<PAGE>
Pursuant to Rule 424(b)(1)
Registration No. 333-64931
PROSPECTUS
1,389,000 SHARES OF COMMON STOCK
[LOGO]
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 on February 22, 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 have a firm commitment to purchase all such Company
Common Stock pursuant to a standby underwriting agreement.
The Rights will expire at 5:00 p.m., Eastern time, on March 22, 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 April 30,
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. On February 16,
1999, ERC transferred to the Company the principal assets related to its battery
business group ("Battery Business Group"), and the Company assumed certain
liabilities related to those assets. If the transfer had taken place as of
October 31, 1998, the total book value of the assets and liabilities transferred
would have been $1,175,000 and $753,000, respectively. Included as assets
transferred to the Company by ERC were 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, on February 22,
1999 (the "Distribution Date"), ERC distributed to its stockholders (the
"Distribution") one share of Company Common Stock for every three shares of
Common Stock of ERC that such stockholders held as of February 19, 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 February 19, 1999,
4,167,573 shares of ERC Common Stock were outstanding; therefore, approximately
1,389,000 shares of Company Common Stock were distributed in the Distribution.
Fractional shares were not 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. 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 "EVRC"
and the Boston Stock Exchange under the symbol "EVL" 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. $312,525 Max. $8,021,475
Total(3)(4)................. $8,334,000 Max. $750,060 Min. $7,583,940
</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
approximately 1,389,000 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 approximately
1,389,000 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 $675,000.
(3) The Company has the option to sell up to an additional 208,350 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 $359,404 and $9,224,696, respectively.
(4) The Underwriters have the option (the "Overallotment Option") to purchase up
to an additional 208,350 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 $112,509 and $1,137,591, respectively.
------------------------------
LOEB PARTNERS CORPORATION BURNHAM SECURITIES INC.
------------------
The date of this Prospectus is February 22, 1999.
<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 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. On February 16,
1999, ERC transferred to the Company the principal assets related to its Battery
Business Group, and the Company assumed certain liabilities related to those
assets; if the transfer had taken place as of October 31, 1998, the total book
value of the assets and liabilities transferred would have been $1,175,000 and
$753,000, respectively. Included as assets transferred to the Company by ERC
were 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, on February 22,
1999 (the "Distribution Date"), ERC distributed 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 held (the "Distribution") as of
February 19, 1999 (the "ERC Record Date"). As of February 19, 1999, 4,167,573
shares of ERC Common Stock were outstanding; therefore, approximately 1,389,000
shares of Company Common Stock were 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. 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 on February 22, 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 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."
3
<PAGE>
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 on 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 1,389,000 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 February 19, 1999). 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 1,389,000 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..................... February 22, 1999
Expiration Date................. March 22, 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 April 30, 1999.
Basic Subscription Privilege.... Rights holders are entitled to purchase for the
Subscription Price one share of Common Stock for each
Right held (the "Basic Subscription Privilege"). See "THE
RIGHTS OFFERING-- Subscription Privileges--Basic
Subscription Privilege."
Oversubscription Privilege...... Each holder of Rights who elects to exercise his Basic
Subscription Privilege may also subscribe at the
Subscription Price for an unlimited number of additional
Underlying Shares (the "Oversubscription Privilege") that
are not otherwise purchased pursuant to the Basic
Subscription Privilege. If an insufficient number of
Underlying Shares is available to satisfy fully all
elections to exercise the Oversubscription Privilege, the
available Underlying Shares will be prorated among holders
who exercise their Oversubscription Privilege based on the
respective numbers of Rights exercised by such holders
pursuant to the Basic Subscription Privilege. 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 208,350 shares of
Company
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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 2,778,000 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 Amended and Restated
Certificate of Incorporation ("Certificate"), the Company
Common Stock received in the Distribution may not be sold
or otherwise disposed of. See "THE DISTRIBUTION--Manner of
Effecting the Distribution." The Company has applied for
listing of the Company Common Stock for quotation on the
Nasdaq SmallCap Market and the Boston Stock Exchange
following the Rights Offering.
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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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, to repay outstanding
indebtedness, 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 208,350 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.......... EVRC
Proposed Boston Stock Exchange
Symbol........................ EVL
Risk Factors.................... See "RISK FACTORS" for a more complete description of
certain factors that investors should consider prior to
exercising their Rights or purchasing Common Stock.
</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 February
16, 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 distributed 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 date on which the Subscription
Agent delivers to the Company final notice of the number
of shares of Common Stock subscribed for in the Rights
Offering (the "closing"). 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 February 19, 1999, approximately
1,389,000 shares of the Common Stock were issued to ERC
stockholders in the Distribution. The shares distributed
to ERC stockholders constituted 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 were not 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................. February 19, 1999.
Distribution Date............... February 22, 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 Company has received an opinion of counsel to the
effect 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, audited by KPMG LLP, independent certified public
accountants, 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.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Operating Data:
Revenues............................................................................. $ 436 $ 438
Cost and expenses:
Cost of revenues................................................................... 98 87
Depreciation and amortization...................................................... 40 45
Administrative and selling......................................................... 268 1,805(1)
Research & development............................................................. 897 1,832
------------ ------------
Loss from operations before income tax benefit....................................... (867) (3,331)
------------ ------------
Net loss............................................................................. $ (572) $ (2,325)
------------ ------------
------------ ------------
Pro forma net loss per share (basic and diluted)(2)................................ $ (1.67)
------------
------------
Pro forma weighted average shares (basic and diluted)(2)........................... 1,389,000
------------
------------
Pro forma net loss per share (basic and diluted), as adjusted(3)................... $ (0.84)
------------
------------
Pro forma weighted average shares (basic and diluted), as adjusted(3).............. 2,778,000
------------
------------
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31, 1998
ACTUAL(4) AS ADJUSTED(5)
<S> <C> <C>
---------------------------
Balance Sheet Data:
Total assets......................................................................... $ 1,176 $ 7,701
----------- -------
Working capital...................................................................... (718) 6,628
----------- -------
Stockholders' equity/net assets...................................................... 423 7,769
----------- -------
</TABLE>
- ------------------------
(1) Includes charges of approximately $280,000 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 October 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. For
the fiscal years ended October 31, 1997 and 1998, if the Company had been an
independent entity, the Company would have had losses of $572,000 and $2,325,000
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.
DEPENDENCE ON NI-ZN PRODUCT LINE; UNCERTAINTY OF MARKET ACCEPTANCE OF
ADVANCED RECHARGEABLE BATTERIES. In the fiscal years ended October 31, 1997 and
1998, 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
9
<PAGE>
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 ("Xiamen"), 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 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 has been advised by its local counsel that the
consent of Xiamen 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") is required. Although ERC is currently seeking and intends to obtain
such consents and approvals, 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 the Company has agreed 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 and Taiwan. 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, 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
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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 foreign investment
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 "Normal Trade Relations" 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 "Normal
Trade Relations" 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 "Normal Trade Relations" trading status for
the PRC 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.
