<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 2000
REGISTRATION NO. 333-33090
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
EVERCEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 06-1528142
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
2 LEE MAC AVENUE
DANBURY, CONNECTICUT 06810
(203) 825-3900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT L. KANODE,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EVERCEL, INC.
2 LEE MAC AVENUE
DANBURY, CONNECTICUT 06810
(203) 825-3900
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
RICHARD A. KRANTZ, ESQ CAMERON READ, ESQ.
ROBINSON & COLE LLP CHOATE, HALL & STEWART
FINANCIAL CENTRE EXCHANGE PLACE
695 EAST MAIN STREET 53 STATE STREET
STAMFORD, CT 06904-2305 BOSTON, MA 02109
(203) 462-7500 (617) 248-5000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share.......................... 1,725,000 $17.50 $30,187,500 $7,970
- -----------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 225,000 shares of common stock which the underwriters have the
option to purchase from Evercel, Inc. solely to cover over-allotments, if
any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on
the basis of the average high and low sale prices of the registrant's Common
Stock on April 4, 2000, as reported by Nasdaq.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 7, 2000
1,500,000 SHARES
[EVERCEL LOGO]
COMMON STOCK
------------------------
We are offering 1,250,000 shares of our common stock and several
shareholders identified in the prospectus are selling an additional 250,000
shares as described in the prospectus.
Our common stock trades on the Nasdaq Small Cap Market under the symbol
"EVRC" and on the Boston Stock Exchange under the symbol "EVL." We have applied
to list our common stock on the Nasdaq National Market under the symbol "EVRC."
On April 5, 2000, the last reported sale price of the common stock on the Nasdaq
Small Cap Market was $20.00 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE
THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE 4 TO READ ABOUT RISKS THAT
YOU SHOULD CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR COMMON STOCK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public Offering Price.................................. $ $
Underwriting Discounts................................. $ $
Proceeds to Evercel.................................... $ $
Proceeds to Selling Shareholders....................... $ $
</TABLE>
The underwriters have an option to purchase 225,000 additional shares of
the common stock from Evercel, Inc. at the public offering price less the
underwriting discounts to cover any over-allotments of shares.
------------------------
ADAMS, HARKNESS & HILL, INC.
FAC/EQUITIES
BURNHAM SECURITIES INC.
PROSPECTUS DATED , 2000
<PAGE> 3
The inside cover contains four pictures with the Evercel logo at the bottom
of the page 4.
The first picture is of a man fishing with a caption that reads "Sport
Fishing Applications."
The second picture is of an Evercel battery with a caption that reads
"Trolling battery."
The third picture is of a Scooter with a caption that reads "Electric
scooter application."
The fourth picture is of the Danbury manufacturing facility with a caption that
reads "Danbury manufacturing facility."
[INSIDE FRONT COVER PAGE]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Price Range of Common Stock................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 25
Management.................................................. 37
Related Party Transactions.................................. 42
Principal and Selling Shareholders.......................... 43
Description of Capital Stock................................ 46
Shares Eligible for Future Sale............................. 50
Underwriting................................................ 51
Legal Matters............................................... 53
Experts..................................................... 53
Where You Can Find More Information......................... 53
Incorporation of Certain Documents by Reference............. 53
Index to Financial Statements............................... F-1
Independent Auditors' Report................................ F-2
</TABLE>
------------------------
We have applied for registration of the trademark "Evercel." This
prospectus also contains trademarks and tradenames of other companies.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary does not contain all the information that may be important to
you. You should read the following summary together with the more detailed
information and our financial statements, the notes to those statements and the
other information appearing elsewhere in the prospectus, especially "Risk
Factors" beginning on page 4.
EVERCEL, INC.
OVERVIEW
We have developed the first rechargeable nickel-zinc battery with
commercially acceptable cycle life. We believe that our patented, independently
tested and proven technology is superior to the competing battery technologies
in our target markets. We intend to manufacture and sell our batteries in two
premium markets. We benefit from a joint venture (the "Joint Venture") in the
People's Republic of China (the "PRC") that produces batteries for the scooter
market. We will also produce batteries in a domestic manufacturing facility for
the electric trolling motor market, used in sportfishing boats. The Joint
Venture has received its first order to supply batteries for 1,500 scooters.
Our proprietary nickel-zinc battery is the result of a substantial
investment over 30 years in research and development in advanced battery
technologies. We believe that our technology has created significant barriers of
entry into our targeted markets. Our manufacturing process and patented
technology allow us to produce batteries with a unique combination of
characteristics including high power, low weight, low maintenance, environmental
acceptance and low lifetime cost when compared to other technologies in our
markets.
