in this offering and the pro forma net
tangible book value per share of Common Stock immediately after this offering.
After giving effect to the sale by the Company of 1,376,500 shares of Common
Stock offered hereby (at the exercise price of $6.00 per share, and after
deduction of underwriting discounts and commissions and estimated offering
expenses), the pro forma net tangible book value of the Company as of July 31,
1998 would have been approximately $7.7 million, or $2.79 per share. This
represents an immediate increase in pro forma net tangible book value of $2.62
per share to existing stockholders and an immediate dilution in pro forma net
tangible book value of $3.21 per share to the investors purchasing shares of
Common Stock at the Subscription Price in this offering. New stockholders who
acquire Common Stock from the Underwriters at prices greater than the
Subscription Price will experience greater dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 6.00
---------
Net tangible book value per share before the offering..................... $ 0.17
---------
Increase per share attributable to new investors.......................... $ 2.62
---------
Pro Forma net tangible book value per share after offering.................. $ 2.79
---------
Net tangible book value dilution per share to new investors................. $ 3.21
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of July 31, 1998, the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price paid per share by
the existing stockholders and by the investors purchasing shares of Common Stock
in the offering (at the offering price of $6.00 per share, before deduction of
underwriting discounts and commissions and estimated offering expenses) payable
by the Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................... 1,376,500 50.0% $ 0.00 0.0% $ 0.00
Purchasers in the Offering............................... 1,376,500 50.0 8,259,000 100.0 $ 6.00
---------- ----- ------------ -----
Total................................................ 2,753,000 100.0% $ 8,259,000 100.0%
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
The foregoing tables and calculations exclude 216,665 shares issuable upon
exercise of options outstanding as of December 11, 1998, granted under the
Company's Equity Incentive Plan at a weighted average exercise price of $6.00.
To the extent that such options are exercised in the future, there will be
further dilution to new investors. See "Management--Equity Incentive Plan."
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.
30
<PAGE>
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 11,000,000 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 1,376,500
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; 10,000,000
shares, pro forma and as adjusted; issued and outstanding-100 shares,
actual; and 1,376,500 shares, pro forma; 2,753,000 shares, as adjusted...... -- 14 28
Additional paid in capital.................................................... 1 221 7,656
--- ----- -----------
Total stockholders' equity and capitalization............................. $ 1 $ 235 $ 7,684
--- ----- -----------
--- ----- -----------
</TABLE>
31
<PAGE>
SELECTED FINANCIAL DATA
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 and from the
Company's balance sheet at July 31, 1998:
<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 87 30
Depreciation and amortization............................................ 34 40 26 37
Administrative and selling............................................... 199 268 210 1,076(1)
Research & development................................................... 644 897 480 1,283
--------- --------- --------- ---------
1,123 1,303 803 2,426
--------- --------- --------- ---------
Loss from operations before income taxes................................... $ (768) $ (867) $ (508) $ (2,005)
Provision (benefit) for income taxes....................................... (261) (295) (173) (682)
--------- --------- --------- ---------
Net loss................................................................... $ (507) $ (572) $ (335) $ (1,323)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31, 1998(2)
-------------------
<S> <C>
Balance Sheet Data:
Total assets................................................................................. $ 524
-----
Working capital.............................................................................. (255)
-----
Stockholders' equity/net assets.............................................................. 235
-----
</TABLE>
(1) Includes charges of approximately $376,000 related to an uncompleted
acquisition.
(2) Pro forma to reflect the Distribution.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has operated as the battery group of ERC since 1970. 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.
32
<PAGE>
United States Government contracts, which represented the bulk of these
contracts, are generally multi-year, cost reimbursement type contracts. Under
cost-reimbursement contracts ERC 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 recently completed a cost reimbursement
contract with the National Institutes of Health and currently has no other
government contracts.
In early 1997, ERC 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 ERC retained all rights. During the latter part of 1997 and early 1998,
Corning validated the performance of the Company's Ni-Zn battery technology.
During fiscal 1998, Corning, terminated the license with ERC for strategic
business reasons.
In February 1998, ERC 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. (formerly
Xiamen Daily-Used 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. $1,500,000 has been paid to ERC under
the NanYa License Agreement; this payment will not be transferred to the
Company. ERC will remain liable for any repayment of this amount which could be
required in the event of unsatisfactory test results pursuant to the NanYa
License Agreement. See "BUSINESS--Partnerships, Joint Ventures and Licenses."
In July 1998, ERC 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, miners' cap
lamps and other applications. The Three Circles License Agreement included an
initial payment to ERC of $3,000,000. In connection with the Three Circles
License Agreement, ERC entered into a joint venture agreement with Xiamen Three
Circles Corp., Ltd. and has obtained a 50.5% ownership of Xiamen Three
Circles-ERC Battery Corp., Ltd. for an investment of approximately $3,000,000.
This Joint Venture will manufacture and sell batteries and pay royalties to ERC
for the benefit of the Company under the terms of the Three Circles License
Agreement. The Three Circles License Agreement will be subject to the terms of
the License Assistance Agreement between ERC and the Company. ERC intends to
obtain the consent of Xiamen Three Circles Co., Ltd. and the Joint Venture and
the approval of the appropriate examination and approval authority of the PRC to
the transfer of the Joint Venture and the Three Circles License Agreement to the
Company. See "BUSINESS--Partnerships, Joint Ventures and Licenses."
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 Institutes 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 66% to $30,000 in the 1998 period from $87,000 in
the 1997 period. The decrease was due primarily to the lower contract revenue
mentioned above.
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Administrative and selling expense increased 412% to $1,076,000 in the 1998
period from $210,000 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 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 has been manufactured and tested
successfully.
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 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."
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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 No. 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 No. 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 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 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."
KPMG Peat Marwick LLP, in its independent auditors report on the Battery
Business Group's financial statements included herein, without reference to the
net proceeds to be received by the Company in the Rights Offering, states that
the Company's recurring losses from operations raise substantial doubt about the
Company's ability to continue as a going concern. The Company anticipates that
it will raise at least $7.0 million of net proceeds from the Rights Offering.
The Company believes that these net proceeds, together with license payments
anticipated to be received under the NanYa License Agreement, will be sufficient
to support its planned operations for at least the next twelve months. The
Company estimates that it will use at least $3.0 million of cash to support its
operations during this period, primarily to lease and equip a new facility for
limited production and manufacturing purposes, for working capital and other
general corporate purposes. See "USE OF PROCEEDS." The Company's cash
requirements will vary depending upon a number of factors, many of which are
beyond the control of the Company, including the demand for the Company's
products, the efforts and success of the Company's licenses 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. If and when the Company is
required to raise additional funds, there can be no assurance that the Company
will be able to
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so on favorable terms if at all. Failure of the Company to raise funds required
to support its operations would have a material adverse effect on the Company's
business, financial condition and results of operations and could result in a
loss to the investors in the Rights Offering of their entire investment.
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
affect 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.
36
<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 believes
that its 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 has
been used on a limited test basis in a range of rechargeable battery
applications, including bicycles, scooters, electric vehicles, trolling motors
for boats, and lawn mowers. The Company also believes that its Ni-Zn battery may
be used in other rechargeable battery applications, including electric
wheelchairs, golf carts, power tools, and consumer and electronic products. The
Company intends to 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 permit 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 nickel metal hydride ("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. ERC has begun licensing the Ni-Zn technology to third parties within
the past year and currently has two license agreements, the NanYa License
Agreement, which will be assigned to the Company, 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, ERC 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. The benefits and
obligations of the Three Circles License Agreement and the Joint Venture
Agreement will be transferred to the Company pursuant to the terms of the
License Assistance Agreement.
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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 opportunities, the Company plans to 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(1) NICKEL-CADMIUM(1) NICKEL-MH(1) LITHIUM-ION(1)
-------------- -------------- ---------------------- --------------- ----------------
<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(2) 0.10--0.30 0.5--1.50 1.00--3.00 1.50--5.00
</TABLE>
- ------------------------------
(1) Handbook of Batteries, Edited by D. Linden (Second Edition) McGraw-Hill
Publisher (1995).
(2) The cost estimate assumes the high volume production levels anticipated to
be achieved in a large-scale manufacturing facility. There can be no
assurance that the Company will achieve these cost estimates.
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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. The
greater the energy density, the lower the weight and generally the smaller the
package required to store and deliver a given amount of energy. Ni-Zn has about
twice the energy density of lead-acid systems and also has higher energy density
than 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, HEV 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 would 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. However, because the Company has not yet produced any of its Ni-Zn
batteries for volume production, there can be no assurance that the Company's
estimates of cost of volume production of its batteries will be accurate.
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
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<PAGE>
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. In tests conducted by the
Company, the Company's batteries have approximately 600 deep discharge cycles
and approximately 11,000 shallow discharge cycles. The Company believes that its
Ni-Zn batteries are suited to a wide range of applications including, among
other things, scooters and bicycles, electric vehicles, electric wheelchairs,
trolling motors for boats, lawn mowers, power tools, consumer and electronic
products, emergency and other portable lighting systems and automobile starting,
lighting and ignition.
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
will be transferred to the Company as part of the Distribution in which the zinc
electrode solubility (shape change) has been greatly reduced and construction
features provide for a sealed maintenance-free construction. In tests conducted
by the Company, the Company's batteries have achieved 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
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 for evaluation to another European vehicle produced in
Norway. The batteries being evaluated in these vehicles have both recently
undergone successful preliminary testing, achieving ranges for these vehicles
approximately 2.5 times greater than that produced by lead acid batteries of
approximately equivalent weight. 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 ERC's joint venture partnership in Xiamen, China
(Xiamen Three Circles-ERC Battery Corp., Ltd.) to begin manufacture of the
Company's batteries which is currently anticipated to begin on a small scale in
late fiscal 1999.
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.
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
lease and equip a small-scale manufacturing plant in the United States to make
Ni-Zn batteries for sale to OEMs beginning in mid-1999. 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
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<PAGE>
are expected to be restricted for selected application markets and geographical
territories. Licensing 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: ERC has
and the Company 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 of license fee payments payable to ERC.
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.
Because the Company's strategy is a long term strategy, the Company does not
anticipate that the net proceeds from the Offering will be sufficient to fully
implement its strategy.
MARKETS
Electric vehicles and hybrid electric vehicles and a range of motive power
applications are significant potential markets for the Company's Ni-Zn battery.
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.
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.
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 after the year 2000, and projections for annual growth rates for EV's
and motive batteries are 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.
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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 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
scooters and bicycles; industrial trucks; neighborhood vehicles; golf carts;
electric wheelchairs, 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. 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 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. 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 $6.1 billion, growing at 7% to 8% per year. The
following table details the market size and growth of this market, and are
estimated from a variety of industry sources. The growth rate of individual
application markets varies widely, with the small cell, portable rechargeable
markets generally representing the faster-growing sectors, resulting primarily
from the continued development and proliferation of new portable electronic
products. There can be no assurance that these projected growth rates will be
achieved.
<TABLE>
<CAPTION>
1997 SALES GROWTH RATE
($ 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"), approximately 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
42
<PAGE>
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 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, assuming high volume production levels. 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 (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 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
43
<PAGE>
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 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, most 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 among 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.
44
<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 performance of 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 February 1998, ERC 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, Taiwan,
Hong Kong and Macao on an exclusive basis and for certain other Southeast Asian
countries 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 by
ERC in 1998 which will not be transferred to the Company, 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 NanYa License
Agreement provides that ERC 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.
45
<PAGE>
ERC has agreed to seek the consent of the other parties to the NanYa License
Agreement to the assignment of such Agreement to the Company; while the Company
does not anticipate a problem in obtaining this consent, the failure to do so
could result in the Company being unable to invest in such joint venture even if
it chooses to do so.
In July 1998, ERC also entered into a Technology Transfer and License
Contract (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 ERC of $3 million. Pursuant to
the Three Circles License Agreement, the Joint Venture must also pay ERC certain
royalties based upon the net sales of Ni-Zn batteries sold, leased or
transferred in the applicable territories. In addition the Joint Venture may
sub-license the Company's technology to third parties in China, Hong Kong,
Taiwan and Macao on a non-exclusive basis. In connection with the Three Circles
License Agreement, ERC 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"). ERC 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 Joint Venture is managed by a Board of Directors consisting of five
individuals, two of whom are appointed by Xiamen-Three Circles Co., Ltd. and
three of whom are appointed by ERC.
Under the Joint Venture contract, ERC is responsible for assisting the Joint
Venture with the selection and purchase of machinery, equipment and materials
outside China; assisting the Joint Venture in marketing, sales and distributions
of batteries outside of China; assisting the Joint Venture's working personnel
in obtaining visas for entrance to the United States for necessary training;
handling matters in respect to export licenses for technology as relates to the
Three Circles License Agreement; and handling other matters as requested by the
Board of Directors of the Joint Venture.
The Joint Venture contract anticipates that the Joint Venture will derive
revenue primarily from net sales of batteries and sub-licenses of ERC's
technology, including revenue received from the payment for the sub-licensing of
the technology and revenue received from the payment of royalties for use of the
technology. Under the terms of the contract, after certain royalties and other
priority returns to the Joint Venture partners, the net income of the Joint
Venture is shared by the Joint Venture partners in accordance with their
respective interests. Distributions are generally either made quarterly or
annually, depending upon the nature of the payment.
The Joint Venture contract may be terminated by either party upon a material
breach of the contract or upon bankruptcy of either party to the contract. The
Joint Venture contract is governed by the laws and pertinent rules and
regulations of the PRC.
In order for ERC to transfer the Joint Venture contract and the Three
Circles License Agreement to the Company, ERC has been advised that it should
obtain the consent of Xiamen Three Circles Co., Ltd. and the Joint Venture and
the approval of the appropriate examination and approval authority of the
People's Republic of China. ERC has agreed to seek these consents and approvals,
however, there can be no assurance that these consents and approvals will be
obtained on a timely basis or at all. Pending receipt of these consents and
approvals, ERC and the Company have entered into a License Assistance Agreement
pursuant to which ERC has retained the Company to provide all services and
assistance necessary for the Company to effectively fulfill, on behalf of ERC,
all of ERC's obligations under the Joint Venture contract and Three Circles
License Agreement in exchange for payment to the Company by ERC of all
remuneration paid and other benefits accruing to ERC pursuant to such
agreements.
46
<PAGE>
The Three Circles License Agreement and the Joint Venture contract will also
be subject to the License Assistance Agreement. See "THE
DISTRIBUTION--Relationship Between ERC and the Company after the
Distribution--License Assistance 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 currently engaged in negotiations to enter into a lease for
approximately 30,000 square feet of space in Danbury, Connecticut, to be used as
a small-scale manufacturing plant for Ni-Zn battery production and for office
space. 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
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 intends to apply to use "Evercel" as a trademark. There can be no
assurance that the Company will receive trademark protection for "Evercel."
47
<PAGE>
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.
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:
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<PAGE>
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.
OTHER ZINC BATTERIES
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 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. If this
product is successfully developed, it has the potential to open up a different,
large consumer market for the Company.
There can be no assurance that these other batteries will be successfully
developed by the Company, and, even if they are successfully developed, there
can be no assurance that they will be commercially successful and profitable for
the Company.
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.
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
The Company is not a party to any material pending legal proceeding.
