SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[Mark One]
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended January 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to __________
Commission file number 0-25411
EVERCEL,INC.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1528142
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3 Great Pasture Road, Danbury, Connecticut 06813
Address of principal executive offices) (Zip code)
Issuer's telephone number including area code: (203) 825-6000
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's common stock, par value $.01,
as of April 5, 1999, was 2,310,771.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [X] No
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EVERCEL, INC.
FORM 10-QSB/A
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Unaudited Condensed Financial Statements:
Condensed Balance Sheet as of January 31, 1999 2
Condensed Statements of Operations for the three
months ended January 31, 1999 and January 31, 1998 3
Condensed Statements of Cash Flows for the three
months ended January 31, 1999 and January 31, 1998 4
Notes to Unaudited Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Signatures 14
1
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EVERCEL, INC.
CONDENSED BALANCE SHEET
(Dollars in thousands)
(Unaudited)
January 31,
1999
----
ASSETS
CURRENT ASSETS:
Cash $ 1
Accounts receivable 36
Inventories 235
------
Total current assets 272
------
Property, plant and equipment:
Cost 1,892
Accumulated depreciation 866
------
Net 1,026
Other assets 523
------
TOTAL ASSETS $1,821
======
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Accrued liabilities $ 98
Accounts payable 33
Notes Payable 821
------
Total current liabilities 952
------
Deferred income tax liability 17
------
Total liabilities 969
------
Net assets of Evercel, Inc. 852
------
TOTAL LIABILITIES AND NET ASSETS $1,821
======
See accompanying notes to financial statements.
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EVERCEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended January 31,
------------------------------
1999 1998
<S> <C> <C>
Revenues:
Contracts $ -- $ 2
License fee income -- 125
----------- -----------
Total revenues -- 127
----------- -----------
Cost & expenses:
Cost of revenues -- 4
Depreciation & amortization 11 10
Administrative and selling expenses 300 249
Research & development 566 369
----------- -----------
877 632
----------- -----------
(Loss) from operations before income tax (benefit) (877) (505)
Income tax (benefit) (360) (172)
----------- -----------
Net (loss) $ (517) $ (333)
=========== ===========
Pro forma, net loss per share (basic and diluted) $ (.37) $ (.24)
=========== ===========
Pro forma weighted average shares (basic and diluted), 1,389,000 1,389,000
=========== ===========
Pro forma, net loss per share (basic and diluted),
as adjusted $ (.19) $ (.12)
=========== ===========
Pro forma weighted average shares (basic and diluted),
as adjusted 2,778,000 2,778,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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EVERCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
January 31,
-------------------
1999 1998
------- -------
Cash flows from operating activities:
Net (loss) $ (517) $ (333)
Depreciation and amortization 11 10
Changes in operating assets and liabilities:
Accounts receivable (19) 16
Inventory (235) --
Other current assets -- 42
Other assets (190) --
Accounts payable (20) 13
Accrued liabilities 18 11
------- -------
Net cash(used in)operating activities (952) (241)
------- -------
Cash flows from investing activities:
Capital expenditures (212) --
------- -------
Net cash (used in)investing activities (212) --
------- -------
Cash flows from financing activities:
Funding of operations provided by ERC 946 241
Increase in short term borrowings 218 --
------- -------
Net cash provided by financing activities 1,164 241
Net increase/(decrease) in cash -- --
Cash, beginning of period -- --
Cash, end of period $ -- $ --
======= =======
See accompanying notes to financial statements
4
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Part I - Financial Information
Item 1. Financial Statements
EVERCEL, INC.
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed financial statements for Evercel, Inc. (the
"Company"), have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Item 310(b)of Regulation S-B. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Company as of January 31, 1999 and
the results of operations for the three months ended January 31, 1999 and 1998
and cash flows for such three month periods have been included.
The accompanying financial statements are presented as if the Company had
existed as a corporation separate from Energy Research Corporation ("ERC"), the
former parent of the Company, for the periods presented and include the
historical assets, liabilities, revenues and expenses that are directly related
to the business that comprise the Company's operations.
For the periods presented certain general and administrative expenses reflected
in the financial statements include allocations of certain corporate expenses
from ERC, which took into consideration personnel, space, estimates of time
spent to provide services, or other appropriate bases. Management believes the
foregoing allocations were made on a reasonable basis; however, they do not
necessarily equal the costs which would have been or will be incurred by the
Company on a stand-alone basis.
The financial information included herein may not necessarily reflect the
financial position and results of operations of the Company in the future or
what the financial position and results of operations of the Company would have
been had it been a separate, stand-alone company during the periods covered.