Currency devaluations in other countries have resulted in decreasing exports for
China and increased pressure to devalue the Renminbi. 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
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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 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 provides that the Company will bear the
obligations and receive the benefits of ERC 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 granted rights
or issued options to purchase up to 183,332 shares of Common Stock to officers
of ERC in connection with the Distribution, including (i) 83,333 shares of
Common Stock issuable to Jerry D. Leitman, Chairman and Acting President and
Chief Executive Officer of the Company in connection with his right to receive
shares of Common Stock (the "Distribution Agreement Option") pursuant to the
Distribution Agreement upon the exercise of his ERC stock options and (ii)
99,999 shares of Common Stock issuable to ERC officers pursuant to stock options
granted under the Company's 1998 Equity Incentive Plan (the "1998 Plan") under
which 300,000 shares have been reserved for issuance. All options issued by the
Company to date have been issued with an exercise price of $6.00 per share. See
"MANAGEMENT--Director Compensation" and "--Equity Incentive Plan." These 300,000
shares represent approximately 9.75% of the Company's outstanding shares of
Common Stock, assuming the exercise of all Rights in the offering and the
exercise of all options issuable under the 1998 Plan.
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 President, Acting Chief
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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 effect 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 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.
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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 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
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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 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 Company
does not maintain key man life insurance. ERC has assigned to the Company Mr.
Charkey's employment agreement, however this agreement is terminable by either
party upon 30 days' notice. 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
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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."
RISK OF PRICE INCREASES FOR 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
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."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. Approximately $4,350,000 (59%)
of the maximum estimated $7,346,000 of net proceeds from the Rights Offering
will be available for working capital and general corporate purposes.
Accordingly, the Company's management will have broad discretion as to the
application of such proceeds. See "Use of Proceeds."
CONTROL BY 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 12.0% of the currently outstanding shares of ERC Common Stock
and, therefore, may be deemed to beneficially own approximately 12.0% 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 5.0% of the currently outstanding shares of ERC Common Stock and,
therefore, may be deemed to beneficially own approximately 5.0% 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
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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 and the Boston Stock Exchange following the closing of the
Rights Offering, however, there can be no assurance that such listings 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.
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 April 30, 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."
NO EXPECTATION OF DIVIDENDS. 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.
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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 March 22, 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 April 30, 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 exercise of such holder's Oversubscription Privilege, then such
additional shares will be allocated among all
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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. 777-580209, ABA No. 021000021 with
confirmation by fax at (212)509-5150. 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 Expiration Date; 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
Expiration Date. 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 all of the following
conditions (the "Guaranteed Payment Procedures") are met:
(i) the Subscription Agent receives, on or prior to the Expiration Date
either (a) 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 member of the NASD or from an Eligible Institution, stating
the information required thereon, as described above; or (b) the properly
completed and executed Subscription Certificate;
(ii) such holder has caused payment in full of the Subscription Price
for each Underlying Share 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;
(iii) the Subscription Agent receives, on or prior to the Expiration
Date a payment guarantee notice (a "Notice of Guaranteed Payment") 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 member of the NASD 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 (in immediately available funds) by 5:00 p.m.,
Eastern time, on April 1, 1999 for each Underlying Share being subscribed
for pursuant to the Oversubscription Privilege; and
(iv) payment in full of the Subscription Price for each Underlying Share
being subscribed for pursuant to the Oversubscription Privilege has been
received (in immediately available funds) by the Subscription Agent by 5:00
p.m., Eastern time, on April 1, 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.
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On or prior to March 30, 1999, the Subscription Agent will provide notice by
facsimile transmission to a Rights holder who exercises the Oversubscription
Privilege pursuant to the Guaranteed Payment Procedures and the member firm,
commercial bank or trust company that guarantees payment for such Rights holder
under the Notice of Guaranteed Payment. The notice shall state the number of
shares subscribed for under the Oversubscription Privilege which are available
for such Rights holder to purchase and the aggregate Subscription Price to be
paid by such Rights holder for such shares.
A holder of Rights who purchases less than all of the shares of Company
Common Stock represented by his Subscription Certificate will receive from the
Subscription Agent a new Subscription Certificate representing the balance of
the unsubscribed Rights, to the extent the Subscription Agent is able to reissue
a Subscription Certificate prior to the Expiration Date.
Unless a Subscription Certificate (i) provides that the shares of Company
Common Stock to be issued pursuant to the exercise of Rights represented thereby
are to be delivered to the record holder of such Rights or (ii) is submitted for
the account of an Eligible Institution, signatures on such Subscription
Certificate must be guaranteed by an Eligible Institution.
Holders who hold shares of Company Common Stock for the account of others,
such as brokers, trustees or depositories for securities, should provide a copy
of this Prospectus to the respective beneficial owners of such shares as soon as
possible, ascertain such beneficial owners' intentions and obtain instructions
with respect to the Rights. If the beneficial owner so instructs, the record
holder of such Rights should complete Subscription Certificates and submit them
to the Subscription Agent with the proper payment. In addition, beneficial
owners of Company Common Stock or Rights held through such a holder should
contact the holder and request the holder to effect transactions in accordance
with the beneficial owner's instructions. Beneficial holders should be aware
that brokers or other record holders may establish deadlines for receiving
instructions from beneficial holders significantly in advance of the Expiration
Date.
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.
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OVERSUBSCRIPTION OPTION
The Company has the option to sell up to an additional 208,350 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 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 March 22, 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
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based upon laws, regulations, rulings, and decisions currently in effect. This
summary does not discuss all aspects of federal taxation that may be relevant to
a particular investor or to certain types of investors subject to special
treatment under the federal tax laws (for example, banks, dealers in securities,
life insurance companies, tax-exempt organizations, and foreign persons), nor
does it discuss any aspect of state, local, or foreign tax laws.
HOLDERS OF COMPANY COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THEIR INDIVIDUAL TAX SITUATIONS AND THE TAX CONSEQUENCES OF THE
RIGHTS OFFERING UNDER THE INTERNAL REVENUE CODE OF 1986 AND UNDER ANY APPLICABLE
STATE, LOCAL, OR FOREIGN TAX LAWS.