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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.................................... 71 Director
William A. Lawson.................................... 64 Director
Warren D. Bagatelle.................................. 60 Director
Richard M.H. Thompson................................ 63 Director
James D. Gerson...................................... 55 Director
Allen Charkey........................................ 57 Executive Vice President, Chief Operating Officer and
Director
Joseph G. Mahler..................................... 46 Acting Chief Financial Officer, Treasurer and
Secretary
</TABLE>
JERRY D. LEITMAN has been the Chairman and Acting President and Chief
Executive Officer of the Company since its formation. He 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 has been a director of the Company since September 1998. He
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 a director of the Company since September 1998.
He 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, IGENE Biotechnology, Inc., Intermagnetics
General Corporation, CCC Information Services Group, Inc., and Roper Starch
Worldwide, Inc. and director emeritus of Northwest Airlines, 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 a director of the Company since September 1998.
He 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 director of the Company since September 1998.
He 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 an internet
travel business.
RICHARD M.H. THOMPSON has been a director of the Company since September
1998. He was the President and Director of Rotary Power International, Inc., a
company that designed and built rotary
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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 & Associates, Inc., a private investment company and financial
advisor serving a variety of technology and emerging growth companies.
JAMES D. GERSON has been a director of the Company since September 1998. He
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 has been a director of the Company since its formation and
Executive Vice President and Chief Operating Officer since October 1998. He
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.
JOSEPH MAHLER joined the Company in October 1998 as Acting Chief Financial
Officer, Treasurer and Secretary and as Vice President, Chief Financial Officer,
Corporate Secretary and Treasurer of ERC. Prior to joining ERC, Mr. Mahler was
Vice President-Chief Financial Officer at Earthgro, Inc. from 1993 to 1998 and
prior to that, he was a Partner at Ernst & Young.
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) review 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.
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<PAGE>
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, which provides for the grant by ERC to Mr. Leitman of stock options
(the "ERC Options") to acquire 250,000 shares of ERC Common Stock, the
Distribution Agreement provides that the Company will issue to Mr. Leitman one
share of Company Common Stock for every three shares of ERC Common Stock which
he purchases pursuant to his exercise of the ERC Options. The ERC Options began
to vest in August 1997 in annual installments of 50,000 shares and will become
fully vested in August 2001. The Distribution Agreement provides that ERC and
the Company will allocate the exercise price of the ERC Options between them
based proportionately upon the relative fair market values of the ERC Common
Stock and the Company Common Stock.
The Company has also agreed to issue to Mr. Leitman a non-transferable
option (the "Company Option") to acquire 83,333 shares of Company Common Stock
exercisable at the Subscription Price. This Company Option will be exercisable
to acquire 33,333 vested shares and 50,000 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 16,666 shares become vested in each of August 1999
and 2000, and all shares are vested in August 2001.
Mr. Leitman may exercise the Company Option with respect to the 50,000
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 most highly compensated individual who will become an
executive officer 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 is an employee of ERC and not of the
Company. His 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%). In addition, the
Company will pay its pro rata portion of Joseph Mahler's compensation.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2)
- ----------------------------------------------------------------- --------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Jerry D. Leitman(1) 1997 $ 73,848 $ 0 $ 0
Acting President, Chief Executive Officer
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.
52
<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.
300,000 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. In addition, the Company has issued to Mr. Mahler
and Mr. Charkey options to acquire 16,666 shares and 33,333 shares of the
Company's stock, respectively, at the Subscription Price. These options will
vest in 25% installments over a four year period beginning December , 1999.
The Company has also issued an aggregate of 33,334 additional options to other
Company employees.
CERTAIN TRANSACTIONS
Mr. Gerson, a director of ERC and the Company, has entered into an agreement
with MTU-Friedrichshafen GmbH ("MTU"), a principal shareholder of ERC and the
Company, pursuant to which Mr. Gerson and a colleague have agreed to purchase
from MTU all of the Rights issued to MTU in connection with the Rights Offering
for $0.50 per Right. Assuming that Mr. Gerson will exercise the Rights he
receives in the Rights Offering as well as his 50% share of the Rights purchased
form MTU, following the Rights Offering, Mr. Gerson will beneficially own
approximately 7.9% of the outstanding Common Stock of the Company including
shares as to which Mr. Gerson disclaims beneficial ownership and excluding any
shares which he might acquire pursuant to the exercise of his Oversubscription
Rights. Mr. Gerson has advised the Company of his intention to exercise all of
his Basic Subscription Rights, including with respect to his 50% share of the
Rights which he acquires from MTU.
Certain directors of the Company, including Mr. Gerson, who together will
own an aggregate of shares of Company Common Stock following the
Distribution, have advised the Company that they intend to exercise their Basic
Subscription Rights. Loeb Investors Co. LXXV, an affiliate of one of the
Underwriters and certain directors, which will own 120,555 shares of Company
Common Stock following the Distribution, has also advised the Company of its
intent to exercise its Basic Subscription Rights. In addition, Mr. Leitman has
advised the Company that he intends to exercise his right to acquire 33,333
shares of Company Common Stock pursuant to his Company Option. None of the
parties who have indicated their intent to exercise their Basic Subscription
Rights have any obligation to effect these exercises.
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
53
<PAGE>
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.
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.
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% stockholders of the
Company following the Distribution, but prior to the consummation of the Rights
Offering, based upon one-third of the beneficial ownership of such individuals
of the Common Stock of ERC as of December 11, 1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------------------------- ------------------------- -----------
<S> <C> <C>
Warren D. Bagatelle 167,094(2) 12.1%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006
Thomas L. Kempner 120,555(2) 8.8%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006
Loeb Investors Co. LXXV 120,555(2) 8.8%
61 Broadway
New York, NY 10006
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C>
James D. Gerson 70,111(3) 5.1%
c/o Fahnestock and Co.
780 3rd Avenue
New York, NY 10017
Bernard S. Baker 6,100(4) *
Richard M.H. Thompson 29,333(5) 2.1%
William A. Lawson 18,555 1.3%
Jerry D. Leitman 116,666(6) 7.8%
Allen Charkey -- *
Joseph G. Mahler -- *
Daimler Benz affiliate MTU-Friedrichshafen GmbH (MTU) 152,586(7) 11.1%
Abt. VC, Gebaude 6.1
Zimmer 102A D-85521
Ottobrunn Germany
All Directors and Executive Officers as a Group (9 persons) 407,859 27.3%
</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) Messrs. Bagatelle and 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 167,094 shares of Common Stock.
(3) Mr. Gerson's shareholdings include 12,133 shares held by his wife, Barbara
Gerson as Custodian for two minor children and also includes 5,266 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. Mr. Gerson has entered into an
agreement with MTU pursuant to which he and an associate have agreed to
purchase from MTU all of the Rights issued to MTU in connection with the
Rights Offering for $0.50 per Right. See "MANAGEMENT--Certain Transactions."
(4) Includes 333 shares owned by Dr. Baker's wife Cornelia Baker.
(5) Mr. Thompson's shareholdings include 20,333 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) 925 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) 32,000 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 33,333 shares of Common Stock which may
be acquired pursuant to the currently exercisable options issued under the
Leitman Option Agreement as well as currently exercisable options to
purchase 83,333 shares of Common Stock, 50,000 of which shares would be
restricted (unvested) shares. See "--Director Compensation".
(7) MTU has entered into an agreement with Mr. Gerson pursuant to which Mr.
Gerson and a colleague have agreed to purchase from MTU all of the Rights
issued to MTU in connection with the Rights Offering for $0.50 per Right.
See "MANAGEMENT--Certain Transactions."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Rights Offering, the Company will have approximately
2,753,000 shares of Common Stock outstanding (assuming no exercise of
outstanding options). Of these shares, the 1,376,500 shares issued in the
Distribution will not be transferable until the closing of the Rights Offering.
Following the closing of the Rights Offering, such shares and the 1,376,500
shares sold in the Rights Offering will be freely tradeable without restriction
or further registration under 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 addition, the Company has agreed to
cause its Affiliates, including its officers and directors, to agree not to
offer to sell, transfer,
55
<PAGE>
hypothecate or otherwise encumber any Rights or Common Stock for a period of not
less than 180 days following the effective date of this Prospectus (the "Lock-Up
Expiry Date") without the prior written consent of Burnham Securities Inc., on
behalf of the Underwriters.
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 27,000 shares immediately
after this Offering, assuming all rights are exercised) or (ii) the average
weekly trading volume in the Common Stock on the Nasdaq SmallCap 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 December 11, 1998, options to purchase a total of 216,665 shares of
Common Stock were outstanding, options for 99,999 shares being not yet
exercisable. An additional 250,001 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.
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<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
Incorporation of the Company (as amended and restated, the "Certificate"), and
ERC, as sole stockholder of the Company, will restate the By-laws of the
Company. Under the Certificate, the Company's authorized capital stock will
consist of 10,000,000 shares of Company Common Stock and 1,000,000 shares of
Preferred 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. 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 closing of
the Rights Offering. The shares of Company Common Stock received in the
Distribution may not be sold or otherwise disposed of until after the closing of
the Rights Offering pursuant to a restriction in the Company's Certificate. The
Company has applied for listing of the Company Common Stock for quotation on The
Nasdaq SmallCap Market following the closing of the Rights Offering.
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, and the Company does not expect to pay any dividends in the near
future. 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, and the By-laws which are attached as exhibits to the Company's
Registration Statement on Form SB-2 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
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<PAGE>
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
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 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. The Certificate provides that any director elected to
fill a vacancy shall hold office for the remaining term of the class to which
such director is elected.
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
58
<PAGE>
(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 one or more series of Preferred Stock and, with 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
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<PAGE>
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
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, telephone no. (212) 509-4000.
THE STANDBY UNDERWRITING
The Company and the Underwriters have entered into the Standby Underwriting
Agreement on the date hereof, pursuant to which the Underwriters are required,
subject to certain terms and conditions (all of which are summarized below), to
purchase all shares of Company Common Stock remaining unsubscribed after the
Rights Offering (the "Unsubscribed Shares") in accordance with the percentages
set forth below. If all of the Rights are exercised, there will be no
Unsubscribed Shares and the Underwriters will not be required to purchase any
shares of Common Stock.
<TABLE>
<CAPTION>
UNDERWRITERS % OF UNSUBSCRIBED SHARES
- -------------------------------------------------------------- -------------------------------
<S> <C>
Loeb Partners Corporation
Burnham Securities Inc.
</TABLE>
The Underwriters have agreed, subject to the condition that the Company
complies with its obligations under the Standby Underwriting Agreement and
subject to the Underwriters' right to terminate their obligations under the
Standby Underwriting Agreement (as specified below), to purchase all of the
Unsubscribed Shares at the Subscription Price. The Company will pay the
Underwriters a financial advisory fee equal to 3.75% of the Subscription Price
for each share of Common Stock included in the Rights Offering. The financial
advisory fee is for services and advice rendered in connection with the
structuring of the Rights Offering and financial advice to the Company before
and during the Rights Offering. An additional fee of 5.25% of the Subscription
Price will be paid to the Underwriters for each share of Common Stock purchased
by the Underwriters pursuant to the Standby Underwriting Agreement. In addition,
the Company has agreed to pay all expenses incurred by the Underwriters in
conducting their due diligence investigation of the Company and all legal fees
and expenses of the Underwriters' counsel incurred in connection with the Rights
Offering, up to an aggregate of $75,000, plus all legal fees and expenses of the
Underwriters' counsel incurred in connection with complying with "blue sky" or
other state securities laws.
The Company has granted to the Underwriters an option (the "Overallotment
Option") to purchase up to a maximum of 206,475 shares of Company Common Stock,
reduced by the number of shares, if any, sold by the Company to holders of
Rights under the Oversubscription Option, at the Subscription Price. The Company
will pay the Underwriters a financial advisory fee of 3.75% of the Subscription
Price and an additional fee of 5.25% of the Subscription Price for each share of
Common Stock purchased by the Underwriters pursuant to the Overallotment Option.
The Overallotment Option will be exercisable by the
60
<PAGE>
Underwriters not later than five business days after the Company's transfer
agent provides the Underwriters with a final accounting of the number of shares
of Company Common Stock sold pursuant to the exercise of Rights, including
pursuant to Oversubscription Privileges. To the extent the Underwriters exercise
this option, each Underwriter will be committed, subject to certain conditions,
to purchase the percentage of additional shares of Company Common Stock shown in
the foregoing table.
Prior to the Expiration Date, the Underwriters may offer shares of Common
Stock on a when-issued basis, including shares to be acquired through the
purchase and exercise of Rights, at prices set from time to time by the
Underwriters. After the Expiration Date, the Underwriters may offer shares of
Common Stock, whether acquired pursuant to the Standby Underwriting Agreement,
the exercise of the Rights or the purchase of Common Stock in the market, to the
public at a price or prices to be determined. The Underwriters may thus realize
profits or losses independent of the Underwriting Discount and the Financial
Advisory Fee. Shares of Common Stock subject to the Standby Underwriting
Agreement will be offered by the Underwriters when, as and if sold to, and
accepted by, the Underwriters and will be subject to their right to reject
orders in whole or in part.
Prior to the Rights Offering, there has been no public market for the Common
Stock. The Subscription Price has been determined by the Company's Board of
Directors based upon a number of factors, including the anticipated initial
capital requirements of the Company, market valuations of development stage
companies in related businesses, the early stage of the Company's business
development, the business potential and prospects of the Company and other
factors deemed relevant. In making its determination, the Board of Directors did
not obtain an independent valuation of the Company or its assets. Moreover, the
Subscription Price bears no direct relation to the book value, earnings, assets
or other generally accepted valuation criteria of the Company.
The Underwriters will be prohibited from engaging in any market making
activities with respect to the Company's when-issued Common Stock and Common
Stock until the Underwriters have completed their participation in the
distribution of shares offered hereby. As a result, the Underwriters may be
unable to provide a market for the Company's when-issued Common Stock and Common
Stock should it desire to do so, during certain periods while the Rights are
exercisable.
In connection with the Rights Offering, the Underwriters and certain selling
group members may engage in stabilizing, syndicate covering transactions or
other transactions that stabilize, maintain or otherwise affect the market price
of the Common Stock. A "syndicate covering transaction" is the placing of any
bid or the effecting of any purchase on the behalf of the Underwriters to reduce
a short position created in connection with the Rights Offering. After the
opening of quotations for the Common Stock on the Nasdaq SmallCap Market,
stabilizing bids for the purpose of preventing or retarding a decline in the
market price may be initiated by the Underwriters or selling group members in
any market at a price no higher that the last independent transaction price for
the Common Stock and then maintained, reduced or raised to follow the
independent market. Such transactions may stabilize the market price of the
Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales of shares of the Rights or the Common Stock to any
accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the Underwriters against certain
liabilities arising out of or based upon misstatements or omissions in this
Prospectus or the Registration Statement of which this Prospectus is a part and
certain liabilities, including liabilities under the Securities Act, and to
contribute to certain payments that the Underwriters may be required to make.
The Underwriters may terminate their obligations under the Standby
Underwriting Agreement (i) if any calamitous domestic or international event or
act or occurrence has disrupted or, in the Underwriters'
61
<PAGE>
opinion, will in the immediate future materially disrupt, the general securities
market in the United States; (ii) if trading in the Common Stock (on a
when-issued basis) shall have been suspended by the Securities and Exchange
Commission or Nasdaq; (iii) if trading on the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market, the Nasdaq SmallCap Market
or in the over-the-counter market shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required on the over-the-counter market by the
NASD or by order of the Securities and Exchange Commission or any other
government authority having jurisdiction; (iv) if the United States shall have
become involved in a war or major hostilities which, in the Underwriters'
opinion, will affect the general securities market in the United States; (v) if
a banking moratorium has been declared by a New York, Connecticut or federal
authority; (vi) if a moratorium in foreign exchange trading has been declared;
(vii) if the Company shall have sustained a loss material to the Company by
fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act, whether or not such loss shall have been insured, or from any
labor dispute or any legal or governmental proceeding; (viii) if there shall be
such material adverse market conditions (whether occurring suddenly or gradually
between the date of this Prospectus and the closing of the offering) affecting
markets generally or technology issues particularly as in the Underwriters'
reasonable judgment would make it inadvisable to proceed with the offering or
the sale or delivery of the shares of Common Stock offered hereby or (ix) if
there shall have been such material adverse change, or any development involving
a prospective material adverse change (including a change in management or
control of the Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company since October 31,
1998.