In September 1998, the ERC Board of Directors approved a restructuring program.
This program included an intention to separate ERC into two publicly held
companies: Evercel, Inc., a newly formed corporation which will own and operate
the Battery Business Group, and ERC, which will continue to own and operate its
fuel cell business. On February 22, 1999 the ERC Board of Directors declared a
special distribution (the "Distribution") of one share of common stock of
Evercel, Inc. for every three shares of ERC common stock outstanding. The
Distribution was treated as a tax-free dividend for tax reporting purposes. The
"Company" refers to Evercel, Inc. or the Battery Business Group of ERC, as
appropriate.
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Immediately after the Distribution, the Company granted at no cost to holders of
its common stock as of February 22, 1999, transferable subscription rights to
subscribe for and purchase additional shares of the Company common stock (a
"Right"). Each holder of common stock of the Company received one transferable
Right for each share of common stock held. Each Right was exercisable to
purchase one share of common stock of the Company at a purchase price of $6.00
per share ("Subscription Price").
Each holder of Rights who elected to exercise his right to purchase for the
Subscription Price a share of common stock for each Right held ("Basic
Subscription Privilege"), could also subscribe at the Subscription Price for an
unlimited number of additional Underlying Shares (the "Oversubscription
Privilege") that were not otherwise purchased pursuant to the Basic Subscription
Privilege.
In connection with the Distribution 1,388,856 shares of Company common stock
were issued. In connection with the closing of the Rights offering on April 5,
1999, 921,915 shares of common stock were issued pursuant to the exercise of
Rights. Pursuant to the Standby Underwriting Agreement with Loeb Partners
Corporation and Burnham Securities Inc., an additional 466,941 shares will be
issued on or about April 12, 1999.
The Company intends to use the net proceeds from the Rights offering to lease
and equip a new facility for limited production and manufacturing purposes, to
repay outstanding indebtedness, and for working capital and other general
corporate purposes.
The Company operates as a separate, publicly held corporation. In order to
effect the segregation of these businesses, prior to the Distribution, effective
February 16, 1999 ERC transferred to the Company the principal assets related to
its Battery Business Group and certain liabilities related to those assets.
The results of operations for the three months ended January 31, 1999 and 1998
are not necessarily indicative of the results to be expected for the full year.
The reader should supplement the information in this document with disclosures
in the Company's Registration Statement on Form SB-2 (File No.
333-64931)declared effective on February 19, 1999.
NOTE 2: LICENSE AGREEMENTS AND SIGNIFICANT CONTRACTS
On May 29, 1998, ERC entered into a Technology Transfer and License Contract
(the "License Contract") with Xiamen Three Circles Co., Ltd. ("Xiamen"). In
connection with this transaction, ERC received $3,000 in payment for granting a
license of its nickel-zinc ("Ni-Zn") batteries to Xiamen. As required by the
License Contract, ERC entered into a Joint
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Venture Contract with Xiamen on July 24, 1998 for the construction of a
manufacturing facility for the production of Ni-Zn batteries. As a result,
Xiamen Three Circles-ERC Battery Corp., Ltd. (the "Joint Venture") was formed.
The Joint Venture will manufacture batteries for electric bicycles, scooters,
wheel chairs, miners cap lamps and other applications for sale within the
licensed territories. In accordance with the License Contract requirements, ERC
contributed the $3,000 license fee received plus an additional $80 to the Joint
Venture in exchange for a 50.5% ownership interest.
In connection with the spin-off, ERC and the Company entered into a License
Assistance Agreement pursuant to which the Company will 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 the License
Contract, until such time as ERC obtains the approval for the assignment of the
agreements to the Company. In return for such assistance, ERC will pay the
Company an amount equal to the sum of all money, dividends, profits,
reimbursements, distributions and payments actually paid to ERC in cash or in
kind or otherwise accruing to ERC pursuant to the Joint Venture Contract and the
License Contract. All expenses and costs incurred by the Company in meeting the
obligations under the License Assistance Agreement shall be solely those of the
Company, and ERC shall not be liable for their payment. The Company will account
for its involvement in the Joint Venture under the License Assistance Agreement
in a manner similar to the equity method of accounting.
In February 1998, ERC entered into a license agreement (the "NanYa License
Agreement") with a joint venture between NanYa Plastics Corporation of Taiwan
and Xiamen for the use of the Company's Ni-Zn batteries in electric vehicles and
hybrid electric vehicles in China, Taiwan, Hong Kong and Macao on an exclusive
basis and for certain other Southeast Asian countries on a non-exclusive basis.