DISTRIBUTION OF THE RIGHTS TO HOLDERS OF COMPANY COMMON STOCK. A holder of
Company Common Stock will not recognize taxable income for federal income tax
purposes as a result of the issuance to such holder of Rights in respect of the
Company Common Stock. Except as provided in the following sentence, the basis of
such Rights will be zero. If either (i) the fair market value of the Rights on
the date of distribution is 15% or more of the fair market value of the Company
Common Stock in respect of which they are received on such date, or (ii) the
stockholder elects, in the stockholder's federal income tax return for the
taxable year in which the Rights are received, to allocate part of the basis of
such Company Common Stock to the Rights, then the stockholder's basis in such
Company Common Stock will be allocated between such Company Common Stock and
such Rights in proportion to their respective fair market values on the date of
distribution. The holding period of a stockholder with respect to Rights
received as a distribution on such stockholder's Company Common Stock will
include the stockholder's holding period for the Company Common Stock in respect
of which the Rights were issued 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 February 19, 1999
(the "ERC Record Date"). Prior to the Distribution, ERC owned all of the
outstanding shares of Company Common Stock. ERC effected the Distribution on
February 22, 1999 (the "Distribution Date") by delivering its shares of Company
Common Stock to Continental Stock Transfer & Trust Company (the "Distribution
Agent"), for cancellation and instructing the Distribution Agent to distribute
all of the issued and outstanding shares of Company Common Stock 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 did not require stockholder approval, and 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
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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 October 31, 1998, would have been to reduce
ERC's assets by approximately $1,176,000 and stockholders' equity by
approximately $423,000.
MANNER OF EFFECTING THE DISTRIBUTION
In connection with the Distribution, the Distribution Agent distributed all
of the outstanding shares of Company Common Stock 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 date on which the Subscription Agent delivers to the Company final notice of
the number of shares of Common Stock subscribed for in the Rights Offering (the
"closing") 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 were not 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.
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 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
26
<PAGE>
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 "EVRC" and the Boston
Stock Exchange under the symbol "EVL" 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 February 19, 1999.
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
The Company has been advised by its counsel, Brown, Rudnick, Freed & Gesmer,
that the Distribution qualifies 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"). Such
counsel has issued 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. 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
27
<PAGE>
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 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 six years following the Distribution of all such information in its
possession, and thereafter requires that each party give the other prior notice
of its intention to dispose of such information. In addition, the Distribution
Agreement provides for the allocation of shared privileges with respect to
certain information (including, for example, the attorney-client privilege) and
requires each of the Company and ERC to obtain the consent of the other prior to
waiving any shared privilege.
28
<PAGE>
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. 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, 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 $208,000 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 the Company has agreed 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 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
29
<PAGE>
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. The
Company has also agreed to reimburse ERC for any expenses incurred by ERC under
the License Assistance Agreement; the Company anticipates that such expenses, if
any, will be minimal.
LINE OF CREDIT AND GUARANTEES
On February 5, 1999, the Company entered into a Loan Agreement and Line of
Credit Note (the "Line of Credit") to borrow up to $3,450,000 (including
borrowings described below) from ERC for working capital and capital
expenditures purposes. Any outstanding borrowings will be secured by all of the
Company's tangible and intangible personal property and bear interest at the
London Interbank Offered Rate (LIBOR) plus 1 1/2%, payable monthly in arrears.
The Line of Credit terminates on the earlier of August 5, 2000 or the date on
which the Company has received net proceeds from the Rights Offering or from
other financing equal to at least $3,450,000.
In addition to the Line of Credit, ERC has unconditionally guaranteed the
Company's obligations under a loan from First Union National Bank. The loan was
entered into by the Company for the purpose of acquiring machinery and
equipment. As of January 22, 1999, the Company had borrowed $821,000 of the
$1,000,000 available under this facility. ERC has also pledged $1,000,000 in
cash as security for this loan which will be payable from proceeds of the Rights
Offering. ERC has also guaranteed the Company's performance under its lease for
manufacturing and office space. In the event of a default by the Company under
the lease, ERC's liability is limited to $500,000 reduced each anniversary date
of the lease by $100,000. Notwithstanding the foregoing, the guaranty terminates
after the first anniversary of the lease upon the Company's net worth exceeding
$3,000,000.
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.
30
<PAGE>
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 $7,346,000 assuming
the exercise of 1,389,000 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>
<CAPTION>
% OF NET PROCEEDS
-----------------
<S> <C> <C>
Leasing and equipping a new facility for limited production
and manufacturing purposes................................. $2,175,000 29.6%
Repayment of outstanding indebtedness........................ $821,000 11.2%
Working capital and other general corporate
purposes (1)............................................... $4,350,000 59.2%
</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.
31
<PAGE>
DILUTION
The net tangible book value of the Company as of October 31, 1998 was
approximately $104,000, or approximately $0.08 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 1,389,000 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 1,389,000 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 October
31, 1998 would have been approximately $7.5 million, or $2.70 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 $3.30 per share (55%) 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..................... $ 0.08
---------
Increase per share attributable to new investors.......................... $ 2.62
---------
Pro Forma net tangible book value per share after offering.................. $ 2.70
---------
Net tangible book value dilution per share to new investors................. $ 3.30
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of October 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.................................... 1,389,000 50.0% $ 0.00 0.0% $ 0.00
Purchasers in the Offering............................... 1,389,000 50.0 8,334,000 100.0 $ 6.00
---------- ----- ------------ -----
Total................................................ 2,778,000 100.0% $ 8,334,000 100.0%
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
The foregoing tables and calculations exclude 166,666 shares issuable upon
exercise of options outstanding as of February 19, 1999, granted under the
Company's 1998 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.
32
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
at October 31, 1998, (ii) the pro forma adjustments giving effect to the
combination of Evercel, Inc. and the Battery Business Group of ERC, the
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 1,389,000
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 1,389,000 shares, pro forma; 2,778,000 shares, as adjusted...... -- 14 28
Additional paid in capital.................................................... 1 409 7,741
--- ----- -----------
Total stockholders' equity and capitalization............................. $ 1 $ 423 $ 7,769
--- ----- -----------
--- ----- -----------
</TABLE>
33
<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, 1997 and 1998, respectively,
and from the Company's balance sheet at October 31, 1998:
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
--------------------
1997 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Contracts................................................................................... $ 144 $ 19
License fee income.......................................................................... 292 419
--------- ---------
Total revenues................................................................................ 436 438
--------- ---------
Cost and expenses:
Cost of revenues............................................................................ 98 87
Depreciation and amortization............................................................... 40 45
Administrative and selling.................................................................. 268 1,805(1)
Research and development.................................................................... 897 1,832
--------- ---------
1,303 3,769
--------- ---------
Loss from operations before income tax benefit................................................ $ (867) $ (3,331)
Income tax benefit............................................................................ (295) (1,006)
--------- ---------
Net loss...................................................................................... $ (572) $ (2,325)
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31,
1998(2)
-----------------
<S> <C>
Balance Sheet Data:
Total assets................................................................................. $ 1,176
-------
Working capital.............................................................................. (718)
-------
Stockholders' equity/net assets.............................................................. 423
-------
</TABLE>
- ------------------------
(1) Includes charges of approximately $280,000 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.