The Company has agreed that, without the prior written consent of the
Underwriters, it will not offer, sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock (or securities convertible into
shares of Common Stock) (collectively, the "Securities") until after the Lock-Up
Expiry Date, other than (i) Common Stock to be sold in the Rights Offering, (ii)
Company option issuances and sales of Common Stock pursuant to the Distribution
Agreement and the Plan and (iii) Securities issued as consideration for an
acquisition if the party being issued the Securities agrees not to transfer,
sell, offer for sale, contract or otherwise dispose of such Securities until
after the Lock-Up Expiry Date. Each director and executive officer of the
Company and certain stockholders of the Company who will beneficially own an
aggregate of approximately shares of Common Stock after the completion of
the Distribution, have agreed with the Underwriters that they will not sell or
otherwise dispose of any shares of Common Stock (other than shares of Common
Stock sold in the Rights Offering) until after the Lock-Up Expiry Date without
the prior written consent of Burnham Securities Inc. on behalf of the
Underwriters.
Loeb Partners Corporation, one of the Underwriters, is affiliated with Loeb
Investors Co. LXXV, a principal stockholder of the Company. In addition, Thomas
Kempner, the Chairman and Chief Executive Officer of Loeb Partners Corporation,
and Warren Bagatelle, a Managing Director of Loeb Partners Corporation, are
directors of the Company.
Under Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers ("NASD") ("Rule 2720"), Loeb Partners Corporation may be
deemed to be an "affiliate" of the Company and to have a "conflict of interest"
with the Company by virtue of the fact that affiliates of Loeb Partners
Corporation may be deemed to beneficially own greater than 10% of the voting
stock of the Company immediately following the Distribution. This offering is
being conducted in accordance with Rule 2720, which provides that, among other
things, when an NASD member participates in the underwriting of an affiliate's
equity securities the public offering price per share can be no higher than that
recommended by a qualified independent underwriter ("QIU") meeting certain
standards. In accordance with this requirement, Burnham Securities Inc. has
assumed the responsibilities of acting as QIU and will recommend a public
offering price for the Common Stock in compliance with the requirements of Rule
2720. In connection with this offering, Burnham Securities Inc. is performing
due diligence investigations and
62
<PAGE>
reviewing and participating in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part.
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.
Certain legal matters in connection with the Rights Offering will be passed upon
for the Underwriters by Fulbright & Jaworski L.L.P., New York, New York.
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.
63
<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.
KPMG Peat Marwick LLP
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.
KPMG Peat Marwick LLP
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:
Accounts receivable................................................................... $ 33 $ 20
Other receivable...................................................................... 42 --
----------- -----------
Total current assets.................................................................... 75 20
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Gross costs........................................................................... 1,160 1,376
Accumulated depreciation.............................................................. 942 873
Net................................................................................... 218 503
----------- -----------
TOTAL ASSETS............................................................................ $ 293 $ 523
----------- -----------
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
Net assets of Battery Business Group of ERC............................................. 215 234
----------- -----------
TOTAL LIABILITIES AND NET ASSETS........................................................ $ 293 $ 523
----------- -----------
----------- -----------
</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 87 30
Depreciation & amortization............................................ 34 40 26 37
Administrative and selling expenses.................................... 199 268 210 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--
Contributions from ERC.................................................. 502 672 387 1,342
--------- --------- --------- ---------
Net cash provided by /(used in) financing activities.............. 502 672 387 1,342
--------- --------- --------- ---------
Net increase/(decrease) in cash................................... -- -- -- --
Cash, beginning of period................................................. -- -- -- --
--------- --------- --------- ---------
Cash, end of period....................................................... $ -- $ -- $ -- $ --
--------- --------- --------- ---------
--------- --------- --------- ---------
</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>
Forward-Looking Statements........... 2
Prospectus Summary................... 3
Summary Financial Data............... 8
Risk Factors......................... 9
The Rights Offering.................. 18
Distribution......................... 24
Use of Proceeds...................... 29
Dilution............................. 30
Dividend Policy...................... 30
Capitalization....................... 31
Selected Financial Data.............. 32
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 32
Business............................. 37
Management........................... 50
Security Ownership of Certain
Beneficial Owners and Management.... 54
Shares Eligible for Future Sale...... 55
Description of Securities............ 57
The Standby Underwriting............. 60
Legal Matters........................ 62
Experts.............................. 63
Index to Financial Statements........ F-1
</TABLE>
1,376,500 SHARES
EVERCEL, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 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 Ninth also 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............................................. $2,641.00
NASD Filing Fee.................................................. 1,450.00
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
- ------ --------------------------------------------------
<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
- ------ --------------------------------------------------
<C> <S> <C>
10.3 License Assistance 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 Technology Transfer and License Contract for Ni-Zn
Battery Technology among Xiamen ERC Battery
Corp. Ltd., Xiamen Daily-Used Chemicals Co., Ltd
and ERC.+
10.7 Cooperative Joint Venture Contract between Xiamen
Three Circles Co., Ltd. and ERC for the
establishment of Xiamen Three Circles--ERC
Battery Corp., Ltd.+
10.8 Technology Transfer and License Agreement for
Ni-Zn Battery Technology among Xiamen Three
Circles Co., Ltd. (formerly Xiamen Daily-Used
Chemicals Co., Ltd.), Nan Ya Plastics
Corporation 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.
** Previously Filed.
+ Confidential treatment has been requested for portions of this document.
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 duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the Town of Danbury, State of Connecticut, on December 14,
1998.
EVERCEL, INC.
By: /s/ JERRY D. LEITMAN
-----------------------------------------
Jerry D. Leitman
Acting President and
Chief Executive Officer
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES STATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JERRY D. LEITMAN
- ------------------------------ Principal Executive December 14, 1998
Jerry D. Leitman Officer and Director
*
- ------------------------------ Principal Financial and December 14, 1998
Joseph G. Mahler Accounting Officer
*
- ------------------------------ Director December 14, 1998
Bernard S. Baker
*
- ------------------------------ Director December 14, 1998
Thomas L. Kempner
*
- ------------------------------ Director December 14, 1998
William A. Lawson
*
- ------------------------------ Director December 14, 1998
Warren D. Bagatelle
*
- ------------------------------ Director December 14, 1998
Richard M.H. Thompson
*
- ------------------------------ Director December 14, 1998
James D. Gerson
*
- ------------------------------ Director December 14, 1998
Allen Charkey
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ JERRY D. LEITMAN
-------------------------
Jerry D. Leitman
ATTORNEY-IN-FACT
</TABLE>
II-3
<PAGE>
Exhibit 10.6
Confidential treatment has been requested for portions of this document. Deleted
portions are identified with a dotted line under the deleted information.
------------------------------------------------
TECHNOLOGY TRANSFER
AND
LICENSE CONTRACT
FOR
Ni-Zn BATTERY TECHNOLOGY
AMONG
XIAMEN ERC BATTERY CORP. LTD.,
AND
XIAMEN DAILY-USED CHEMICALS CO., LTD.
AND
ENERGY RESEARCH CORPORATION
------------------------------------------------
May 29, 1998
<PAGE>
This Technology Transfer and License Contract (this "Contract") made and entered
into as of May 29, 1998, by and between Xiamen Daily-Used Chemicals Co., Ltd.
("Xiamen") A Chinese legal person having its place of business at 722 Xiahe Road
in Xiamen, Fujian Province, China and Energy Research Corporation ("ERC"), a New
York corporation having its place of business at 3 Great Pasture Road, Danbury,
CT 06813 USA. Following execution of this Contract Xiamen and ERC anticipate
establishing a joint venture, Xiamen ERC Battery Corp. Ltd., (the "Joint Venture
") that shall become a party to this Contract. Xiamen and ERC agree, that for
purpose of this Contract, Xiamen shall be solely responsible for the obligations
of the Joint Venture hereunder (and the term "Joint Venture" when used herein
shall mean "Xiamen") until, following the establishment of the Joint Venture,
the Joint Venture is made a party to this Contract.
WITNESSETH THAT:
Whereas, ERC has developed certain technology and technical know-how
for a sealed nickel zinc ("Ni-Zn") battery including technology for a
fibrillated electrode, an improved zinc electrode and a lightweight nickel
electrode that uses graphite, ERC has represented to the Joint Venture that such
technology has been used to develop a Ni-Zn battery suitable for use in the
Field ( as defined herein), and has demonstrated and described this technology
to representatives of the Joint Venture and the Joint Venture has determined to
its satisfaction that it wishes to acquire and license the technology for the
purpose of commercializing a Ni-Zn battery in the Field; and
Whereas, ERC, in consideration of the payments and obligations
described herein, wishes to license its know-how to the Joint Venture and enter
into a technology license agreement as set forth herein for the purpose of
allowing the Joint Venture to make, have made and sell or otherwise
commercialize a Ni-Zn battery in the Field and in the Licensed Territories (as
defined herein):
NOW, THEREFORE:
In consideration of the foregoing and the mutual terms, promises and
conditions set forth herein, all of which is hereby acknowledged, the Parties
agree as follows:
I. DEFINITIONS
When used in this Contract, the following capitalized terms
shall have the following meanings:
1.1 "Effective Date" shall mean the date this Contract is
signed by the Parties.
1.2 "ERC Facility" shall mean the ERC facility located at
3 Great Pasture Road, Danbury, CT 06813, USA.
<PAGE>
1.3 "ERC Know-How" shall mean all of the technical
information, know-how, inventions (whether patented or not), trade secrets, and
other technical, engineering and design information and data, including without
limitation, all processes and techniques owned by ERC or in which ERC acquires a
licensable interest; during the term of this Contract useful for the commercial
manufacture of Ni-Zn batteries within the Field, such as designs, drawings,
blueprints, flow sheets, reports, manuals, specifications, process descriptions,
operating procedures, materials or parts lists and other written or printed
materials that are owned by ERC and which may be useful or helpful to die Joint
Venture in the development and production of Ni-Zn batteries within the Field.
1.4 "Field" means the manufacture, use and sale, lease or
other transfer of Ni-Zn batteries for miner's lamps and two and three wheel
vehicles, applications such as motor bikes, bicycles, scooters, rickshaws,
industrial traction equipment, and off-road recreational vehicles such as golf
carts, boats and all terrain vehicles (ATVs).
1.5 "Licensed Technology" shall mean ERC Know-How.
1.6 "Licensed Territories" means the Exclusive Licensed
Territory and Non Exclusive Licensed Territory. The term "Exclusive Licensed
Territory" shall mean Mainland China, Taiwan, Hong Kong, and Macao and the term
"Non Exclusive Licensed Territory", shall. mean the other countries of Southeast
Asia listed in Annexure A. This Contract does not provide a license to any other
territory.
1.7 "Net Sales" means the sum of all sales, leases and other
transfers of Ni-Zn batteries at the Net Selling Price.
1.8 "Net Selling Price" means the gross invoiced price of
Ni-Zn batteries sold by the Joint Venture or the consideration received by the
Joint Venture if leased or transferred by the Joint Venture or its agents or
affiliates in arms-length commercial transactions in the ordinary course of
business, without any deduction other than returns, rebates and refunds actually
given and die following items of expense to the extent to which they are
actually given or paid and expressly included in the gross invoice price:
1. Sales discounts;
2. Transportation insurance premiums
3. Transport expenses on sales, leases and other
transfers.
For the purpose of computing the Net Selling Price for sales,
leases or other transfers of the Ni-Zn batteries to affiliates of the Joint
Venture or other parties that do not represent arms-length commercial
transactions in the ordinary course of business, the Net Selling Price shall be
determined by the Joint Venture.
1.9 "Party" means ERC or Xiamen until the Joint Venture is
made a party to this Contract and, thereafter, ERC, Xiamen or the Joint Venture
as the case may be.
2
<PAGE>
II LICENSE
2.1 License. ERC hereby grants to the Joint Venture for the duration of
the Term stated in Section 6.1, a license of the Licensed Technology solely
within the Licensed Territories and solely within the Field, subject to and in
accordance with the terms and conditions of this Contract. The Joint Venture
agrees that: (a) notwithstanding the transfer of the License Technology
contemplated in this Contract, ERC owns and retains, and shall continue after
the transfer to own and retain, all rights in the Licensed Technology, (b) the
Joint Venture receives hereby only those rights expressly granted to it in this
Contract, and (C) the Joint Venture shall make no use of any trade names or
marks of ERC without ERC's express written consent.
2.2 Exports. The Joint Venture shall not, without ERC's prior written
consent export, cause to be exported or facilitate the export of Ni-Zn batteries
out of either the Exclusive Licensed Territory or the Non-Exclusive Licensed
Territory, nor sell, lease or transfer Ni-Zn batteries to third parties for
export, or sale, lease or transfer, provided however, that the Joint Venture may
(a) export products incorporating the Ni-Zn batteries, and (b) sell, lease or
transfer Ni-Zn batteries to third parties incorporating Ni-Zn batteries into
their products for export, if the manufacture of, and the incorporation of Ni-Zn
batteries into, such products takes place in the Exclusive Licensed Territory
and Non-Exclusive Licensed Territory.
2.3 New Developments. ERC or its assigns shall promptly from time to
time, but at least once a year, disclose to the Joint Venture any know-how or
patents of ERC or its assigns arising or issued after the Effective Date and not
previously disclosed to the Joint Venture, and if reasonably requested by the
Joint Venture, provide the Joint Venture, from time to time, with a list of all
patent applications filed by ERC relating to the Field. Similarly, the Joint
Venture shall promptly disclose to ERC or its assigns any inventions,
discoveries, know-how, technical information, improvements or other
developments, whether or not patentable, relating to the Licensed Technology,
that it develops or in which it acquires a licensable interest during the term
of this Contract. ERC or its assigns shall have a worldwide, perpetual
royalty-free license to use these new developments, for all purposes, outside
the Exclusive Licensed Territory.
2.4 Compliance with Law. The Joint Venture shall comply with all
applicable laws and regulations when using the Licensed Technology, including
any applicable U.S. export control laws, and shall take all steps required to
record and authenticate this Contract and obtain whatsoever Chinese approvals
are required to render it valid and enforceable.
2.5 Other Agreements. During the Term of the license granted under
Section 2.1 hereof ERC will not work independently or with any other entity in
the Field in the Exclusive Licensed Territory.
3
<PAGE>
III PAYMENTS
3.1 Transfer Payment. The total payment (the "Transfer Payment") (which
does not include royalties) for the transfer of the Licensed Technology is three
million U.S. dollars (US$3,000,000). This amount shall be paid to ERC by the
Joint Venture within sixty (60) days of the Effective Date of the Joint Venture
Contract.
3.2 Payment Procedures. All payments made pursuant to this Contract
including all royalty payments due under Part V hereof, shall be made by wire
transfer to an account designated by ERC or Xiamen net of any applicable taxes,
withholdings, duties owed by the Joint Venture or ERC or Xiamen (excluding, in
the case of ERC or Xiamen, only income or corporate excise taxes imposed by the
U.S. or P.R.China and its states and instrumentalities respectively).