Under the NanYa License Agreement, which was assigned by ERC to the Company
pursuant to the Distribution Agreement, the joint venture would be required to
pay $2,000 to the Company upon completion of certain conditions, and a final
payment of $1,500 upon completion of duplication of the battery at its
facilities in China. In addition, the NanYa License Agreement requires the
licensee to pay to the Company royalties on sales of batteries during the term
of the Agreement. The NanYa License Agreement provides that the licensor has the
right to invest the final payment in equity in the joint venture manufacturing
and sales organization formed between NanYa Plastics and Xiamen. 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.
As part of the separation of the Company's business from ERC, the Company
entered into various agreements with ERC including a Distribution Agreement, Tax
Sharing Agreement, Service Agreement and License Assistance Agreement.
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The Distribution Agreement provides for, among other things, the principal
corporate transactions required to effect the Distribution, the transfer to the
Company of the assets of the battery business, the division between ERC and the
Company of certain liabilities and obligations, the distribution by ERC of all
outstanding shares of the Company common stock to ERC stockholders and certain
other agreements governing the relationship between ERC and the Company after
the Distribution. Subject to certain exceptions, the Distribution Agreement
provides for 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 Tax Sharing Agreement defines the parties' rights and obligations with
respect to the filing of returns, payments, etc. relating to ERC's business for
periods prior to and including the Distribution and with respect to certain tax
attributes of ERC after the distribution.
The Services Agreement provides that ERC will provide to the Company certain
management and administrative services, as well as the use of certain office,
research and development, manufacturing and support facilities and services of
ERC. The Services Agreement shall continue until terminated by either party upon
120 days' notice. In addition, the Company may terminate the Services Agreement
as to one or more of the Services upon 60 days' notice to ERC.
The types of services 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 ERC's
Chief Executive Officer and Chief Financial Officer. ERC also provides office,
research and development and manufacturing space for the Company. The method of
calculating the applicable charges 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 $160 per quarter, excluding certain services
billed on the basis of usage, such as purchasing, analytical lab, microscope
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.
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<PAGE>
In order for ERC to transfer the Joint Venture contract and the Three Circles
License Agreement to the Company, ERC must 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.
On December 22, 1998, The Company entered into a commitment to borrow up to
$1,000 from First Union National Bank (the "First Union Line of Credit") for the
purpose of acquiring machinery and equipment for the new battery manufacturing
plant. On February 17, 1999, the Company entered into a commitment to borrow up
to an additional $647 from First Union National Bank. On February 17, 1999, the
Company had total borrowings of $860 against these two commitments. ERC has
unconditionally guaranteed the commitments and has pledged $1,647 of cash
against the Notes. The Notes are payable from the proceeds of the Rights
Offering to be received on April 5, 1999.
On January 15, 1999, the Company, Inc. entered into a lease for manufacturing
and office space in Danbury, CT. The lease term is five years with an option to
extend for an additional five years. The annual rent is $171 for the first three
years and increases to $178 in year four and $185 in year five. ERC has
guaranteed the performance of the lease (the "Lease Guaranty"). In the event of
a default by Evercel, ERC's liability is limited to $500 reduced each
anniversary date of the lease by $100. Notwithstanding the foregoing, the
guaranty terminates after the first anniversary of the lease upon Evercel's net
worth exceeding $3,000.
On February 5, 1999, the Company entered into a Loan Agreement and Line of
Credit Note (the "Line of Credit") to borrow up to $3,450 (including borrowings
noted above) from ERC for working capital and proposed capital expenditures. Any
outstanding borrowings will be secured by all of the tangible and intangible
personal property and bear interest at the London Interbank Offered Rate (LIBOR)
plus 1 1/2%, payable monthly in arrears. The $3,450 Line of Credit represents
the maximum borrowing limit and is reduced by the sum of the following: a) any
outstanding advances under the First Union Line of Credit; b) any amounts ERC
has paid on account of the Lease Guaranty; c) the net proceeds received on
account of any sale or issuance of any equity securities by the Company,
including the Rights Offering; and d) the amount of any loans (excluding the
First Union Line of Credit) obtained
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by the Company after the date of this agreement, including the present value of
the Company's lease obligations. The Line of Credit terminates on August 5, 2000
or the date on which the Company has received net proceeds from items c) and d)
of at least $3,450, whichever is earlier. In connection with the completion of
the Rights offering, the Company anticipates receiving $5,531 from the issuance
of common stock on April 5, 1999. Upon receipt of these proceeds the line of
credit terminates pursuant to its terms. In addition, under its Standby
Underwriting Agreement, the Company expects to receive an additional $2,342 on
or about April 12, 1999 from the sale to the Underwriters of shares remaining
unsubscribed in the Rights offering (after deducting underwriting discounts and
fees).