Our goal is to commercially introduce our battery technology to the motive
power market. We intend to reach this goal by:
- Establishing Evercel as a premium brand name;
- Creating a manufacturing and distribution network with global reach;
- Selling scooter batteries directly to equipment manufacturers;
- Selling trolling motor batteries to consumers and premium boat
manufacturers;
- Expanding our strategic alliances to access additional markets for our
batteries; and
- Maintaining our technical leadership through continued research and
development.
We operated as the battery business group of FuelCell Energy, Inc.
("FuelCell"), formerly known as Energy Research Corporation, between 1970 and
1999. During that time, FuelCell focused primarily on the development and
engineering of electricity production and storage by electrochemical means. On
February 22, 1999, we were spun-off from FuelCell. At that time, FuelCell
transferred to Evercel the intellectual property and principal assets related to
its battery business group and certain liabilities related to those assets.
We are a Delaware corporation incorporated on June 22, 1998. Our principal
executive offices are located at 2 Lee Mac Avenue, Danbury, Connecticut 06810
and our telephone number is (203) 825-3900.
We maintain a website on the Internet at WWW.EVERCEL.COM. Information
contained on our Internet Website does not constitute a part of this prospectus.
1
<PAGE> 6
THE OFFERING
Common stock offered by:
Evercel....................................... 1,250,000 shares
The Selling Shareholders...................... 250,000 shares
Common stock to be outstanding after the
offering........................................ 7,233,258 shares
Use of proceeds................................. To equip a U.S. production
facility with an automated
line, to provide funds for a
second automated line at the
production facility within 12
months after completion of
the first, to increase the
production capacity of the
Joint Venture, to equip our
new production facilities and
for working capital and
general corporate purposes,
including acquiring
additional businesses,
products and technologies or
establishing joint ventures.
See the section entitled "Use
of Proceeds."
Nasdaq Market symbol............................ EVRC
Except as otherwise noted, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option. In addition, we have
adjusted all of the information in this prospectus, except as otherwise noted,
to reflect a 2-for-1 stock split, accomplished by means of a 100% stock
dividend, paid to shareholders on March 22, 2000.
The number of shares to be outstanding immediately after this offering does
not include:
- 760,430 shares of our common stock issuable upon stock options
outstanding at April 1, 2000, at a weighted average exercise price of
$6.83 per share;
- 601,268 shares of our common stock issuable upon warrants outstanding at
April 1, 2000, at a weighted average exercise price of $8.40 per share,
without giving effect to 48,000 warrants which will be exercised by the
selling shareholders in connection with this offering; and
- 960,000 shares of our common stock issuable upon conversion of our Series
A Preferred Stock outstanding as of April 1, 2000, without giving effect
to 55,550 shares of our Series A Preferred Stock which will be converted
by the selling shareholders in connection with this offering.
2
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table summarizes statements of income and balance sheet data
for our business. You should read this information together with our financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" presented elsewhere in this
prospectus. The pro forma as adjusted balance sheet data as of December 31, 1999
reflects the sale by us of the 1,250,000 shares of common stock in this
offering, after underwriting discounts and commissions and our estimated
offering expenses and receipt by us of proceeds from the exercise of warrants by
the selling shareholders.
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEARS ENDED OCTOBER 31, DECEMBER 31,
-------------------------------- ----------------------
1997 1998 1999 1998 1999
------ ------- ------- ----------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues........................... $ 436 $ 438 $ 196 $ -- $ 13
Total operating costs and
expenses......................... 1,303 3,769 5,568 607 1,361
Interest income, net, equity in net
loss of affiliates and other
expense.......................... -- -- 51 -- 28
Income tax benefit................. (295) (1,006) (360) (249) --
------ ------- ------- ------ -------
Net loss........................... (572) (2,325) (4,961) (358) (1,320)
Preferred stock dividends.......... -- -- -- -- (22)
------ ------- ------- ------ -------
Net loss -- common shareholders.... $ (572) $(2,325) $(4,961) $ (358) $(1,342)
====== ======= ======= ====== =======
Basic and diluted loss per share... $(0.21)(a) $ (0.84)(a) $ (1.11) $(0.13)(a) $ (0.23)
====== ======= ======= ====== =======
Basic and diluted shares
outstanding...................... 2,778(a) 2,778(a) 4,457(b) 2,778(a) 5,722(b)
====== ======= ======= ====== =======
</TABLE>
- ------------------------
(a) Represents the pro forma loss per share and shares assumed to be outstanding
based on the number of shares outstanding immediately after our spin-off
from FuelCell.