Accordingly, whatever payment is due hereunder the Joint Venture shall make such
additional payments as are necessary to ensure that the net amounts actually
received by ERC or Xiamen will not be less that the amounts it would have
received if such taxes and the like were not required to be paid. All payments
hereunder shall be made in U.S. dollars or Chinese currency by wire transfer to
a bank account designated by ERC or Xiamen respectively. Where it is necessary
to convert Chinese currency into U. S. dollars for the purpose of calculating
and paying royalties under Part V of this Contract, the exchange rate shall be
determined by reference to the average of the daily exchange rates published by
the People's Bank of China on the day the conversion is made.
3.3 Reinvestment. ERC will reinvest the Transfer Payment of $3 million
received under Section 3.1 hereof or more to purchase a 51% equity interest in
this Joint Venture within 90 days of the Effective Date of the Joint Venture
Contract.
IV TECHNOLOGY TRANSFER
4.1 The Licensed Technology will be transferred to the Joint Venture
for use in the Field pursuant to this Contract upon receipt of the Transfer
Payment made in accordance with Section 3.2 hereof.
4.2 Such transfer shall take place within six (6) months of the
Effective Date of the Joint Venture Contract and at ERC's Facility in Danbury,
CT to persons designated by the Joint Venture. ERC will provide reasonable
support to transfer Licensed Technology at no cost to the Joint Venture in order
for the Joint Venture to duplicate the Ni-Zn battery performance set forth in
Appendix B. Persons designated by the Joint Venture to accept the transfer will
have reasonable access to all personnel and equipment at ERC's Facility to
facilitate the transfer.
4
<PAGE>
V. ROYALTIES
5.1 Royalty Payments. As additional consideration for the license
granted herein, the Joint Venture shall pay to ERC a royalty of ________ percent
(____%) on Net Sales of Ni-Zn batteries sold, leased or transferred in the
Exclusive Licensed Territory and ________ percent (____%) on such Net Sales in
the Non-Exclusive Territory. The contract establishing the Joint Venture shall
provide that the Joint Venture shall distribute to Xiamen from its Net Sales
income an amount equivalent to a royalty of ________ percent (____%) on Net
Sales of Ni-Zn batteries sold, leased or transferred in the Exclusive Licensed
Territory and ________ percent (____%) on such Net Sales in the Non-Exclusive
Licensed Territory The obligation to make royalty payments hereunder shall
commence with the first product sales, leases or transfers of Ni-Zn batteries
manufactured by the Joint Venture, its agents or affiliates and royalties shall
thereafter by payable semi-annually thirty (30) days after the close of each
June 30 and December 31 of each year in which products subject to royalty are
sold, leased or transferred. All payments shall be made in accordance with the
payment provisions in Sections 3.2 hereof.
5.2 Records and Reports. The Joint Venture shall keep accurate,
detailed records and books of account containing all information reasonably
required to compute and verify royalties due to ERC and Xiamen under this
Contract, including information concerning products manufactured and assembled
and sales, leases and other transfers by the Joint Venture, its agents and its
affiliates. Such books and records shall be maintained for at least five (5)
years after the year to which they relate. When rendering payment of royalties,
the Joint Venture shall provide ERC and Xiamen with a written accounting showing
the calculation of the royalty, the number of products to which the royalty is
applicable and the Net Selling Price. At its expense, ERC or Xiamen may, by its
designated independent public accountants, audit once annually all Joint
Venture, royalty records and books kept by the Joint Venture to confirm the
accuracy of the Joint Venture's calculations of the Net Selling Price, Net Sales
and royalties due; provided however, that in the event such an audit discloses
that the actual royalty amount due under this Contract for the applicable period
is more than five percent (5%) greater than the royalty amount reported by the
Joint Venture for such period, the Joint Venture shall pay the reasonable costs
of such audit incurred by ERC or Xiamen.
VI. TERM, TERMINATION AND LIABILITY
6.1Term and Termination for Default. The license granted to the
Joint Venture hereby shall continue for a period of _________ years (the "Term")
commencing on the Effective Date of this Contract unless earlier terminated as
provided in this Section. In the event that the Joint Venture (a) fails to make
any payment hereunder when and as due, (b) otherwise materially defaults in its
obligations hereunder and fails to remedy such default within sixty (60) days
after such default has been called to its attention by written notice from the
parties, or (C) is dissolved or liquidated, and in any such event, the other
party, at its
5
<PAGE>
option, may terminate this Contract upon sixty (60) days prior written notice,
and all its obligations and the license granted hereunder shall thereupon cease.
6.2 Non-Waiver. No failure or delay on the part of either Party to
exercise any of its rights under any provision of this Contract or for any one
or more defaults shall be construed to prejudice its rights in connection with
such provisions or any continuing or subsequent default.
6.3 Return of Information. Upon termination of this Contract for any
reason before the end of its Term the Joint Venture will promptly deliver and
return to ERC the Licensed Technology and all technical information it has
received from ERC or derived from the Licensed Technology. Thereupon, the Joint
Venture shall not use the Licensed Technology for any purpose and ERC shall have
the right by any legal means to determine that the License Technology is not
being used.
6.4 Liability and Indemnity. ERC makes no warranties concerning any
products developed or manufactured by the Joint Venture. The Joint Venture shall
be responsible for all uses it makes of the Licensed Technology, for compliance
with all laws and regulations, and for any representations, warranties and
liabilities to purchasers of its Ni-Zn batteries. The Joint Venture shall
indemnify and hold harmless ERC and its affiliates from any claims, suits,
costs, damages, losses or liabilities of any kind or nature whatsoever arising
from or in connection with the Joint Venture's use of the Licensed Technology or
sale, lease or other transfer of Ni-Zn batteries. Under no circumstances will
ERC be liable to the Joint Venture for any indirect special or consequential
damages, irrespective of the cause.
VII. CONFIDENTIAL INFORMATION
7.1 Confidentiality. In order to protect the proprietary interest of
ERC in the Licensed Technology, ERC and Xiamen shall enter into a
confidentiality agreement substantially in the form set forth in Appendix D
prior to the transfer of the Licensed Technology pursuant to Section 4.1. The
Joint Venture shall become a party to such confidentiality agreement following
its establishment.
VIII. SUB-LICENSING
8.1 Authorization. The Parties agree that the Joint Venture shall only
be authorized to sub-license Licensed Technology to third parties within China,
Hong Kong, Taiwan and Macao. All such sub-licenses shall be non-exclusive. The
Joint Venture shall determine the terms of such sub-license.
8.2 Revenue Sharing. The contract establishing the Joint Venture shall
provide for the sharing of certain revenue received by the Joint Venture as
provided in Appendix C hereof.
6
<PAGE>
IX. REPRESENTATIONS AND WARRANTIES
Each of ERC and Xiamen represents and warrants that:
(a) it is validly existing with the status of a legal person in
its jurisdiction of establishment as evidenced by its business license
or certificate of incorporation;
(b) it has full power and authority under law to enter into this
Contract and perform its obligations hereunder;
(C) the person executing this Contract on behalf of such Party
has been authorized to do so pursuant to a valid resolution of such
Party's board of directors; and
(d) this Contract when executed by such Party, will constitute
the legal, valid and binding obligations of that Party in accordance
with its terms.
X. NOTICES
10.1 Notice Procedures. Any notice or other communication provided
for in this Contract shall be written in English or Chinese and shall be
delivered personally or be sent by telefacsimile or first class mail, postage
prepaid:
If to Xiamen or the Joint Venture:
Xiamen Daily-Used Chemicals Co., Ltd.
and Xiamen ERC Battery Corp., Ltd.
722 Xiahe Road
Xiamen, Fujian, Province, China
Attention: Sheng Qi, General Manager
Tel: [0592-2074764]
Fax: [0592-20221931
If to ERC:
Energy Research Corporation
3 Great Pasture Road
Danbury, CT 06813
Attention: Jerry D. Leitman, President
Tel: 203-792-1460
Fax: 203-798-2945
7
<PAGE>
cc: Ross M. Levine, Manager,
Contracts & Assistant Secretary
or to such other persons, telefacsimile or address as a Party may specify by
notice in accordance with this Section to the other Party. Any notice or other
communication rendered in accordance with this Section shall be deemed to have
been duly given: if delivered personally, when left at the address referred to
above; if sent by airmail, fourteen(14) days after the postmark; or if, sent by
telefacsimile, upon electronic confirmation of receipt of the facsimile by the
transmitter.
XI. MISCELLANEOUS
11.1 Applicable Law. This Contract shall be governed by the laws
of the State of New York, excluding its choice of law principles. Any dispute,
controversy or claim arising out of or in connection with the Contract, or the
breach, termination or invalidity thereof, if not resolved by mutual agreement
between the Parties within sixty(60)days of notice thereof, shall be finally
settled, upon the notice of any Party, by arbitration in accordance with the
Rules of the Arbitration Institute of the Stockholm, Chamber of Commerce. The
arbitration shall be held in Stockholm, Sweden. There shall be one arbitrator
who shall be appointed by the Parties within sixty(60) days of a notice of
arbitration. If the Parties fail to agree on an arbitrator within such time
period, the arbitrator shall be appointed by the Arbitration Institute of the
Stockholm Chamber of Commerce. Such arbitrator shall have the authority to award
any remedy or relief proposed by any Party. Any award rendered shall be rendered
in both the English and Chinese languages and shall be final and binding on the
Parties as from the date rendered. Judgment upon the award may be entered in any
court having jurisdiction thereof. Notwithstanding any dispute under
arbitration, the Parties shall continue to perform this Contract, except for the
matter under dispute. Each Party agrees that should any arbitration or legal
proceedings be brought against it or its assets in relation to the performance
of this Contract no immunity (sovereign or otherwise) shall be claimed by or on
behalf of itself with respect thereto or to any award made in respect thereof.
11.2 Legality. The Parties each declare that~ to the best of their
respective knowledge, as of the date first written above, there are no laws or
regulations in effect that materially limit or restrict their ability to fully
perform their obligations under this Contract.
11.3 Amendment.. This Contract may not modified or amended except
by a writing duly signed by an authorized representative of each Party.
11.4 Effect of Unenforceable Provisions. In the event any one or
more of the provisions contained in this Contract are found to be invalid,
illegal or unenforceable in any respect, such provision(s) shall be deemed
severed and deleted herefrom and the Validity, legality and/or enforceability of
the remaining pro-visions contained herein shall not in any way be affected or
impaired thereby, and the Contract shall be construed insofar as possible to
reflect the commercial basis on which the Parties entered into the Contract.
8
<PAGE>
11.5 Government Information, Nothing in this Contract shall
authorize the disclosure of, or access to, classified or restricted information,
material or know-how of the Government of the United State of America to persons
not authorized or licensed to disclose or receive such. classified or restricted
information.
11.6 Relationship. The relationship of the Parties herein shall be
that of independent contractors and nothing herein contained shall be deemed to
create any agency relationship.
11.7 Assignment. No Party may assign its interest in this Contract
without the written consent of the other Party, except to a wholly-owned or
majority-owned subsidiary of the assigning Party.
11.8 Entire Contract. The terms and provisions herein contained
constitute the entire agreement between the Parties as to the subject matter
thereof and supersede all previous and contemporaneous communications,
representations, contracts or understandings, whether written or oral, between
the Parties hereto with respect to the subject matter hereof. This Contract is
written in both the English and Chinese languages; both versions shall be
equally valid.
11.9 Counterparts. This Contract may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures hereto and thereto were upon the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound, the Parties
hereto have caused this Contract to be duly executed and delivered on their
respective behalf in a manner binding upon them by their duly authorized
officers, whose signatures appear below, as of the date first above written.
For and on behalf of:
XIAMEN DAILY-USED CHEMICALS CO., LTD.
By: /s/ Shen Qi
Title: General Manager
For and on behalf of:
ENERGY RESEARCH CORPORATION
By: /s/ Jerry D. Leitman
Title: President
10
<PAGE>
APPENDIX A
DEFINITION OF NON-EXCLUSIVE LICENSED
COUNTRIES IN SOUTHEAST ASIA
For purposes of this Contract the non-exclusive license countries in the
Southeast Asia area are as follows:
1. Brunei
2. Myanmar (formerly known as Burma
3. Cambodia
4. Indonesia
5. Lao
6. Malaysia
7. Philippines
8. Singapore
9. Thailand
10. Vietnam
11
<PAGE>
APPENDIX B
NICKEL-ZINC BATTERY PERFORMANCE
Battery Size: __ Ampere-hour __ Volt (__7-cell) Module
Cycle Life: ___ to ___% Depth of Discharge at the
___ Discharge Rate at ___oC
Specific Energy: ___ Wh/kg at the ___ Discharge Rate at
___oC
--------------------
Normal Recharge Time: ___ Hrs at ___ oC
12
<PAGE>
APPENDIX C
SHARING OF SUB-LICENSE REVENUE
Capitalized terms used herein shall have the meanings ascribed to
them in the Technology Transfer and License Contract dated May 29,1998 between
Energy Research Corporation and Xiamen Daily-Used Chemicals Co., Ltd.
It is intended that the contract establishing the Joint Venture
will provide for a sharing by ERC and -Xiamen of the payments received by the
Joint Venture pursuant to sub-license agreements entered into between the Joint
Venture and third parties (hereinafter referred to as "Sub-license Revenue") as
follows:
1. Subject to the exception in paragraph 3 below, the first US$
______ of Sub- license Revenue (excluding Royalties) shall be distributed by the
Joint Venture to Xiamen. Thereafter, ______ of the Sub-license Revenue
(excluding Royalties) shall be distributed by the Joint Venture to ERC and
_______ of the Sub-license Revenue (excluding Royalties) shall be distributed by
the Joint Venture to Xiamen.
2. In the event the Joint Venture receives a non-exclusive license
or sub-license to manufacture Ni-Zn batteries for electric or hybrid electric
vehicles, provided Xiamen has received Sub-license Revenue (excluding
Royalties)equal to US$ ______, then, following the Joint Venture's receipt of
such non-exclusive license, the next US$ ______ in Sub-license Revenue
(excluding Royalties) received by the Joint Venture shall be distributed by the
Joint Venture to ERC. Thereafter, Sub-license Revenue(excluding Royalties) shall
be distributed by the Joint Venture in accordance with the last sentence of
paragraph 1 above.
3. In the event the Joint Venture receives an exclusive license to
manufacture Ni-Zn batteries for electric or hybrid electric vehicles, then,
following the Joint Venture's receipt of such exclusive license, the first US$
______ in Sub-license Revenue (excluding Royalties) received by the Joint
Venture shall be distributed by the Joint Venture to ERC. Thereafter, Sub-
license Revenue (excluding Royalties) shall be distributed by the Joint Venture
in accordance with the last sentence of paragraph 1 above.
4. Sub-license Royalties in the Exclusive Territory are intended
to be distributed ______ to ERC and ______ to Xiamen.
13
<PAGE>
APPENDIX D
FORM OF
CONFIDENTIALITY AGREEMENT
This Confidentiality Agreement(the "Agreement") dated May 29,1998,
is entered into among Xiamen Daily-Used Chemicals Co., Ltd., ("Xiamen") having
its legal address at 722 Xiahe Road, Xiamen, People's Republic of China and
Energy Research Corporation,("ERC") having its legal address at 3 Great Pasture
Road, Danbury, Connecticut 06813 USA (each respectively a "Party" and
collectively, the "parties" ). This Agreement is being entered into pursuant to
and in fulfillment of the requirements of Section VH of the Technology Transfer
and License Contract(the "Contract") dated May 29,1998 between Xiamen and ERC.