NOTE 3: PRO FORMA LOSS PER SHARE
The pro forma weighted average shares of 1,389,000 reflect the distribution of
one share of common stock of Evercel, Inc. for every three shares of ERC common
stock outstanding as of February 22, 1999. The pro forma weighted average shares
as adjusted of 2,778,000 reflect both the distribution and the subsequent rights
offering.
The computation of diluted loss per share for the first quarter of fiscal 1999
follows the basic calculation since common stock equivalents were antidilutive.
The weighted average number of options outstanding for the period ending January
31, 1999 is 166,666.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Comparison Three Months Ended January 31, 1999 and January 31, 1998
The Company had no revenues in the first quarter of fiscal 1999 as compared to
$127,000 for the same period last fiscal year. The decline was due to the
termination in May 1998 of a license agreement with Corning, Inc.
The Company had no cost of revenues in the first quarter of fiscal 1999 as
compared to $4,000 for the same period last fiscal year. The lack of cost is
attributable to having no revenues as previously mentioned.
Administrative and selling expense increased 20% to $300,000 in the first
quarter of fiscal 1999 from $249,000 in the same period last fiscal year. The
current quarter costs reflect an increase in costs related to efforts to
commercialize the Company's battery technology. These costs allocated based upon
research and development activity and administrative activity. Depreciation
remained relatively unchanged quarter to quarter.
Research and development expense increased 53% to $566,000 in the first quarter
of fiscal 1999 from $369,000 in the same period last fiscal year. This was a
result of increased costs as compared to the same period last fiscal year
relating to the commercialization of the Company's battery technology.
The Company has recorded a tax benefit for its losses in each quarter at the
rate of 41% and 34% respectively. 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."
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.
Working capital at January 31, 1999 was a negative $680,000 as compared to a
negative $718,000 at October 31, 1998. To date, ERC has provided all of the
working capital needs of the Company.
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.
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The Company has entered into a lease for manufacturing and office space in
Danbury, CT. The lease term is five years with a five-year option to extend. The
annual rent is $171,000 for the first three years and increases to $178,125 in
year four and $185,250 in year five. ERC has guaranteed the Company's
performance of this lease. In the event of a default by the Company, ERC's
liability is limited to $500,000 reduced each anniversary date of the lease by
$100,000. Notwithstanding the foregoing, ERC's guaranty terminates after the
first anniversary of the lease upon the Company's net worth exceeding
$3,000,000.
The Company has entered into an agreement pursuant to which it can borrow up to
$1,000,000 from First Union National Bank for the purpose of acquiring machinery
and equipment for the Company's new battery manufacturing plant. As of January
31, 1999, the Company had borrowed $821,000 under this facility. On February 17,
1999, the Company entered into a commitment to borrow up to an additional $647
from First Union National Bank. On February 17, 1999, the Company had total
borrowings of $860 against these two commitments. ERC has unconditionally
guaranteed the commitments and has pledged $1,647,000 of cash against the Notes.
The Note are payable from the proceeds of the Rights offering to be received on
April 5, 1999.
Additionally, on February 5, 1999, the Company entered into a Loan Agreement and
Line of Credit Note to borrow up to $3,450,000 (including borrowings noted
above) from ERC for working capital and capital expenditures. The line of credit
is anticipated to terminate on April 5, 1999 the date on which the Company will
receive proceeds from the Rights Offering.
The Company anticipates that is will raise at least $7,873,000 of net proceeds
from the Rights Offering including funds to be received from the sale of
unsubscribed shares to Loeb Partners Corporation and Burnham Securities Inc.
pursuant to a Standby Underwriting Agreement. 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 $3,450,000 of cash to support its operations during this
period, primarily to lease and equip a new facility for limited production and
manufacturing purposes, to repay outstanding indebtedness, and for working
capital and other general corporate purposes. 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 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. 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
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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.
Under the NanYa License Agreement, the Company expects to receive license fee
income upon the successful completion of two battery tests required by that
Agreement. The Company expects to receive a portion of this license fee income
during fiscal 1999, assuming the first test's successful completion, and the
remainder of the license fee income in fiscal year 2000 upon the duplication of
the battery and the first test's results. 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 that to continue to enter into license agreements, to
participate in joint manufacturing ventures and to expand its battery
manufacturing facilities, for which the Company may require additional capital.
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. 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 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.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
issuer caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVERCEL, INC.
\s\ Joseph G. Mahler
--------------------
Joseph G. Mahler
Acting Chief Financial Officer,
Treasurer and Secretary
Dated: April 9, 1999
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