34
<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 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; $1,300,000 of this payment has been retained by ERC
who 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. ERC used this $3,000,000 to obtain a 50.5%
ownership in the Joint Venture. 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 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."
FISCAL 1998 COMPARED WITH FISCAL 1997
Contract revenue decreased 87% to $19,000 in the 1998 period from $144,000
in the 1997 period. The decrease was due primarily to the completion of funding
of the National Institutes of Health contract.
License fee income increased 43% to $419,000 in the 1998 period from
$292,000 in the 1997 period. The increase was due substantially to license fees
received under the NanYa License Agreement and the battery license agreement
with Corning, Inc. as described above. During the 1998 period, Corning, Inc.
terminated its license with the Company. License fee income, net, in future
periods will not include payments from Corning, Inc.
Cost of revenue decreased 11% to $87,000 in the 1998 period from $98,000 in
the 1997 period. The decrease was due primarily to the lower contract revenue
partially offset by increased license costs.
Administrative and selling expense increased 574% to $1,805,000 in the 1998
period from $268,000 in the 1997 period. The 1998 period reflects an increase in
costs related primarily to the acceleration of the
35
<PAGE>
commercialization of the Ni-Zi battery technology. These included salary and
fringe benefits, and legal and professional costs related to the creation of
joint venture and licensing agreements with the Company's Chinese partner, the
unconsummated acquisition of a battery manufacturing company, and the costs of
the proposed Distribution and Rights Offering in connection with the spin off of
the Battery Group. These costs amounted to $400,000, $280,000 and $240,000,
respectively. The administrative and selling expense also includes approximately
$620,000 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
administrative activity. Depreciation increased 12% to $45,000 in the 1998
period from $40,000 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 104% to $1,832,000 in the
1998 period from $897,000 in the 1997 period. This was a result of increased
costs as compared to fiscal 1997 relating to the commercialization of the
battery technology.
INCOME TAXES
The Company has recorded a tax benefit for its losses to the extent such
losses have been recognized in the consolidated tax return of ERC.
Subsequent to the Distribution, the Company's income tax provision will be
recorded on a separate company basis, pursuant to the requirements of Financial
Accounting Standard No. 109 "Accounting for Income Taxes."
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 130 requires companies to report
comprehensive income and SFAS No. 131 requires companies to report segment
information as it is used internally to evaluate segment performance. These
statements 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
36
<PAGE>
also provided all of the funding for capital expenditures for the purchase of
machinery and equipment for all battery activities.
The Company has entered into a Services Agreement with ERC to provide
certain management and administrative services and office, research and
development and manufacturing support facilities and services to the Company.
See "THE DISTRIBUTION--Relationship Between ERC and the Company after the
Distribution--Services Agreement."
The Company 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 new battery manufacturing plant. As of January
22, 1999, the Company had borrowed $821,000 under this facility. The note is due
on June 30, 1999. ERC has unconditionally guaranteed the commitment and has
pledged $1,000,000 of cash against the Note. The Note is payable from the
proceeds of the Rights Offering.
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 purpose. The Line
of Credit terminates on the earlier of August 5, 2000 or the date on which the
Company has received net proceeds from the Rights Offering or other financing
equal to at least $3,450,000. (See Note 11 to Notes to Financial Statements).
The Company anticipates that it will raise at least $7,000,000 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
$3,450,000 of cash to support its operations during this period, primarily to
lease and equip a new facility for limited production and manufacturing
purposes, 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 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.
37
<PAGE>
Working capital at October 31, 1998 was a negative $718,000. 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 is in the process of implementing a
new system that is Year 2000 compliant and believes that adequate resources have
been allocated for this purpose and expects the system implementation 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.
QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
The Company's exposure to market risk for changes in interest rates relates
to the Company's short and long term debt obligations. The Company's notes
payable are expected to be paid in full in 1999 and have terms ending in 2000.
Based on the Company's overall interest exposure at October 31, 1998, including
all interest rate sensitive instruments, a near-term change in interest rate
movement would not materially affect the results of operations or financial
position of the Company.
CURRENCY RATE EXPOSURE
The Company's functional currency is the U.S. dollar. During 1998, ERC
invested $3,000,000 in the Joint Venture. ERC intends to transfer the Joint
Venture to the Company. This investment is currently being maintained in U.S.
dollars. Since the cash deposit with the Joint Venture is in U.S. dollars, the
Company's foreign currency risk is limited to the investment in the Joint
Venture. To the extent that the Company expands its international operations,
the Company will be exposed to increased risk of currency fluctuation.
38
<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.
39
<PAGE>
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
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.
40
<PAGE>
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
The Company believes that its Ni-Zn battery represents a promising
commercial battery technology because of its long cycle life, high energy
density, and low material costs. Additionally, the low environmental impact of
materials contained in the Company's batteries compared to that of lead-acid or
Ni-Cd batteries provides advantages from an environmental standpoint. The
Company's Ni-Zn battery combines
41
<PAGE>
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 has leased
and plans to 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 are expected to be
restricted for selected application markets and geographical territories.
Licensing
42
<PAGE>
arrangements will require licensees to pay the Company royalties on sales and,
where feasible and appropriate, up-front fees for technology transfer.
ENTER INTO JOINT VENTURES AND EQUITY PARTICIPATIONS WITH LICENSEES: 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.
43
<PAGE>
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 50% of the market, 2) Ni-MH, approximately 32% of the market and
3) lithium-ion ("Li-ion"), approximately 14% 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
44
<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
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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.
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- 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 agreement and joint
venture with Xiamen 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 $5,000,000 in three stages. The payments include $1,500,000 received by ERC
in 1998, $1,300,000 of which was not transferred to the Company, a further
$2,000,000 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 $1,500,000 to be paid to the Company 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. At either party's option, the
license may become non-exclusive with respect to all covered territories after a
certain time period, in which case the percentage royalty payable on product
sales will be reduced. The NanYa License Agreement provides that
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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. 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 entered into a joint venture with Xiamen Three Circles
Co., Ltd. ("Xiamen"), called Xiamen Three Circles--ERC Battery Corp., Ltd. (the
"Joint Venture"). Prior to forming the Joint Venture, ERC entered into a
Technology Transfer and License Contract (the "Three Circles License Agreement")
with Xiamen 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 was entered into with the agreement of Xiamen to make the Joint Venture
a party to the Three Circles License Agreement in its place following the
formation of the Joint Venture. The license included an initial payment to ERC
of $3,000,000. ERC used this $3,000,000 as its initial investment in the joint
venture, and received a 50.5% share of 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. 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.