Accordingly, for good and valuable consideration, and in
consideration of the mutual promises contained herein, all of which is hereby
acknowledged, the Parties agree as follows:
1. The Parties shall, at all times, both during the term of the
Contract and for ten(10) years following its expiration or
termination, keep in confidence all Confidential Information(as
defined below in paragraph 2), and shall not use the Confidential
Information of another Party except in accordance with paragraph 3
below or pursuant to the prior written consent of such Party. The
Parties shall take all necessary measures to maintain the
confidentiality of Confidential Information, including formulating
rules and procedures satisfactory to the Patties to prevent
unnecessary access to an unauthorized disclosure of Confidential
Information.
2. "Confidential Information" shall mean any and all technical and
non-technical proprietary information or know-how, whether or not
protected by patent, copyright or trade secret, that is related to
existing and future technology, products, product development,
improvements, research, engineering, business management, sales,
marketing, financial affairs, or any other information of a
confidential nature relating to any party.
3. The Parties may disclose Confidential Information to their
officers and employees and to their legally authorized agents, but
only to the extent necessary for such Party to carry out its
obligations under the Contract. The Parties shall ensure that all
individuals or entities having access to Confidential Information
are bound by confidentiality agreements at least as restrictive as
this one.
4. Each Party hereby agrees to indemnify and hold the other Party
harmless against any claim, loss, cost, expense, liability or
damage caused by the unauthorized disclosure of Confidential
Information by such Party.
5. This Agreement shall be governed by the laws of the state of New
York without any regard to the principles of the conflict of laws
thereof. Any dispute, controversy or
14
<PAGE>
claim arising out of or in connection with this Agreement shall be
finally settled by arbitration in accordance with Section 11. 1 of
the Contract.
6. This Contract may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the
signatures hereto and thereto were upon the same instrument.
IN WITNESS WHEREOF, and intending to be legally bound, the Parties hereto
have caused this Agreement to be duly executed and delivered on their respective
behalf by their duly authorized officers, whose signatures appear below, as of
the date first written above.
XIAMEN DAILY-USED CHEMICALS CO., LTD.
By: /s/ Shen Qi
Title: General Manager
ENERGY RESEARCH CORPORATION
By: /s/ Jerry D. Leitman
Title: President
15
<PAGE>
Exhibit 10.7
Confidential treatment has been requested for portions of this
document. Deleted portions are identified with a dotted line under
the deleted information.
-------------------
COOPERATIVE JOINT VENTURE CONTRACT
BETWEEN
XIAMEN THREE CIRCLES CO, LTD.
AND
ENERGY RESEARCH CORPORATION
FOR
THE ESTABLISHMENT
OF
XIAMEN THREE CIRCLES-ERC BATTERY CORP.,
LTD,
A
SINO-FOREIGN
MANUFACTURING JOINT VENTURE
<PAGE>
Cooperative Joint Venture Contract
Between Xiamen Three Circles Co., Ltd.
and Energy Research Corporation
GENERAL PROVISIONS
In accordance with the "Law of the People's Republic of China on
Chinese-Foreign Cooperative Joint Ventures" and other relevant Chinese laws
and regulations and with the principles of equality and mutual benefits and
through friendly consultations, China Xiamen Three Circles Co., Ltd. and
Energy Research Corporation have agreed to jointly invest in establishing a
manufacturing joint venture company in Xiamen City, Fujian Province, the
People's Republic of China and hereby enter into this Contract as follows
(the "Contract"):
PARTIES OF THE JOINT VENTURE
Article 1. Parties to this Contract are as follows:
XIAMEN THREE CIRCLES CO., LTD. ("PARTY A"), registered in Xiamen, China,
having its legal address at 722 Xiahe Road, Xiamen, China.
Legal representative: Name: Lin Kewei
Title: Chairman
Nationality: Chinese
ENERGY RESEARCH CORPORATION ("PARTY B"), registered in the United
States, having its legal address at Three Great Pasture Road, Danbury,
Connecticut.
Legal representative: Name: Jerry Leitman
Title: President
Nationality: United States of America
ESTABLISHMENT OF THE JOINT VENTURE
Article 2. In accordance with the "Law of the People's Republic of China on
Chinese- Foreign Cooperative Joint Ventures" and other relevant Chinese laws and
regulations, both Party A and Party B agree to set up Xiamen Three Circles-ERC
Battery Corp., Ltd. a manufacturing joint venture company (the "Joint Venture")
in the People's Republic of China (hereinafter also referred to as "China").
Article 3. The name of the Joint Venture shall be {Chinese Text } in Chinese and
Xiamen Three Circles-ERC Battery Corp. Ltd. in English. The legal
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address of the Joint Venture shall be at Gulangyu Industrial Zone, Yue Hua Dong,
Xiamen City, Fujian Province.
Article 4. All activities of the Joint Venture shall be in compliance with and
protected by the laws and pertinent rules and regulations of the People's
Republic of China.
Article 5. The form of organization of the Joint Venture shall be a limited
liability company with legal person status. Each Party's liability for the
obligations of the Joint Venture and otherwise shall be limited in all respects
to the extent of the funds it has actually contributed to the Joint Venture's
registered capital. In no event and under no circumstances shall any Party's
liability hereunder or otherwise exceed such amount. The profits of the Joint
Venture shall be shared by the Parties in accordance with this Contract.
THE PURPOSE AND SCOPE OF BUSINESS
Article 6. The purpose for forming the Joint Venture is to commercialize certain
technologies of Party B through the establishment of the Joint Venture and to
enhance the economic cooperation in energy between China and the United States.
Article 7. The business scope of the Joint Venture shall be to (I) accept a
license of the technology of Party B specified in the Technology Transfer and
License Contract attached hereto as Annexure 1 (hereinafter referred to as the
"TLC"), (ii) manufacture nickel zinc electrochemical power sources ("Batteries")
with the technology received pursuant to the TLC, (iii) sell, lease or otherwise
transfer the Batteries both inside and outside China in accordance hereof, and
(iv) sub-license to third-parties the technology made available to the Joint
Venture pursuant to the TLC.
Included in the business scope of the Joint Venture shall be the
manufacture of Ni-Zn batteries for miner's lamps, two and three wheel vehicles,
industrial traction equipment and off-road golf carts, boats, and all terrain
vehicles.
It is expected that the annual sales value of the Joint Venture's Battery
production shall be US ( ), ( )% of which will be sold in the foreign
market.
TOTAL AMOUNT OF INVESTMENT AND REGISTERED CAPITAL
Article 8. The total investment of the Joint Venture is US$( ). The
registered capital of the Joint Venture is US$6,100,000. The difference between
the registered capital of the Joint Venture and its total investment amount
shall be provided to the Joint Venture either by the Parties, pro rata, in the
form of additional capital contributions or shareholder loans or shall be
provided to the Joint Venture in the form of loans by third party lenders.
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Article 9. The aggregate amount of registered capital to be contributed by Party
A and Party B to the Joint Venture is US$6,100,000. Party A shall, in accordance
with Article 10, contribute the Renminbi equivalent of US$3,019,500, accounting
for 49.5% of the Joint Venture's registered capital ("Party A's Ownership
Percentage") and Party B shall contribute US$3,080,500, accounting for 50.5% of
the Joint Venture's registered capital ("Party B's Ownership Percentage").
Article 10. Party A shall, in accordance with Article 9, make its contribution
to the registered capital of the Joint Venture in cash in Renminbi by reference
to the middle rate for the exchange of United States dollars for Renminbi
published by the People's Bank of China on the date of contribution and Party B
shall make its contribution to the registered capital of the Joint Venture in
cash in United States dollars on the basis of a letter of credit (the "Letter of
Credit") executed with a bank by Party B in favor of the Joint Venture.
Article 11. The registered capital of the Joint Venture shall be contributed in
a single installment by Party A and Party B in accordance with their respective
Ownership Percentages within 3 months after the issuance of a business license
to the Joint Venture. Party B shall provide the Joint Venture with the Letter of
Credit at the earliest possible date following the issuance of a business
license to the Joint Venture. Party A shall make its contribution to the
registered capital of the Joint Venture in a single installment within twenty
(20) days of the Joint Venture's receipt of the Letter of Credit produced by
Party B. Party B's capital contribution shall be made in a single ro installment
in accordance with the terms of the Letter of Credit.
Article 12. Transfer or assignment of all or part of a Party's Ownership
Interest in the registered capital of the Joint Venture to a third party shall
be permitted only with the consent of the other Party and the approval of the
examination and approval authority.
Responsibilities of the Parties
Article 13. Party A shall be responsible for:
(a) handling such matters as filing with the relevant Chinese
departments applications for approval and registration of
establishment of the Joint Venture and obtaining of the
business license thereof;
(b) making its registered capital contribution to the Joint
Venture in cash within the time limit and in accordance with
Articles 9 to 11;
(C) assisting Party B's foreign personnel in obtaining their
entry -visas, work permits and in going through customs
procedures;
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(d) assisting the Joint Venture in obtaining land and facilities
deemed suitable by party B for the Joint Venture's
operations;
(e) assisting the Joint Venture, with the selection and purchase
of machinery, equipment and materials inside China;
(f) assisting the Joint Venture in marketing sales and
distributions of Batteries within China;
(g) handling other matters entrusted to it by the Board Of Joint
Venture; and
(h) pay taxes on its income as required by law.
Party B shall be responsible for:
(a) making its registered capital contribution to the Joint
Venture in cash within the time limit and in accordance with
Articles 9 to 11;
(b) assisting the Joint Venture with the selection and purchase
of machinery, equipment and materials outside China;
(C) assisting the Joint Venture in marketing, sales and
distribution of Batteries outside of China;
(d) assisting Joint Venture working personnel in obtaining visas
and in going through customs procedures for entrance to the
U.S. for necessary training;
(e) handling matters in respect of export licenses for
technology and other technology related matters set forth in
the TLC;
(f) handling other matters entrusted to it by the Board of
Directors of the Joint Venture; and
(g) pay taxes on its income as required by law.
LICENSE; BATTERY PRODUCTION; SUB-LICENSE; REVENUE
Article 14. The Joint Venture shall enter into and become a party to the TLC.
Based on the Joint Venture's scope of business, it is anticipated that the Joint
Venture will derive revenue principally from two sources: (I) "Net Sales" (as
such term is defined in
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the TLC) of Batteries ("Battery Revenue") and (ii) from payments to the Joint
Venture under sub-licenses of Party B's technology ("Sub-license Revenue"),
including revenue received from the payment for the transfers of technology
(Sub-license Transfer Revenue") and revenue received from the payment of
royalties for use of such technology ("Sub-license Royalty revenue"). The Joint
Venture shall deposit the funds it receives in respect of Battery Revenue into a
bank account (the "Battery Revenue Account") and the funds it receives in
respect of Sub-license Revenue into another bank account (the "Sub-license
Revenue Account"). The Sub-license Revenue Account shall have two sub-accounts.
Sub-account A ("Sub-account A") shall contain all Sub-license Transfer Revenue.
Sub-account B ("Sub-account B") shall contain all Sub-license Royalty Revenue.
The Joint Venture shall allocate the costs and expenses of producing Battery
Revenue to the Battery Revenue Account and the costs of producing Sub-license
Revenue to the Sub-license Revenue Account in accordance with appropriate
accounting principles and such other guidelines as the Board of Directors of the
Joint Venture may establish. The revenue available for distribution to the
Parties from the Battery Revenue Account and the Sub-license Revenue Account,
and all other revenue or funds available to the Joint Venture for distribution
to the Parties, shall be distributed to the Parties in accordance with the
priority specified in the schedule set forth in Article 33.
NON-COMPETITION
Article 15. The Parties hereby agree not to compete, whether directly or
indirectly, with each other with respect to the Field (as defined in the TLC) of
use of the technology to be provided under the TLC or with the business of the
Joint Venture in China (including Hong Kong, Taiwan and Macau) and to cause
their affiliated or associated companies and entities to be likewise bound not
to compete, in each case for the duration of the Joint Venture's term and for
two (2) years following the expiration or early termination of this Contract.
BOARD OF DIRECTORS
Article 16. The establishment of the Board of Directors of the Joint Venture
shall take place on or after the date of the issuance of the business license to
the Joint Venture.
Article 17. The Board of Directors of the Joint Venture shall consist of five
Directors, two of whom shall be appointed by Party A and three of whom shall be
appointed by Party B. The Chairman of the Board shall be appointed by Party B
and the Vice Chairman by Party A. Each Director, Chairman and Vice Chairman
shall be appointed for a term of three years and may serve consecutive terms if
reappointed by the Party which originally appointed him.
Article 18. The highest governing authority of the Joint Venture shall be its
Board of
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Directors (the "Board of Directors"). All decisions of the Board of Directors
shall be made by a simple majority vote of the members of the Board of
Directors, except for decisions regarding the following items that by law
require the unanimous approval of the Board of Directors:
(a) amendment of the Joint Venture's Articles of Association;
(b) increase in the registered capital of the Joint Venture;
(C) merger or division or change in the legal form of organization
of the Joint Venture;
(d) termination and dissolution of the Joint Venture; and
(e) mortgage of all the assets of the Joint Venture.
The Joint Venture shall not take out any loans or incur any debts or use the
assets of the Joint Venture as collateral without the prior approval of its
Board of Directors in a duty adopted resolution.
Article 19. The Chairman of the Board of Directors shall be the legal
representative of the Joint Venture. Should the Chairman be unable to perform
his responsibilities and duties, he may authorize the Vice Chairman to represent
him temporarily.
Article 20. The Board of Directors shall convene at least one meeting every
year, provided that no meeting shall be held unless notice of such meeting has
been waived or provided at the last known address, telex or fax of each director
or given in accordance with Article 51 hereof. In principal, the location for
holding such meeting shall alternate on an annual basis between the U.S. and
China. No less than two-thirds (2/3) of the Board of Directors shall constitute
a quorum, provided that no meeting of the Board of Directors shall be held for
matters requiring the unanimous approval of the Board of Directors unless all
Directors are present at such meeting. Meetings of the Board of Directors shall
be called and presided over by the Chairman of the Board of Directors. The
Chairman may convene interim meetings of the Board of Directors at the request
of not less than one third of all Directors. The Chairman shall establish the
agenda for Board of Directors' meetings and send a copy of the agenda to all the
members of the Board of Directors no less than fourteen (14) days prior to such
meetings. Minutes of all meetings shall be taken in English and Chinese, shall
be signed by all the members of the Board of Directors and filed with the
records of the Joint Venture.
OPERATION AND MANAGEMENT ORGANIZATION
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Article 21. The Joint Venture shall establish an operation and management
organization responsible for the daily operations and management of the Joint
Venture. The operation and management organization shall have a General Manager
and a Deputy General Manager. The General Manager shall be nominated by Party A
and approved and appointed by the Board of Directors for a term of three years.
Where the Board of Directors determines that additional deputy general managers
are needed, the General Manager may nominate such additional deputy general
managers for approval and appointment by the Board of Directors.
Article 22. The responsibilities and duties of the General Manager shall be to
carry out resolutions adopted by the Board of Directors and to organize and
direct the day operations and management of the Joint Venture. The General
Manager shall maintain records of all actions taken by the Joint Venture and
cause the Joint Venture to implement financial reporting and accounting systems
that will enable the Joint Venture to produce financial reports that meet the
requirements of the laws of China. The Deputy General Manager(s) shall assist
the General Manager in his work.
The operation and management organization of the Joint Venture may have
several departmental managers, who shall be responsible for the work mi each
department respectively and for handling matters entrusted to them by the
General Manager and Deputy General Manager(s). Such departmental managers shall
be responsible to the General Manager and Deputy General Manager(s).
Article 23. In case of graft, dereliction of duty, or for any other reason, the
General Manager and Deputy General Manager(s) may be removed and replaced at any
time by a resolution of the Board of Directors.
PURCHASE OF EQUIPMENT
Article 24. In the purchase of required raw materials, fuel, parts, equipment,
means of transportation and articles for office use, the Joint Venture shall
give preference to the purchase of such items in China provided that the terms
and conditions (including with respect to price and quality) are the same as
those available from sources outside China.
Article 25. If the Joint Venture's Board of Directors entrusts Party B to select
and purchase equipment on overseas markets, persons appointed by Party A shall
be permitted to attend any overseas meetings arranged by Party B's personnel
with potential sellers of such equipment.
LABOR MANAGEMENT
Article 26. The recruitment, employment dismissal and resignation, wages, labor;
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welfare, rewards, penalties, social insurance, housing allowances, traveling
standards and other matters concerning the employees of the Joint Venture
(including its senior management personnel) shall be determined by the Board of
Directors. With respect to labor contracts, the Joint Venture shall either enter
into labor contracts with the trade union of the Joint Venture or labor
contracts with individual employees to the extent required by law. All labor
contracts, after their execution, shall be filed with the local labor management
department.
Article 27. The treatment of personnel recommended to the Joint Venture by Party
B shall be determined by the Board of Directors by reference to the treatment of
personnel of the Joint Venture in similar employment situations with similar
backgrounds and training.
TAXES, FINANCE AND AUDITING
Article 28. The Joint Venture shall pay taxes in accordance with the
stipulations of the laws of China.
Article 29. Employees of the Joint Venture shall pay individual income tax in
accordance with the stipulations of "Individual Income Tax Law of the People's
Republic of China".
Article 30. The Joint Venture's Board of Directors shall allocate reserve funds,
enterprise expansion funds and bonus and welfare funds for its employees in
accordance with the laws of China. The annual amount of such allocations shall
be decided by the Board of Directors.
Article 3l. The fiscal year of the Joint Venture shall be from January 1st to
December 31st of each year. All vouchers and receipts of the Joint Venture shall
be written in Chinese, and translated into English if requested by Party B,
The Joint Venture shall open Renminbi and/or foreign exchange bank
accounts in currencies used by the Joint Venture with banks inside China and/or
banks outside China (as approved by relevant Chinese authority) as the Board of
Directors determines to be required consistent with the laws of China. The Joint
Venture shall make all distributions hereunder to Party B in United States
dollars. Party A shall assist the Joint Venture in obtaining all necessary
approvals to allow it to (I) exchange Remninbi for foreign exchange through an
authorized foreign exchange bank and (ii) transfer foreign exchange outside of
China to Party B in respect of payments to Party B of distributions hereunder
and in respect of amounts due to it under the TLC and otherwise. If at any time
the Joint Venture does not have sufficient foreign exchange to pay Party B in
full its share of distributions due hereunder or amounts due under the TLC or
otherwise, Party A shall assist the Joint Venture in obtaining the necessary
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foreign exchange.
Article 32. The annual examination and audit of the financial statements of the
Joint Venture shall be conducted by an international accounting firm registered
to do business in China and approved by the Board of Directors and the results
thereof shall be reported to the Board of Directors and the General Manager. The
cost of employing such accounting firm shall be borne by the Joint Venture.
At any other time, if either Party considers it necessary to employ another
registered auditor (including an auditor registered in another country) to
undertake a financial audit and examination of the Joint Venture's financial
affairs, that Party may do so and all expenses resulting therefrom shall be
borne solely by that Party. Each Party shall have the right to inspect the books
of account and other financial records of the Joint Venture at any time during
normal business hours and to make photocopies of any materials or records.
DISTRIBUTIONS
Article 33. All funds received by the Joint Venture shall be deposited into its
bank accounts and withdrawn from its bank accounts in accordance with guidelines
established by the Board of Directors and this Contract.
Following the payment of all costs required by law and of the operating
expenses of the Joint Venture, revenue of the Joint Venture, which according to
law may be distributed to the Parties, shall be distributed to the Parties in
accordance with the following schedule:
A. Distributions to the Parties from Sub-account A of the Sub-license
Revenue Account shall be made at the end of each year after completion
of the annual audit in the following order of priority:
1. first, all of the revenue in Sub-account A shall be distributed
to Party A until Party A receives an aggregate amount of
distributions of revenue equal to US$( ); and
2. thereafter, ( ) of the revenue in Sub-account A shall be
distributed to Party B and ( ) of the revenue in such
account shall be distributed to Party A.
Distributions to the Parties from Sub-account B of the Sub-license
Revenue Account shall be made at the end of each year ( )
( ) to Party B and ( ) to Party A.
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B. Distributions to the Parties from the Battery Revenue Account
shall be made at the end of each quarter in the following order
of priority:
1. first, all of the revenue in such account shall. be
distributed to Party B until Party B receives an amount
equivalent to ( ) percent
( %) of Net Sales in the Exclusive Licensed Territory
(as such term is defined in the TLC) and ( ) percent ( %)
of Net Sales in the Non-Exclusive Licensed Territory (as
such term is defined in the TLC), in each case, as
calculated for the relevant period;
2. secondly, all of the revenue in such account shall be
distributed to Party A until Party A receives an amount
equivalent to ( )
( %) of Net Sales in the Exclusive Licensed Territory
(as such term is defined in the TLC) and ( ) percent ( %)
of Net Sales in the Non-Exclusive Licensed Territory (as
such term is defined in the TLC), in each case, as
calculated for the relevant period; and
3. thereafter, the revenue in such account shall be distributed
to the Parties in accordance with the respective Parties'
Ownership Percentages at the end of each year after
completion of the annual audit.
C. Distributions to the Parties of revenue or other funds of the
Joint Venture that are not Sub-license Revenue or Battery
Revenue, if any, shall be distributed to the Parties at the end
of each year after completion of annual audit in accordance with
the respective. Parties' Ownership Percentages.
Prior to the end of each quarter of each year, the General Manager shall
prepare the Joint Venture's previous quarter's balance sheet, profit and loss
statement, statement of changes in financial position and cash flow, and
statement of the amount of distributions to which the Parties are entitled based
on the foregoing schedule and submit the same to the Board of Directors for
examination and approval.
DURATION OF THE JOINT VENTURE
Article 34. The Joint Venture shall. commence on the date on which the business
license of the Joint Venture is issued and shall continue, unless earlier
terminated in
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accordance with Article 42 hereof, for ( ) years following such date.
DISPOSAL OF ASSETS UPON EXPIRY OF THE DURATION
OR EARLY TERMINATION OF THE JOINT VENTURE
Article 35. Upon (I) the expiry of the duration of the Joint Venture or (ii)
early termination of the Joint Venture in accordance with Article 42, the Joint
Venture shall be liquidated and dissolved and its assets disposed of in
accordance with the laws of China and the provisions of this Article. Pursuant
thereto, the Board of Directors shall appoint a committee (consisting of 3
members, one nominated by Party A and two nominated by Party B) to oversee the
liquidation and disposal of the joint Venture's remaining assets. The committee
shall value the Joint Venture's assets based on their market value as determined
by an independent international appraiser appointed by the Board of Directors
and shall exercise its best efforts to auction the assets and obtain the highest
price in foreign exchange for them. In any such auction, the Parties shall be
entitled to bid for the purchase of the assets of the Joint Venture. Upon
completion of the liquidation process, the Joint Venture's assets shall be
distributed to the Parties in accordance with their Ownership Percentages.
Should the Joint Venture be terminated earlier pursuant to Article 42, then,
concurrent with the liquidation of any of the joint Venture's assets, the Joint
Venture shall procure the return to the Joint Venture of all technology,
technical documentation(including any and all copies)and know-how provided to
licensees of the Joint Venture and return to Party B the same along with all the
technology, technical documentation(including any and all copies)and know-how
provided to the Joint Venture by Party B pursuant to the TLC.
INSURANCE
Article 36. Insurance by the Joint Venture against various kinds of risks shall
be taken out with the People's Insurance Company of China or any other insurance
company registered to do business in China. The type, value and duration of the
insurance purchased by the Joint Venture shall be decided by the Board of
Directors.
AMENDMENT TO, ALTERATION AND TERMINATION OF THE CONTRACT;
CONFIDENTIALITY
Article 37. Amendments to or alterations of this Contract shall come into force
only after a written agreement with respect thereto has been signed by Party A
and Party B and approval by the original examination and approval authority has
been obtained.
Article 38. In order to protect the proprietary interests of Party B in the
technology that is the subject of the TLC, the Joint Venture shall enter into
and become a party to the Confidentiality Agreement attached to the TLC as
Appendix D thereto.
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Article 39. Should the Joint Venture be unable to continue its operations or to
achieve the business purposes stipulated in the Contract as a result of the
failure of one Party to fulfill its obligations under the Contract or the
Articles of Association of the Joint Venture, or as a result of the material
breach by one Party of the stipulations of this Contract or the Articles of
Association, this Contract shall, at the option of the non-defaulting Party, be
deemed to have been terminated by the defaulting Party unilaterally. In such
case the non-defaulting Party, in addition to any other rights it may have,
shall have the right to apply to the original examination and approval authority
for termination of this Contract in accordance with Article 42.
LIABILITIES FOR BREACH OF CONTRACT
Article 40. Should either Party A or Party B fail to make its capital
contributions in accordance with the provisions set forth in Article 11 of this
Contract, the breaching Party shall pay to the other Party an amount equal to
one percent (1%) of its contribution that is overdue as liquidated damages per
month, starting from the first month in which its contribution is overdue.
Should the breaching Party fail to pay its capital contribution for more than
three (3) months, the breaching Party shall pay an additional amount equal to
three percent (3%) per month of its overdue contribution. If such failure
exceeds six (6) months, the non-breaching Party shall have the right, in
addition to any other right it may have, to apply to the original examination
and approval authority for termination of this Contract in accordance with
Article 42.
Article 41. In the event of a material breach of this Contract by one Party, the
other Party shall be relieved of its continued performance hereunder.
EARLY TERMINATION
Article 42. A Party shall have the right at any time to give written notice to
the other Party of its desire to terminate this Contract and dissolve the Joint
Venture (a "Termination Notice") upon the occurrence of any of the following
significant events:
(a) the other Party commits a material breach of this Contract, the
Articles of Association, the TLC, or the Confidentiality Agreement
and such breach is not remedied within sixty (60) days of written
notice thereof to the breaching Party;
(b) the other Party becomes bankrupt, or is the subject of proceedings
for liquidation or dissolution, or ceases to carry on its present
business;
(C) the Joint Venture is unable to pay its debts as they become due or is
in receipt of a petition to declare it bankrupt or insolvent or the
Joint
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Venturehas incurred losses for a period of three (3) consecutive
years after the issue of its business license and the cumulative
amount of such losses exceeds 100% of the registered capital of the
Joint Venture; or
(d) a material part of a Party's economic benefits under the Contract
cannot be realized on account of the action of a government
authority.
A meeting of the Board of Directors shall take place within two (2) months
following the date of a Party's receipt of a Termination Notice, unless by the
date of such meeting a proposal to resolve the matter has been made to and
accepted in writing by the Party that served the Termination Notice. If by the
date of such meeting a proposal to resolve the matter has not been made or, if
made has not been accepted, then each Party shall be deemed to have provided the
other Party with its consent to terminate this Contract and dissolve the Joint
Venture .
In any such case, the Parties shall cause all members of the Board of
Directors appointed by them to attend or be represented by proxy at such meeting
and to vote in such a manner that the Board of Directors shall adopt unanimous
resolutions to (I) terminate this Contract, (ii) dissolve the Joint Venture,
(iii) liquidate its assets in accordance with Article 35 and (iv) submit an
application to the relevant approval authorities to bring the foregoing
resolutions into effect. Failure of a Party to cause all of its members of the
Board of Directors to vote as aforesaid in accordance with this Article shall be
deemed sufficient evidence of a dispute entitling the other Party to proceed to
arbitration in accordance with Article 44.
APPLICABLE LAW
Article 43. Except as set forth in Article 44, the execution, validity,
interpretation and performance of this Contract shall be governed by the laws of
the People's Republic of China.
SETTLEMENT OF DISPUTES
Article 44. Any dispute, controversy or claim arising out of or in connection
with this Contract, or the breach, termination or invalidity thereof, if not
resolved by mutual agreement between the Parties within sixty (60)days of notice
thereof, shall be finally settled by arbitration in accordance with the Rules of
the Arbitration Institute of the Stockholm Chamber of Commerce. The arbitration
shall be held in Stockholm, Sweden. The arbitration proceedings shall be
governed by the laws of Sweden without any regard to the principles of the
conflict of laws thereof. The text of the award shall be rendered in both the
English and Chinese languages.
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There shall be one arbitrator who shall be appointed by the Parties within
sixty (60)days of the respondent's receipt of the claimant's request for
arbitration. If the Parties fail to agree on the appointment of an arbitrator
within such time period, such appointment shall be made by the Arbitration
Institute of the Stockholm Chamber of Commerce within, to the extent possible,
twenty (20) days of the written request of any Party.
The arbitrator shall have the authority to award any remedy or relief,
including, without limitation, a declaratory judgment, specific performance of
any obligation created under this Contract or the issuance of an injunction. Any
award rendered shall be final and binding on the Parties as from the date
rendered. Judgment upon the award may be entered in any court having
jurisdiction thereof. The costs of any arbitration initiated pursuant to this
Article 44 (including, without limitation, the costs of legal counsel) shall be
borne by the Party losing the arbitration.
All claims or disputes between the Parties to this Contract, including with
respect to agreements contemplated herein (e.g. the TLC, Confidentiality
Agreement, and other agreements among the Parties and/or the Joint Venture),
that arise under or in connection with this Contract or such agreements, may be
brought in a single arbitration initiated in accordance with this Article 44.
Each Party agrees that should any arbitration or legal proceedings be brought
against it or its assets in relation to the performance of this Contract, no
immunity (sovereign or otherwise) shall be claimed by or on behalf of itself
with respect thereto or to any award made in respect thereof.
Article 45. If any dispute is under arbitration, except for the matters under
dispute, the Parties shall continue to perform this Contract.
LANGUAGE
Article 46. This Contract is written in Chinese and English. Both versions shall
be equally authentic and valid.
MISCELLANEOUS MATTERS
Article 47. This Contract shall be submitted for approval to the relevant
authorities of the People's Republic of China, and shall come into force on the
date of such approval.
Article 48. This Contract (including all Annexures) shall constitute the entire
agreement of the Parties in connection with the subject matter hereof and shall
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supersede all previous and contemporaneous discussions, negotiations, letters or
agreements (whether written or oral) between the Parties.
Article 49. The invalidity of any provision of this Contract shall not affect
the validity of any other provision of this Contract.
Article 50. The provisions of the Articles of Association of the Joint Venture
shall be construed in accordance with the provisions of this Contract to the
effect that the provisions of this Contract shall prevail if there is any
contradiction or inconsistency between the provisions of this Contract and the
pro-visions of the Articles of Association.