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 sales of batteries ("Battery Revenue") and from
sub-licenses of ERC's technology, including revenue received from payment for
the transfer of the technology ("Sub-License Transfer Revenue") and revenue
received from the payment of royalties for use of the technology ("Sub-License
Royalty Revenue") (collectively, "Sub-License Revenue"). The Joint Venture will
allocate the costs and expenses of producing Battery Revenue and Sub-License
Revenue to separate accounts containing funds received in respect of Battery
Revenue and Sub-License Revenue. Sub-License Revenue will be allocated to
sub-accounts for Sub-License Transfer Revenue and Sub-License Royalty Revenue.
Under the terms of the contract, after certain royalties and other priority
returns are paid to the Joint Venture partners from the Battery Revenue and
Sub-License Revenue sub-accounts, 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 by its local
counsel that the consent of Xiamen and the Joint Venture and the approval of the
appropriate examination and approval authority of the People's Republic of China
is required. 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
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and approvals, ERC and the Company have entered into a License Assistance
Agreement pursuant to which the Company has agreed 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.
The relationship between ERC and the Company in connection with The Three
Circles License Agreement and the Joint Venture contract will also be governed
by 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 until the Company moves into its new facilities in mid-1999 in exchange
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 was 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 has entered into a lease for approximately 28,500 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 lease term is five years
with an option for the Company to extend the term for an additional five years.
The annual rent is $171,000 for the first three years and increases to $178,000
in year four and $185,000 in year five. ERC has guaranteed the Company's
performance under the 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 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.
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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 ten 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 Illuma as a registered trademark at this time and the Company
has applied to use "Evercel" as a trademark. There can be no assurance that the
Company will receive trademark protection for "Evercel."
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 has three outstanding battery patent
applications filed in recent years.
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.
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The Company also relies on know-how and trade secrets to establish its
battery technologies for commercial applications and there is no assurance it
can adequately protect this information in its dealings with other entities.
There can be no assurance that other organizations will not develop similar or
better information through their own efforts.
RESEARCH AND DEVELOPMENT
DEVELOPMENT OF NI-ZN
The Company expects to continue working on improving the characteristics of
its Ni-Zn batteries to provide a longer cycle life and higher energy density,
including the following research objectives:
SUPPORT FOR POTENTIAL AND CURRENT LICENSEES: New applications for Ni-Zn
offer the opportunity to optimize the cell design to better meet the customer's
desired specifications. Troubleshooting and general technical service for
existing licensees will be conducted by the research and development group.
TESTING OF NI-ZN IN EV'S, ELECTRIC BICYCLES AND SCOOTERS: The Company
started to conduct performance testing with vehicles from several different EV
manufacturers during the second quarter of 1998. Goals include measuring range
and other performance characteristics as a function of varied vehicle duty
cycles. Electric bicycles from Golden Dragon Bicycle Company in Xiamen have also
been received for testing, along with a scooter from another company.
BATTERY MANAGEMENT SYSTEM DEVELOPMENT ("BMS"): One of the primary reasons
for the Company conducting the EV tests in-house is to be able to monitor the
way individual cells, as well as the vehicle, behave during discharge/recharge
cycles. Finalizing the Ni-Zn BMS design is important to ensure customers get the
performance the cells are designed to provide and that the practical cycle-life
matches design. This task also will be completed by the ZSW Institute in Germany
under contract to ERC.
PERFORMANCE IMPROVEMENT: The performance of all batteries varies with
temperature; with specific power declining as temperature declines. The Company
plans to conduct research to improve the low temperature performance of its
Ni-Zn battery. Other technical goals include increasing cycle life from over 600
to 1000 and further improving energy density. The work will center on improved
electrode materials and separator systems.
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. 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.
Certain research and development on this battery is being conducted through
a cooperative technology joint venture which includes ERC and Xiamen, with
assistance from Xiamen University. In the Distribution Agreement, ERC has agreed
to endeavor to cause the Company to become a party to this technology joint
venture. ERC has also agreed that the joint venture will not undertake any
projects involving battery technology without the Company's prior consent, until
the Company becomes a party to the joint venture.
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.
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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.................................... 65 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 are 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 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
members of the Audit Committee are Mr. Bagatelle (Chairman), Mr. Thompson and
Mr. Lawson.
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. The members of the Compensation
Committee are Mr. Lawson (Chairman), Mr. Thompson and Mr. Gerson.
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.
54
<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 "Distribution
Agreement Option"). 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 16,667 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 would otherwise vest, Mr.
Leitman 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). However, until the applicable
installment of the Note is repaid, the shares will remain restricted. In the
event the Note is not fully repaid by August 4, 2001, the shares shall be
forfeited to the Company for no consideration.
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 is an executive
officer of the Company (the "named executive officers"), 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) 1998 $ 320,000 $ 0 $ 6,217
Acting President, Chief Executive Officer 1997 73,848 0 0
Allen Charkey 1998 122,512 18,000 14,500
Executive Vice President, 1997 116,168 9,000 11,265
Chief Operating Officer 1996 101,300 9,000 10,289
</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.
55
<PAGE>
EQUITY INCENTIVE PLAN
The Company has adopted the 1998 Equity Incentive Plan (the "1998 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 1998 Plan. See "--Director Compensation" for a description of
the Company Option which has been issued to Mr. Leitman pursuant to the 1998
Plan. In addition, the Company has issued to Mr. Mahler and Mr. Charkey pursuant
to the 1998 Plan 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 11, 1999.
The Company has also issued an aggregate of 33,334 additional options to other
non-executive Company employees.
CERTAIN TRANSACTIONS
Mr. Gerson, a director of ERC and the Company, has entered into an agreement
with MTU-Friedrichshafen GmbH a subsidiary of Daimler Chrysler ("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 from MTU, following the Rights Offering,
Mr. Gerson will beneficially own approximately 7.8% 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. Bagatelle, Dr. Baker, and
Mr. Gerson, who together own an aggregate of 124,083 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 of certain directors, which owns 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.
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.
All future transactions between the Company and its officers, directors or
5% stockholders, and their respective affiliates, will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by a majority of the independent, disinterested directors of the
Company.
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
56
<PAGE>
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transactions from
which the director derived an improper personal benefit.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-laws of the Company ("By-laws") provide that the Company will
indemnify and hold harmless, to the fullest extent permitted by applicable law
as it presently exists or may thereafter be amended, any person (an
"Indemnitee") who was or is made or is threatened to be made a party or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), by reason of the fact that he,
she, or a person for whom he or she is the legal representative, is or was a
director or officer of the Company or, while a director or officer of the
Company, is or was serving at the request of the Company as a director, officer,
employee or agent of another company or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee.
The By-laws further provide that the Company will pay the expenses
(including attorneys' fees) incurred by an Indemnitee in defending any
proceeding in advance of its final disposition, provided however, that, to the
extent required by law, such payment of expenses in advance of the final
disposition of the proceeding will be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under the
relevant section of the By-laws or otherwise.
The By-laws also provide (i) that the rights conferred on any Indemnitee
thereby are not exclusive of any other rights which such Indemnitee may have or
thereafter acquire under any statute, provision of the Certificate, the By-laws,
agreement, vote of stockholders or disinterested directors or otherwise, (ii)
that the Company's obligation, if any, to indemnify or to advance expenses to
any Indemnitee who was or is serving at its request as a director, officer,
employee or agent of another company, partnership, joint venture, trust,
enterprise or nonprofit entity will be reduced by any amount such Indemnitee may
collect as indemnification or advancement of expenses from such other company,
partnership, joint venture, trust, enterprise or nonprofit enterprise, and (iii)
that any repeal or modification of the relevant provisions of the By-laws will
not adversely affect any right or protection thereunder of any Indemnitee in
respect of any act or omission occurring prior to the time of such repeal or
modification.
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
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 February 5, 1999.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------------------------- ------------------------- -----------
<S> <C> <C>
Warren D. Bagatelle 167,094(2) 12.0%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------------------------- ------------------------- -----------
Thomas L. Kempner 120,555(2) 8.7%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006
<S> <C> <C>
Loeb Investors Co. LXXV 120,555(2) 8.7%
61 Broadway
New York, NY 10006
James D. Gerson 70,111(3) 5.0%
c/o Fahnestock and Co.
780 3rd Avenue
New York, NY 10017
Bernard S. Baker 7,433(4) *
Richard M.H. Thompson 24,250(5) 1.7%
William A. Lawson 18,555 1.3%
Jerry D. Leitman 116,666(6) 8.4%
Allen Charkey -- *
Joseph G. Mahler -- *
Daimler Benz affiliate MTU-Friedrichshafen GmbH (MTU) 152,586(7) 10.9%
Abt. VC, Gebaude 6.1
Zimmer 102A D-85521
Ottobrunn Germany
All Directors and Executive Officers as a Group (9 persons) 404,109 29.1%
</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 2,300 shares owned by Dr. Baker's wife Cornelia Baker.
(5) Mr. Thompson's shareholdings are held jointly with his wife, Elizabeth
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."
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Rights Offering, the Company will have approximately
2,778,000 shares of Common Stock outstanding (assuming no exercise of
outstanding options). Of these shares, the approximately 1,389,000 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
approximately 1,389,000 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, 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 February 19, 1999, options to purchase a total of 166,666 shares of
Common Stock were outstanding, options for 83,333 shares being not yet
exercisable. In addition, Mr. Leitman may acquire up to 83,333 shares of Common
Stock pursuant to the Distribution Agreement Option. An additional 133,334
shares of Common Stock are available for future grants under the Company's stock
option plan. All future issuances of options will state that the exercise price
of such options will be at least 85% of the fair market value of the Common
Stock on the date of grant.
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, except as described above with respect to Affiliates.
59
<PAGE>
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL STOCK
Under the Certificate, the Company's authorized capital stock consists 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 and the Boston Stock Exchange 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--No
Expectation of Dividends."
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 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
60
<PAGE>
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 (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
61
<PAGE>
limitations for questions by participants at the meeting). The Certificate
provides that the Company's stockholders may not take action by written consent.
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
62
<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 February 19, 1999, 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 50%
Burnham Securities Inc. 50%
</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 (i) for each share of Company Common
Stock purchased by the Underwriters pursuant to the Standby Underwriting
Agreement and (ii) for each share of Company Common Stock purchased by the
Underwriters upon the exercise of Rights acquired by them, other than Rights
acquired in any state in which payment of such a fee would make any applicable
blue sky exemption unavailable. 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 and in connection with the NASD's review of the Underwriters'
participation in the offering.
The Company has granted to the Underwriters an option (the "Overallotment
Option") to purchase up to a maximum of 208,350 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.
63
<PAGE>
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 Underwriters have advised the Company that they may
offer shares of Common Stock to certain dealers at a price that represents a
concession of not more than $0.24 per share, and such dealers may reallow a
concession of not more than $0.10 per share to certain other dealers. The
Overallotment Option will be exercisable by the Underwriters not later than
thirty 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 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 of the distribution of
shares offered hereby.
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 without the prior
specific written approval of the customer.
64
<PAGE>
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 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, the Nasdaq SmallCap
Market or the Boston Stock Exchange; (iii) if trading on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market, the Boston Stock Exchange 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 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; (vii) 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 as in the Underwriters'
reasonable judgment would make it inadvisable to proceed with the offering, sale
or delivery of the shares of Common Stock offered hereby: (viii) if, in the
reasonable judgment of the Underwriters, there shall have been such material
adverse change, or any development involving a prospective material adverse
change, in the financial condition, net worth or results of operations of the
Company since December 31, 1998 or in the business prospects or conditions of
the Company since the date of this Prospectus, or that materially and adversely
impacts the Standby Underwriting Agreement; (ix) if the Dow Jones Industrial
Average shall have fallen by more than 12.5% from its closing price on the day
immediately preceding the closing date; (x) if the Rights shall not have been
mailed to the stockholders of the Company prior to 5:00 p.m. New York time on
February 26, 1999 (provided the Underwriters provide notice of such termination
prior to the Company mailing the Rights); (xi) if the Company makes any material
changes to the terms of the Rights Offering without the consent of the
Underwriters; or (xii) if the Rights Offering shall not have closed by April 30,
1999.
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 1998 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 beneficially own an
aggregate of approximately 556,695 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 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.
65
<PAGE>
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 reviewing and participating in the preparation
of this Prospectus and the Registration Statement of which this Prospectus forms
a part. Burnham Securities Inc. will receive a fee of $10,000 from the Company
as compensation to act as QIU. The Company has agreed to indemnify Burnham
Securities Inc. against certain liabilities it may incur in connection with its
responsibilities as QIU, or to contribute to payments that Burnham Securities
Inc. may be requested to make in respect thereof.
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, 1998, and for each of the years in the two-year period ended October 31,
1998 and the balance sheet of Evercel, Inc. as of October 31, 1998, have been
included herein and in the registration statement in reliance upon the reports
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
66
<PAGE>
EVERCEL, INC.
INDEX TO FINANCIAL STATEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheet as of October 31, 1998....................................................................... F-3
</TABLE>
BATTERY BUSINESS GROUP OF ERC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-4
Balance Sheet as of October 31, 1998................................................. F-5
Statements of Operations for the Year ended October 31, 1997 and 1998................ F-6
Statements of Cash Flows for the Year ended October 31, 1997 and 1998................ 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 October 31, 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 October 31,
1998 in conformity with generally accepted accounting principles.
KPMG LLP
Stamford, Connecticut
January 22, 1999
F-2
<PAGE>
EVERCEL, INC.
Balance Sheet
October 31, 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 ERC. 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 ERC.