Article 51. Any notice or other communication provided for in this Contract
shall be written in English or Chinese and shall be delivered personally or be
sent by airmail or sent by facsimile as follows:
If to Party A:
Xiamen Three Circles Co., Ltd.
722 Xiahe Road,
Xiamen City, Fujian Province
China
Postal Code: 361004
Attention: Mr. Shen Yi, General Manager
Telephone: 86-592-2074764
Fax: 86-592-2022193
If to Party B:
Energy Research Corporation
Three Great Pasture Road
Danbury, Connecticut 06813
USA
Attention: Mr. Jerry D. Leitman, President
Telephone: (203) 792-1460
Fax: (203) 798-2945
or to such other person, address or facsimile number as either Party may specify
by notice in accordance with this Article to the other Party. Any notice or
other communication rendered in accordance with this Article shall be deemed to
have been duly given: if delivered personally, when left at the address refereed
to above; if sent by airmail, twenty (20) days after the postmark of the sending
city; or, if sent by
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facsimile, upon electronic confirmation of receipt of the facsimile by the
transmitter.
Article 52. This Contract shall be executed in 16 originals, 8 in Chinese and 8
in English.
Article 53. Each of the Parties represents and warrants that:
(a) it is validly existing with status of legal person in its
jurisdiction of establishment as evidenced by its business license
or certificate of incorporation;
(b) it has full power and authority under law to enter into this
Contract and perform its obligations hereunder;
(C) the person executing this Contract on behalf of such Party has
been authorized to do so pursuant to a valid resolution of such
Party's board of directors; and
(d) this Contract when executed by such Party, will constitute the
legal, valid and binding obligations of that Party in accordance
with its terms.
Article 54. In connection with the "Licensed Technology" (as defined in the
TLC), Party B undertakes that:
(a) to the best of its knowledge, the information in respect of all
technologies (including but not limited to design, manufacturing
technology, process flow, testing and inspection and relevant
patent information ) to be provided pursuant to the TLC in respect
of the Batteries is complete and accurate. Party B undertakes
further that, to the best of its knowledge and provided that the
Joint Venture and Party A comply with their respective obligations
hereunder and under the TLC, and follow the instructions and advice
of Party B, such technologies are capable of meeting the product
quality set forth in Appendix B of the TLC;
(b) the Licensed Technology to be transferred to the Joint Venture is
currently among the most advanced technologies of Party B relating
to the Field (as such term is defined in the TLC);
(C) Annexure 2 hereto contains a list of all the technologies and
services Party B shall provide to the Joint Venture after it enters
into and becomes a party to the TLC;
16
<PAGE>
(d) the drawings, specifications and other detailed information
concerning the components of the Licensed Technology shall be
furnished to the Joint Venture as scheduled in the TLC;
(e) improvements in the Licensed Technology shall be provided to the
Joint Venture in accordance with Section 2.3 of the TLC; and
(f) the training of the Joint Venture's technicians in the use of the
Licensed Technology shall be in accordance with relevant industry
standards.
Article 55. The TLC executed by and between Party A on behalf of the Joint
Venture and Party B on May 29, 1998 is attached hereto as Annexure I and forms
an integral part of this Contract. In the event of any inconsistency between the
provisions of the TLC and the provisions of this Contract, the provisions of
this Contract shall prevail. After this Contract is approved by the Examination
and Approval Authority and comes into force, the Joint Venture shall perform the
obligations of Party A under the TLC.
17
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound, this Contract has been
signed by the authorized representatives of both Parties on July 7, 1998 as
follows:
XIAMEN THREE CIRCLES CO., LTD.
By: /s/ Shen Qi
--------------------------------
Name: Shen Qi
Title: General Manager
ENERGY RESEARCH CORPORATION
By: /s/ Jerry D. Leitman
--------------------------------
Name: Jerry Leitman
Title: President
18
<PAGE>
Annexure 2
Technologies and Services to be Transferred to the Joint Venture
Technology
1. Process and technology description of the positive and negative electrodes
including:
a) Formulations
b) Material specifications
c) Methods of preparation
d) Machinery required
e) Vendors for raw materials
f) Drawings
2. Description of cell assembly including:
a) Materials required including separators, current collectors, cell cases,
terminals and electrolyte
b) Methods of assembly c) Machinery required d) Drawings e) Vendors for
materials
3. Description of cell and battery formation and testing including:
a) Procedures
b) Equipment required
c) Vendors
4. A list of all trade secrets including those related to:
a) Electrode formulations
b) Electrode processing and manufacture
c) Cell assembly
d) Cell formation (if required)
Services
1. Training for engineering and technical staff of the Joint Venture at ERC
in Danbury and at Xiamen to assist in:
a) Transferring of all pertinent technology relating to the manufacture of
nickel-zinc cells and batteries
b) Assistance with regard to understanding the operation of pertinent
manufacturing machinery
c) Assistance with regard to cell and battery assembly d) Assistance with the
operation (including software) of all equipment
19
<PAGE>
<TABLE>
<CAPTION>
- --------------- -------- ------------------------------------ -------------------------------------------------------
U.S. PATENT NO. DATE TITLE DESCRIPTION
- --------------- -------- ------------------------------------ -------------------------------------------------------
<S> <C> <C> <C>
5,658,694 8/19/97 Simplified Zinc Negative electrode Low solubility zinc electrode in sealed cell
with Multiple Electrode assemblies construction.
- --------------- -------- ------------------------------------ -------------------------------------------------------
5,556,720 9/17/98 Sealed Zinc Secondary Battery and Improved low solubility zinc electrode in
Zinc Electrode Therefore sealed cell construction
- --------------- -------- ------------------------------------ -------------------------------------------------------
5,460,899 10/24/95 Sealed Zinc Secondary Battery and Low solubility zinc electrode in sealed cell
Zinc Electrode Therefore construction
- --------------- -------- ------------------------------------ -------------------------------------------------------
5,264,305 11/23/93 Zinc Secondary Bipolar Battery Bipolar batteries with horizontally
construction disposed electrodes
- --------------- -------- ------------------------------------ -------------------------------------------------------
5,023,155 6/11/91 Nickel Electrode for Alkaline A nickel electrode comprising conductive
Batteries diluent, an active material including nickel
hydroxide containing boron.
- --------------- -------- ------------------------------------ -------------------------------------------------------
4,976,904 12/11/90 Method and Apparatus for Electrode materials containing active
Continuous Formation of Fibrillated material in a fibrillated polymer binder are
Polymer Binder Electrode formed continuously into a cohesive
Component electrode component by utilizing an
extruder barrel for processing the
electrode materials.
- --------------- -------- ------------------------------------ -------------------------------------------------------
4,810,598 3/7/89 Gas Recombination Assembly for An assembly for recombining gases
Electrochemical Cells generated in electrochemical cells.
- --------------- -------- ------------------------------------ -------------------------------------------------------
4,661,759 4/28/87 Nickel-Oxygen Monitor Cell System A system for monitoring the state of charge
of a nickel-alkaline secondary battery
wherein the monitor cell is comprised of a
sealed metal-gas having a nickel electrode \
and an oxygen counter electrode.
- --------------- -------- ------------------------------------ -------------------------------------------------------
4,546,058 10/8/85 A nickel electrode including a conductive
support and a layer on the support
including a mixture of nickel hydroxide
Nickel Electrode for Alkaline and a graphite diluent containing a spinel-
Batteries type oxide.
- --------------- -------- ------------------------------------ -------------------------------------------------------
</TABLE>
20
<PAGE>
Exhibit 10.8
Confidential treatment has been requested for portions of this
document. Deleted portions are identified with a dotted line under
the deleted information.
TECHNOLOGY TRANSFER
AND
LICENSE AGREEMENT
FOR
Ni-Zn BATTERY TECHNOLOGY
BETWEEN
XIAMEN DAILY-USED CHEMICALS CO., LTD.
NAN YA PLASTICS CORPORATION
ENERGY RESEARCH CORPORATION
FEBRUARY 21, 1998
<PAGE>
TECHNOLOGY TRANSFER AND LICENSE AGREEMENT
THIS AGREEMENT is made and entered into this 21st day of February, 1998, by
and between the JOINT VENTURE, a China corporation having a place of business
in Xiamen, Fujian, China (hereinafter "JV") owned jointly by the XiAMEN
DAILY-USED CHEMICALS Co., LTD. (XDC of China located in 722 Xiahe Road, Xiamen,
Fujian, China and NAN YA PLASTICS Corporation of Taiwan (NAN YA) located in 201,
Tung Hwa N. Road, Taipei, Taiwan and ENERGY RESEARCH CORPORATION, a New York
corporation having a place of business at 3 Great Pasture Road, Danbury, CT
06813 (hereinafter "ERC").
INTRODUCTION
ERC has developed certain technology and technical know-how for a sealed
Nizn battery including technology for a fibrillated electrode, an improved zinc
electrode, and a light-weight nickel electrode that uses graphite. ERC has
represented to JV that such technology has been used to develop a NiZn battery
and has demonstrated and described this technology (subject to non-disclosure
agreements) to representatives of XDC and NAN YA and XDC and NAN YA have
determined to their satisfaction that they wish the JV to acquire the technology
substantially as described.
JV wishes to commercialize a NiZn battery using the know-how of ERC and for
that purpose wishes to enter into the license for such know-how set forth below.
ERC, in consideration of the payments and obligations described below, wishes to
enter into the license of its know-how to JV as set forth below for the purpose
of allowing JV to make, have made and sell or otherwise commercialize a NiZn
battery for certain uses and in certain territories as described below.
NOW, THEREFORE, in consideration of the foregoing and the terms and
conditions set forth below and intending to be legally bound, the parties agree
as follows:
I. DEFINITION AND SCOPE OF THE AGREEMENT
As used in this Agreement, the following terms shall have the following
respective meanings which are intended to define the scope of the Agreement:
1.1 "JV" shall mean an entity which XDC and NAN YA have formed as a joint
venture, company or partnership.
1.2 "Effective Date" is the date set forth above, i.e., February 21, 1998.
1.3 "ERC Facility" shall mean the ERC facility located at 3 Great Pasture
Road, Danbury, CT 06813.
<PAGE>
1.4 "ERC Know-How" shall mean all of the technical information, know-how,
inventions (whether patented or not), trade secrets, and other technical,
engineering and design information and data, including without limitation, all
processes and techniques owned by ERC or in which ERC acquires a licensable
interest, during the term of this Agreement, useful for the commercial
manufacture of NiZn batteries within the Field, such as designs, drawings,
blueprints, flow sheets, reports, manuals, specifications, process descriptions,
operating procedures, materials and parts fists and other written or printed
materials that are owned by ERC and which may be useful or helpful to JV in the
development and production of NiZn batteries within the Field.
1.5 "Field Of the Agreement" or "Field" means the manufacture, use and
sale, lease or other transfer of NiZn batteries for electric or electric or
hybrid electric vehicles (i.e. vehicles powered solely by electricity but which
may rely on other means of providing electric power in addition to storage
batteries), including on the road passenger cars, trucks and buses, provided
however, that for the purpose of this Agreement, electric vehicles do not
include any two and three wheel vehicles, motor bikes and trikes, rickshaw,
industrial traction equipment, lawn care equipment, and off-road recreational
vehicles, regardless of how they may be powered. Examples of recreational
vehicles are golf carts, boats and all terrain vehicles (ATVs).
1.6 "Licensed Technology" shall mean ERC Know-How.
1.7 "Licensed Territories" means the Exclusive License Territory and
Non-Exclusive Territory. The "Exclusive Licensed Territory" shall mean Mainland
China, Taiwan, Hong-Kong, and Macao and the 'Non-Exclusive Licensed Territory".,
shall mean the other countries of Southeast Asia listed in Appendix A.
1.8 "Net Sales" means the sum of all sales at the Net Selling Price of the
NiZn batteries in the Field.
1.9 "Net Selling Price" means the gross invoice Price of NiZn batteries
manufactured by the JV hereunder and then sold by the JV in the Field in arms
length commercial transactions in the ordinary course of business, without any
deduction other than returns, rebates and refunds actually given and the
following items of expense to the extent to which they are actually given or
paid and expressly included in the gross invoice price-
1. Sales discounts;
2. Transportation insurance premiums
3. Transport expenses on sales.
For the purpose of computing the Net Selling Price for sales or other
transfers of the NiZn batteries to affiliates of the JV that do not represent
arms length commercial transactions in the ordinary course of business, the Net
Selling Price shall be unanimously determined by XDC, NAN YA and ERC.
2
<PAGE>
1.10 "Party" means the JV or ERC, or when used in the plural, JV and ERC.
II LICENSE GRANT
2.1 License. ERC hereby grants to the JV, during the term stated in
Section 6. 1, an exclusive (even against ERC) license to use the Licensed
Technology solely within the Licensed Territory and within the Field, subject to
and in accordance with the terms and conditions of this Agreement; provided,
however, the foregoing license shall convert to a non exclusive license upon
JV's or ERC's election under Section 5.2. The JV, XDC and NAN YA agree that ERC
owns and retains all rights in the Licensed Technology, that the JV receives
only those rights expressly granted to it in this Agreement, and that the JV
shall make no use of any trade names or marks of ERC without ERC's express
written consent.
2.2 New Developments. During the period that the license granted the JV
under Section 2.1 remains exclusive, ERC or its assigns shall promptly from time
to time, but at least once a year, disclose to the JV any ERC or its assigns
Know-How or patents arising or issued after the Effective Date hereof and not
previously disclosed to the JV and if reasonably requested by the JV, provide
the JV from time to time with a list of all patent applications filed by ERC
relating in any way to the Field. Similarly, during the exclusive period, the JV
shall promptly disclose to ERC or its assigns any inventions, discoveries,
know-how, technical information, improvements or other developments, whether or
not patentable, relating to the Licensed Technology that it develops or in which
it acquires a licensable interest during the term of this Agreement; and ERC or
its assigns shall have a worldwide, perpetual royalty-free license to use these
new developments, for all purposes outside the Licensed Territory.
2.3 Compliance with Law. The JV shall comply with all applicable laws and
regulations when using the Licensed Technology, including any applicable U.S.
export control laws, and shall take all steps required to record and
authenticate this Agreement, or otherwise render it valid and enforceable,
within the Licensed Territory.
2.4 Other Agreements. During the period that the License granted under
Section 2.1 remains exclusive, ERC will not work with any other entity in the
Field in the Exclusive Licensed Territory.
III. PAYMENTS
3.1 Total Payments. Total payments for the Licensed Technology (excluding
royalties) is $5 million U.S. dollars. This amount is to be paid in U.S.
currency in three installments as defined below. These payments, and all royalty
payments due under Part V, shall be net of any applicable taxes, withholdings,
duties or the like owed by the JV or ERC (excluding only income or corporate
excise taxes imposed by the U.S. and its states and instrumentalities); thus all
payments made to ERC shall be grossed up as needed to ensure that the net
amounts actually received by ERC will not be less than the amount it would have
received if such taxes and the like were not required to be paid.
3
<PAGE>
3.2 First Payment. The first payment, in the amount of $1.5 million,
is to be made within 30 days of signing of the license agreement.
3.3 Second Payment. The second payment of $2.0 million is to be made
within 30 days upon satisfactory completion of the Test Program as defined in
Appendix B. In the event the Test Program is not completed satisfactorily, ERC
will return $1.3 million to the JV within 30 days after all batteries sent to
the JV are returned to ERC in their original sealed state and all test data
obtained by the JV are also returned.