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, 1998, and the related statements of
operations and cash flows for the years ended October 31, 1997 and 1998. 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, 1998, and the results of its operations and its cash
flows for the years ended October 31, 1997 and 1998 in conformity with generally
accepted accounting principles.
KPMG LLP
Stamford, Connecticut
January 22, 1999, except as to the third paragraph
of Note 11 which is as of February 5, 1999
F-4
<PAGE>
BATTERY BUSINESS GROUP OF ERC
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable................................................................................ $ 17
-----------
Total current assets........................................................................... 17
-----------
PROPERTY, PLANT AND EQUIPMENT:
Costs.............................................................................................. 1,680
Accumulated depreciation........................................................................... 855
Net................................................................................................ 825
-----------
Other assets....................................................................................... 333
-----------
Total Assets................................................................................... $ 1,175
-----------
-----------
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Accrued liabilities................................................................................ $ 80
Accounts payable................................................................................... 53
Due to ERC......................................................................................... 603
-----------
Total current liabilities...................................................................... 736
-----------
Deferred income tax liability........................................................................ 17
Total liabilities.............................................................................. 753
Net assets of Battery Business Group of ERC.......................................................... 422
-----------
TOTAL LIABILITIES AND NET ASSETS................................................................... $ 1,175
-----------
-----------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
BATTERY BUSINESS GROUP OF ERC
Statements of Operations
(in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER
31,
----------------------
1997 1998
----------- ---------
<S> <C> <C>
Revenues:
Contracts................................................................................ $ 144 $ 19
License fee income....................................................................... 292 419
----------- ---------
Total revenues....................................................................... 436 438
----------- ---------
Cost and expenses:
Cost of revenues......................................................................... 98 87
Depreciation and amortization............................................................ 40 45
Administrative and selling expenses...................................................... 268 1,805
Research and development................................................................. 897 1,832
----------- ---------
1,303 3,769
----------- ---------
(Loss) from operations before income tax (benefit)......................................... (867) (3,331)
Income tax (benefit)....................................................................... (295) (1,006)
----------- ---------
Net (loss)................................................................................. $ (572) $ (2,325)
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
BATTERY BUSINESS GROUP OF ERC
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER
31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Cash flows from operating activities:
Net (loss)................................................................................. $ (572) $ (2,325)
Depreciation and amortization............................................................ 40 45
Changes in operating assets and liabilities:
Accounts receivable.................................................................... 9 16
Other current assets................................................................... (42) 42
Other assets........................................................................... -- (333)
Accounts payable....................................................................... 12 36
Accrued liabilities.................................................................... 1 32
--------- ---------
Net cash provided by/(used in)
operating activities............................................................... (552) (2,487)
--------- ---------
Cash flows from investing activities:
Capital expenditures....................................................................... (120) (652)
--------- ---------
Net cash provided by/(used in)
investing activities............................................................... (120) (652)
--------- ---------
Cash flows from financing activities:
Contributions from ERC..................................................................... 672 2,536
Due to ERC................................................................................. -- 603
--------- ---------
Net cash provided by /(used in)
financing activities............................................................... 672 3,139
--------- ---------
Net increase/(decrease) in cash...................................................... -- --
Cash, beginning of period.................................................................... -- --
--------- ---------
Cash, end of period.......................................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
(1) GENERAL INFORMATION
In September, 1998, the Energy Research Corporation ("ERC") Board of
Directors approved a restructuring program to enhance stockholder value. 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. Accordingly, the ERC Board of Directors will declare a special
distribution (the "Distribution") of one share of common stock of Evercel, Inc.
for every three shares of ERC common stock outstanding as of a record date to be
determined. The Distribution will be 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.
Immediately after the Distribution, the Company will grant at no cost to
holders of its Common Stock as of a record date to be determined, 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
will receive one transferable Right for each share of Common Stock held on the
record date. Each Right will be 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 elects to exercise his right to purchase for the
Subscription Price a share of Common Stock for each Right held ("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.
The Company intends to use the net proceeds from the Rights Offering
primarily to lease and equip a new facility for limited production and
manufacturing purposes, for working capital, and general corporate purposes.
(see note 11)
After the distribution, the Company and ERC will operate as separate,
publicly held corporations. In order to effect the segregation of these
businesses, prior to the Distribution, ERC will transfer to the Company the
principal assets related to its Battery Business Group, and the Company will
assume certain liabilities related to those assets.
As part of the separation of the Company's business from ERC, the Company
will enter into various agreements with ERC including a Distribution Agreement,
Tax Sharing Agreement, Service Agreement and License Assistance Agreement.
The Distribution Agreement will provide 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 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.
F-8
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
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 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 ERC's Chief Executive Officer and Chief Financial Officer. 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 $208 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.
LICENSE ASSISTANCE AGREEMENT
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.
(2) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Battery Business Group of ERC is engaged in the development and
commercialization of an innovative, patented, Nickel-Zinc rechargeable battery,
as well as the research and design of other advanced battery technologies. The
Battery Business Group of ERC has been an integral part of ERC and has received
all of its funding from ERC to date.
F-9
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
BASIS OF PRESENTATION
The accompanying financial statements are presented as if the Battery
Business Group of ERC had existed as a corporation separate from ERC for the
periods presented and include the historical assets, liabilities, revenues and
expenses that are directly related to the business that will 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.
SIGNIFICANT ACCOUNTING POLICIES
CASH
The Company did not have any cash at October 31, 1998. All cash needs have
been provided by ERC to date.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation provided on the straight- line method over the estimated useful
lives of the respective assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the lease. When property is sold or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in operations for the period. The
Company capitalizes interest costs as part of the cost of constructing major
facilities and equipment. There were no interest costs capitalized in 1997 and
1998.
OTHER ASSETS
Organization costs associated with the formation of the Company have been
deferred and are being amortized using the straight line method over five years.
Rights offering costs represent legal and professional costs directly
attributed to the Company's underwritten rights offering. These costs will be
offset against the net proceeds therefrom.
REVENUE RECOGNITION
Revenues and fees on long-term contracts, including government cost
reimbursement contracts, are recognized on the percentage of completion method.
Percentage-of-completion method is measured by costs (including applicable
general and administrative) incurred and accrued to date as compared with the
estimated total costs for each contract. Contracts typically extend over a
period of one or more years. In accordance with industry practice, receivables
include amounts relating to contracts having production
F-10
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
cycles longer than one year and a portion thereof will not be realized within
one year. Provisions for estimated losses, if any, are made in the period in
which such losses are determined. License fee income arises from license
agreements whereby the Company grants the right to use Company patents and know-
how. Amounts are recognized when earned in accordance with the terms of the
agreements.