3.4 Final Payment. The final payment of $1.5 million is to be made
after duplication of the battery and the battery test results by JV based on the
Licensed Technology at its facilities. At ERC's option, all or part of the final
payment may be used to buy an equity interest in the JV. In the event the JV is
capitalized at less than { *** } (based on cash contributions), ERC
shall have the right to buy an equity interest greater than { *** }% or
to purchase a { *** }% interest and receive the balance in cash. For example,
if the cash capitalization of the JV is ${ *** }, ERC, at its option
could purchase a { *** }% equity position, or alternatively, buy a {
*** }% equity position and receive $ { *** } in cash. If the ERC
buys its equity right after Second Payment is made, ERC is obligated to pay
interest to JV at a fixed interest rate on the amount of the equity it buys
until Final Payment. The interest rate will. be unanimously determined by JV and
ERC through good faith negotiation and based on prevailing bank rates at the
time.
3.5 The Licensed Technology will be transferred to the JV for use in
the Field pursuant to this license agreement, after completion of activities
described in Section 3.3 and Appendix B.(See Article IV - Technology Transfer)
IV. TECHNOLOGY TRANSFER
4.1 Upon the satisfactory conclusion of the Test Program under Section
3.3 and Appendix B, ERC shall transfer all know-how as described in Section 1.4
to the JV for its use in the Field pursuant to this license agreement. Such
transfer shall take place at ERC Facilities in Danbury, CT to persons designated
by the JV. ERC will provide up to { *** } man hours to the transfer
process at no cost to the JV. Persons designated by the JV will have access to
all personnel and equipment at ERC's Danbury facility to facilitate the
transfer.
4.2 In the event final payment is not made under Section 3.4 by the JV,
the JV and XDC and NAN YA will return all information received under Section 4.1
or from prior disclosures. The JV, XDC and NAN YA agree not to use the Licensed
Technology for any purpose and ERC shall have the right to determine by any
means that the Licensed Technology is not being used.
V. ROYALTIES
5.1 Royalty Payments. As additional consideration for the license
granted herein, the JV shall pay to ERC a { *** } royalty on the Net
Sales of NiZn batteries it
4
<PAGE>
manufactures or has manufactured and sells in the Field for a period of {
*** } beginning from the first commercial sales. The royalty payments will
commence with the product sales and will be payable quarterly 30 days after the
close of each calendar quarter in which products subject to royalty are sold
Royalties shall be payable in U.S. Dollars; where it is necessary to convert
from Renminbi to Dollars for this purpose, the exchange rate will be determined
by the rate published by the State Administration of Exchange Control, )Xiamen
Branch, P.R. China for the last day of the quarter for which payment is due.
5.2 Change to Non-Exclusive License. Either the JV or ERC may cause the
license in the Exclusived Territory to become non-exclusive. In no event can
this exclusive license become non-exclusive before { *** }. If either
party notifies the other after that date to change the license to become
non-exclusive, the royalty rate shall become { *** }% in all Licensed
Territories.
5.3 Royalty Records and report. The JV shall keep accurate, detailed
records and books of account containing all information reasonably required to
compute and verify royalties due under this Agreement. These records shall
include information concerning sales by both the JV and its affiliates and shall
be maintained for at least five (5) years after the year to which they relate.
When rendering payment of the foregoing royalties, the JV shall provide ERC with
a written report showing the calculation of the royalty, the number of products
to which the royalty is applicable and their Net Selling Price. At its expense,
ERC may, by its designated independent public accountants, audit once annually
all JV royalty records and books to confirm the accuracy of the JV's
calculations of the Net Selling Price and royalties due; provided however, that
in the event such an audit discloses that the actual royalty amount due under
this Agreement for the applicable period is more than five percent (5%) greater
than the royalty amount reported by the JV for such period, the JV shall pay the
reasonable costs of such audit incurred by ERC.
VI. DEFAULT, TERMINATION AND LIABILITY
6.1 Term and Termination for Default. The licenses granted to the JV
shall continue until terminated as provided in this Agreement. In the event that
a Party (the "defaulting Party") shall (a) fail to make any payment hereunder
when and as due, or (b) otherwise materially default in its obligations
hereunder and fail to remedy such default within thirty (30)days after such
default shall have been called to its attention by written notice from the other
Party, then, and in any such event, the other Party, at its option, may
terminate, upon thirty(30) days written notice, this Agreement and all its
obligations and any licenses to the Parties hereunder except as provided in
Section 6.5.
6.2 Non-Waive . No failure or delay on the part of either Party to
exercise any of its rights under this Article for any one or more defaults shall
be construed to prejudice its rights in connection with such or any subsequent
default.
6.3 Return of Information Upon Termination Upon termination of this
Agreement for any reason, the JV will deliver to ERC all technical information
it has received
5
<PAGE>
from ERC or derived from the Licensed Technology.
6.4 Continuing Obligation . If the JV terminates the Agreement and
continues to manufacture or sell any NiZn batteries after such termination, the
JV shall continue to pay ERC royalty under the terms in this agreement but at
the non-exclusive rate of { *** }% unless the technology used for the
manufacture of the NiZn battery is unanimously determined not to belong to ERC's
Licensed Technology by the JV and ERC. Notwithstanding the earlier termination
of this Agreement, the Parties' obligations under Sections 3.3, 4.2, 5.3, 6.3
and Article VII and for payment of royalties on the Net Sales of NiZn batteries,
in the Field and subject to the license agreement under Sections 5. 1 or 5.2,
sold before such termination shall survive such termination.
6.5 Liability and Indemnity. ERC makes no warranties concerning any
products developed by the JV. Rather, the JV shall be responsible for all uses
it makes of the Licensed Technology, for complying with all laws and
regulations, and for any warranties or liabilities to purchasers of its NiZn
batteries; and the JV shall indemnify and hold harmless ERC and its affiliates
from any claims, suits, losses or liabilities of any kind or nature whatsoever
arising from or in connection with the JV's use of the Licensed Technology or
sale of NiZn batteries. Under no circumstances will ERC be liable to the JV for
any indirect, special or consequential damages, irrespective of the cause.
VII. CONFIDENTIAL INFORMATION
Subject to the exercise by the JV of its rights in the Licensed Technology
under Article 11, all written information marked "proprietary" or "confidential"
(or if oral, subsequently reduced to a writing so marked and delivered to the
receiving party within thirty (30) days of its oral disclosure)which any Party
discloses to the other in connection with Agreement whether contained in
blueprints, drawings, reports, letters or memoranda, process descriptions,
operating procedures or other recorded form, shall be treated as confidential
unless (a) such information shall have been in the possession of the receiving
Party prior to its receipt from the disclosing Party, (b) such information is or
becomes part of the public knowledge or literature through no fault of the
receiving Party, or (c) such information shall otherwise become available to the
receiving Party from a source other than the disclosing Party, and said source
not being in violation of any obligation of secrecy with respect to such
information. Information which is so considered to be confidential shall be held
by the receiving Party for its sole benefit and used only in accordance with
this Agreement. The receiving Party shall use all reasonable efforts to prevent
the use of all or any part of such confidential information belonging to the
disclosing Party in any other connection, or the transmission thereof to third
Parties, unless and until it has first obtained the written consent of the
disclosing Party specifically authorizing such use or transmission. The Parties
understand that information may be provided which is subject to a
confidentiality agreement with a third Party. The Parties agree that such
information shall be held in confidence in accordance with the terms of the
third Party confidentiality agreement. No Party shall be obligated to divulge
third Party confidential information to the other Party.
6
<PAGE>
VIII. NOTICES
All notices required to be given hereunder shall be in writing and shall be
given by first class mail, postage prepaid, addressed to the Parties as follows:
To the JV: Xiamen Daily-Used Chemicals Co., LTD.
722 Xiahe Road,
Xiamen, Fujian, P. R. China
Attention: Sheng Qi, General Manager
Tel: 0592-2074764
Fax: 0592-2022193
Nan Ya Plastics Corporation
201, Tung Hwa N. Road
Tiapei, Taiwan
Attention: Chang, Chin Lung, Vice President
Tel: 886-2-717-8268
Fax: 886-2-713-6411
To ERC: Energy Research Corporation
3 Great Pasture Road
Danbury, CT 06813
Attention: Jerry D. Leitman, President
Tel: (203)-792-1460
Fax: (203)-798-2945
cc: Ross M. Levine, Manager, Contracts
& Assistant Secretary
or such other address as a Party shall by notice request.
IX. ENTIRE AGREEMENT
The terms and provisions herein contained constitute the entire Agreement
between the Parties and shall supersede all previous communications,
representations, agreements or the Parties hereto with respect to the subject
matter hereof, and no agreement or understanding varying or extending the same
will be binding upon either Party hereto unless in writing; and signed by duly
authorized officers or representatives of the respective Parties. This Agreement
is written in both the English and Chinese languages, both versions will be
equally valid.
7
<PAGE>
X. MISCELLANEOUS
10.1 Plant Location. The Ni-Zn battery pilot plant and commercial
manufacturing facility will be initially located in Xiamen, China. If necessary,
the Ni-Zn battery can also be produced in Taiwan.
10.2 Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of new York as they apply to contracts entered into in
NewYork by parties residing there, notwithstanding any choice of law principles
to the contrary. The IV and JV Principals agree that the state and federal
courts of New York shall have jurisdiction over them with respect to all matters
arising under or in respect to this Agreement.
10.3 Legality. The parties each declare that, to the best of their
respective knowledge, as of the date first written above, there are no laws or
regulations in effect that materially limit or restrict their ability to My
Fully their obligations under this Agreement.
10.4 This Agreement may not be modified or amended except by a writing
duly signed by the authorized representatives of both Parties-
10.5 Effect of Unenforceable Provisions. In the event any one or more of
the provisions contained in this Agreement shall be invalid, illegal or
unenforceable in any respect, said provision(s) shall be deemed severed and
deleted herefrom and the validity, legality and/or enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
10.6 Government Information. Nothing in this Agreement shall authorize
the disclosure of, or access to, classified or restricted information, material
or know-how of the Government of the United States of America to persons not
authorized or licensed to disclose or receive such classified or restricted
information.
10.7 Relationship. The relationship of the Parties herein shall be that
of independent contractors and nothing herein contained shall be deemed to
create any relationship of agency.
10.8 Assignment. Neither Party may assign this Agreement without the
written consent of the other Party, except to a wholly-owned or majority-owned
subsidiary of the assigning Party.
8
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in a manner binding upon them by their duly authorized officers as of the date
first above written. This Agreement expires upon completion of { *** }
of royalty payments after the first commercial sales.
The undersigned JV, Xiamen Daily-Used Chemicals Co., LTD. and Nan Ya
Plastics Corporation accept their joint and several liability for all the
payment and performance obligations of the JV under this Agreement.
THE JV
XIAMEN DAILY-USED CHEMICALS CO., LTD.
By: /s/ Zhi Yi
-------------------------------------
Title: President
----------------------------------
NAN YA PLASTICS CORPORATION
By: /s/ Chin Lung Chang
-------------------------------------
Title: Vice President
----------------------------------
ERC
ENERGY RESEARCH CORPORATION
By: /s/ Jerry Leitman
-------------------------------------
Title: President
----------------------------------
9
<PAGE>
APPENDIX A
DEFINITION OF NON-EXCLUSIVE LICENSED
COUNTRIES IN SOUTHEAST ASIA
The purpose of this Appendix A is to define non-exclusive licensed countries in
Southeast Asia agreed by parties through good faith negotiation. The
non-exclusive licensed countries in the Southeast Asia are as follows:
(1) Brunei
(2) Myanmar (formerly known as Burma)
(3) Cambodia
(4) Indonesia
(5) Laos
(6) Malaysia
(7) Philippine
(8) Singapore
(9) Thailand
(10) Vietnam
10
<PAGE>
APPENDIX B
TEST PROGRAM FOR NI-Zn BATTERY TECHNOLOGY
TRANSFER AND LICENSE AGREEMENT
The purpose of this Appendix B is to define agreement for Ni-Zn battery testing
conditions
reached by parties through good faith negotiation.
The parties agree as follows:
1. The testing will be conducted in parallel by Xiamen and Nan Ya, and testing
results from
either party have equivalent weight for determining battery performance.
2. One { *** } battery module and ten { *** } single cells
will be provided to Xiamen and Nan Ya each for testing, respectively.
3. Nan Ya will use it's own facility to conduct the testing in Taiwan, and
Xiamen will use ERC's testing facility to conduct the testing in US.
4. Nan Ya and Xiamen will use the same procedures agreed by a parties to conduct
the testing.
5. Whether or not the testing results meet the criteria will be unanimously
determined by Xiamen and NanYa.
6. If the testing from either parties does not meet the criteria, the testing
will be allowed to repeat, but in no event later than { *** } of the
Effective Date of the License
Agreement.
7. The testing parameters, testing conditions, and testing criteria are given in
Table I
11
<PAGE>
TABLE 1.
TESTING PARAMETERS, CONDITIONS, AND TESTING
CRITERIA FOR Ni-Zn BATTERY
<TABLE>
<CAPTION>
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
BATTERY FOR TESTING
PARAMETERS TESTING CONDITIONS TESTING CRITERIA COMMENT
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
<S> <C> <C> <C> <C>
Specific Energy, Wh/kG [ *** ] discharge rate [ *** ] Module [ *** ]
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Energy Density (Wh/L) [ *** ] discharge rate [ *** ] Module [ *** ]
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Specific Power, W/kg [ *** ] [ *** ] Module [ *** ]
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Specific Power (regen), W/kg [ *** ] [ *** ] Module [ *** ]
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Power Density, W/L [ *** ] [ *** ] Module [ *** ]
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Recharge Time, h [ *** ] [ *** ] Module [ *** ]
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Fast Recharge Time (40% [ *** ] [ *** ] Module [ *** ]
to 80% SOC), min
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Life, Cycles (80% DOD) [ *** ] discharge rate [ *** ] Module [ *** ] (1)
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Power and Capacity [ *** ] [ *** ] Module [ *** ]
Degradation after 500
Cycles, % Rated
Specification
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Continuous Discharge in 1 [ *** ] [ *** ] Module [ *** ]
h (no failure), % rated
energy capacity
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Efficiency, % [ *** ] discharge rate [ *** ] Module [ *** ]
[ *** ] charge
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Self-Discharge, Capacity [ *** ] [ *** ] Single Cell [ *** ]
Degradation % Rated
Specification
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Maximum Operation [ *** ] [ *** ] Single Cell Capacity Degradation (2)
Temperature (Capacity [ *** ] Rated
Degradation, % Rated Specification
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
Minimum Operation [ *** ] [ *** ] Single Cell [ *** ] Rated (2),(3)
Temperature (Capacity Specification
Degradation, % Rated Capacity Degradation
Specification) [ *** ] Rated
Specification
- ------------------------------- ------------------------------- ------------------- ----------------------- ------------------
</TABLE>
12
<PAGE>
COMMENT:
(1) The discharge of each cycle will be cut-off at { *** } ; the
charge level and the charge process of each cycle will be defined in the testing
plan agreed by the all parties.
(2) Minimum and maximum operating temperature tests will be conducted on {
*** } single cells. The testing will determine the capacity
degradation (% rated specification) of the cell at the specified minimum and
maximum operating temperatures. Only discharge capacity will be measured at
the specified minimum and maximum operating temperatures. The discharge
capacity will be measured after the battery reaches specified temperatures.
The degradation of the discharge capacity at temperatures { *** }
is required to be between { *** } and { *** } rated
specification. The degradation of discharge capacity at { *** } is
not allowed to be greater than { *** } rated specification.
(3) { *** }
13
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
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
December 11, 1998