During the fiscal years ended October 31, 1997 and 1998, cost exceeded the
revenue by $1,126 and $3,658, respectively, as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
Contract revenue........................................................... 144 19
--------- ---------
Cost and expenses.......................................................... $ 1,303 $ 3,769
Less license expense....................................................... 33 92
--------- ---------
Contract costs............................................................. 1,270 3,677
--------- ---------
Cost in excess of revenue.................................................. $ 1,126 $ 3,658
--------- ---------
--------- ---------
</TABLE>
A portion of the cost in excess of revenue for the above indicated reporting
periods was included in the revenue of ERC. Certain of the costs indicated above
were recovered under cost reimbursement contracts and as Independent Research
and Development allowed under government contracts awarded to ERC. After the
Distribution the Company will no longer participate in the cost reimbursement
contracts of ERC.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
Prior to the Distribution, the Battery Business Group was included in the
consolidated tax filings of ERC. The provision for income taxes of the Company
represents an allocation of a portion of the ERC consolidated U.S federal income
tax provision to the battery group. The allocated tax provision is determined
based upon the income or loss of each group as if a separate tax return was
filed. If ERC is unable to recognize the tax benefit of an operating loss
generated by a group through offset of the loss against income of other members
of the consolidated group, or carryback of the loss to reduce prior year's
consolidated taxable income, such benefit is not allocated to the group. To the
extent that ERC is subsequently able to recognize previously unrecorded tax
benefits relating to losses of a group, the benefit is allocated to that group
as the group generates future taxable income up to the amount of prior losses
giving rise to the unrecognized tax benefit.
USE OF ESTIMATES
Management has made estimates and assumptions relating to the reporting of
assets and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from these
estimates.
F-11
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
(3) LICENSE AGREEMENTS AND JOINT VENTURE CONTRACT
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 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 lamp 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 addition $80 to the Joint Venture in exchange for a 50.5% ownership
interest.
In connection with the proposed 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 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. Under the NanYa License
Agreement, which is to be 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.
F-12
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
(4) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1998
---------------
<S> <C>
U.S. Government.................................................................. $ 12
Commercial....................................................................... 5
---
$ 17
---
---
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL OCTOBER 31,
LIFE 1998
---------- -----------
<S> <C> <C>
Machinery and equipment.............................................. 3-8 years $ 1,068
Furniture and fixtures............................................... 10 years 9
Construction in progress............................................. 603
-----------
$ 1,680
-----------
-----------
</TABLE>
(6) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-------------
<S> <C>
Rights offering costs............................................................ $ 307
Security deposits................................................................ 14
Organizational costs............................................................. 12
-----
$ 333
-----
-----
</TABLE>
(7) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1998
---------------
<S> <C>
Accrued vacation................................................................. $ 21
Accrued salaries and wages....................................................... 23
Accrued health benefits.......................................................... 17
Other accrued liabilities........................................................ 19
---
$ 80
---
---
</TABLE>
F-13
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
(8) EQUITY
At the Distribution Date, holders of ERC common stock will receive one share
of the Company's common stock for every three shares of ERC stock held. If the
Distribution had taken place on October 31, 1998, approximately 1,376,424 shares
of the Company's common stock would have been issued.
The Company's operations to date have been substantially funded by ERC.
The changes in the Company's equity are as follows:
<TABLE>
<S> <C>
BALANCE AT OCTOBER 31, 1996........................................ $ 111
Net loss........................................................... (572)
Net cash transfer from ERC......................................... 672
---------
BALANCE AT OCTOBER 31, 1997........................................ 211
Net loss........................................................... (2,325)
Net cash transfer from ERC......................................... 2,536
---------
BALANCE AT OCTOBER 31, 1998........................................ $ 422
---------
---------
</TABLE>
(9) INCOME TAXES
The income tax benefit consists entirely of current federal income tax
benefit. There were no differences between the expected income tax benefit at
the statutory rate of 34% and the actual benefit in 1997. In 1998 the actual
benefit was 30.2% due to certain nondeductible expenditures.
State income taxes have historically been reimbursed under U.S. government
cost reimbursement contracts awarded to the ERC.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. The principal temporary differences relate to the excess of tax
over book depreciation relative to the Company's property, plant and equipment
in the amount of $17.
(10) EMPLOYEE BENEFITS
The Company has participated in the ERC Capital Accumulation Plan. The
Company charged $25 and $28 to expense under the Capital Accumulation Plan of
ERC during the years ended October 31, 1997 and 1998, respectively.
The Company has participated in the ERC Pension Plan. The Company charged
$20 and $33 to expense under the ERC Pension Plan during the years ended October
31, 1997 and 1998, respectively.
The Company has adopted the 1998 Equity Incentive Plan. 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. As of October 31,
1998, no options had been granted under the 1998 Equity Incentive Plan.
The Company and ERC have agreed to issue to the Chief Executive Officer one
share of the Company's Common Stock for every three shares of ERC Common Stock
which he purchases pursuant to his exercise of ERC Options. Under this agreement
an option has been granted to acquire a total of 83,333
F-14
<PAGE>
BATTERY BUSINESS GROUP OF ERC
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
(Dollars in thousands)
shares of Evercel's Common Stock at an exercise price based proportionately upon
the relative fair market values of ERC Common Stock and the Company's Common
Stock.
(11) SUBSEQUENT EVENTS
On December 22, 1998, Evercel, Inc. entered into a commitment to borrow up
to $1,000 from First Union National Bank ("First Union Line of Credit") for the
purpose of acquiring machinery and equipment for the new battery manufacturing
plant. As of January 22, 1999, the Company had borrowed $821 against this
commitment. The note is due on June 30, 1999. ERC has unconditionally guaranteed
the commitment and has pledged $1,000 of cash against the Note. The Note is
payable from the proceeds of the planned Evercel, Inc. Rights Offering.
On January 15, 1999, Evercel, 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 ("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, Evercel, Inc. entered into a Loan Agreement and Line of
Credit Note (Line of Credit) to borrow up to $3,450 (including borrowings noted
above) from ERC for working capital and capital expenditures purposes. Any
outstanding borrowings will be secured by all of the Company's 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 being 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 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) above equal to
at least $3,450, whichever is earlier.
F-15
<PAGE>
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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.................. 19
Distribution......................... 25
Use of Proceeds...................... 31
Dilution............................. 32
Dividend Policy...................... 32
Capitalization....................... 33
Selected Financial Data.............. 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business............................. 39
Management........................... 53
Security Ownership of Certain
Beneficial Owners and Management.... 57
Shares Eligible for Future Sale...... 59
Description of Securities............ 60
The Standby Underwriting............. 63
Legal Matters........................ 66
Experts.............................. 66
Index to Financial Statements........ F-1
</TABLE>
UNTIL APRIL 16, 1999 (25 DAYS AFTER THE EXPIRATION DATE), ALL DEALERS THAT
EFFECT TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THE
RIGHTS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,389,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FEBRUARY 22, 1999
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