(b) Due to losses we have incurred, dilutive instruments, consisting of
outstanding shares of Series A Preferred Stock, options and warrants, have
been excluded from diluted shares. On October 31, 1999, there were
outstanding options exercisable for 625,098 shares of common stock. At
December 31, 1999, there were outstanding 264,000 shares of Series A
Preferred Stock convertible into 960,000 shares of common stock, warrants
exercisable for 595,268 shares of common stock and options exercisable for
627,098 shares of common stock.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $6,117 $
Total assets................................................ 8,810
Total current liabilities................................... 742 742
Total shareholders' equity.................................. 8,068
</TABLE>
3
<PAGE> 8
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before purchasing our common stock.
The factors discussed below, as well as other factors not currently known to us
or that we currently deem immaterial, may harm our business, financial condition
and results of operations and could result in a complete loss of your
investment.
RISKS RELATED TO OUR BUSINESS
WE WERE A PART OF FUELCELL UNTIL FEBRUARY 1999 AND FACE SIGNIFICANT RISKS AS A
NEW COMPANY, WHICH COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
We were a part of FuelCell until February 1999 and have not begun a
large-scale commercial release of our initial products. Accordingly, we have
only a limited operating history from which you can evaluate our business and
prospects. Our limited operating history makes predicting the future results of
our operations or the risks we will face difficult. Our business model has not
been tested and, accordingly, we cannot be certain that our business strategy
will be successful.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BECOME PROFITABLE IN THE FUTURE.
We are not profitable and have had limited revenues. No assurance can be
given that we will become profitable in the foreseeable future, if ever. For the
two-month period ended December 31, 1999, and the twelve months ended October
31, 1999 and 1998, we had losses of $1.3 million, $5.0 million and $2.3 million.
Even though we anticipate that the first commercial shipments of our products
will occur in 2000, we expect that we will continue to incur losses through
2000. Even if we do achieve profitability, we may be unable to sustain or
increase our profitability in the future.
WE ARE DEPENDENT ON OUR NICKEL-ZINC BATTERY PRODUCT LINE AND ARE UNCERTAIN
WHETHER OUR BATTERIES WILL BE WIDELY ACCEPTED IN THE MARKETPLACE.
To date, we have received no revenues from sales of our nickel-zinc
batteries other than for samples. We believe that we will depend on sales of our
nickel-zinc batteries for substantially all of our revenues for the foreseeable
future. Our success will depend upon the market acceptance of nickel-zinc
technology. Our nickel-zinc batteries have not achieved, and may never achieve,
market acceptance. Our introduction of new products may be delayed or
unsuccessful. Our batteries will be a more expensive initial purchase than many
competing batteries and other technologies. We cannot assure you that we will be
successful in convincing customers of the value of our batteries over their life
cycles and their other advantages. Our batteries also require specialized
chargers, which are not yet commercially available. Our success will depend, in
large part, on our ability to meet customer requirements by developing and
introducing, on a timely basis, new products and enhanced and modified versions
of our current products. There can be no assurance that we will be able to do
so. Our competitors may introduce new technologies or refine existing
technologies that will be more appealing to customers than our products.
OUR INABILITY TO ENFORCE OUR PATENTS AND PROTECT OUR INTELLECTUAL PROPERTY MAY
ADVERSELY AFFECT OUR ABILITY TO COMPETE.
Patents, trade secrets and other proprietary rights are important to our
success and competitive position. Our efforts to protect our proprietary rights,
including our patents, may be inadequate and may not prevent others from
claiming violations by us of their
4
<PAGE> 9
property rights. Because of the intense competition in battery technology and
the large number of patents filed, or being filed, we may need to use another
company's patent under a license agreement. We are uncertain if we could reach
an agreement to use those patents and whether the terms of such an agreement
would be acceptable to us. If any court or competent authority concludes that
our products or manufacturing processes have infringed upon the product or
process rights held by others, such a conclusion could harm our business,
financial condition and results of operations. Additionally, a determination
that we have infringed upon the product or process rights held by others could
result in the loss of our proprietary rights, subject us to liability to third
parties or prevent us from manufacturing or selling our products, any of which
could have a material negative effect on our business and hinder our intentions
to sell our nickel-zinc battery technology. We cannot be sure any of our pending
applications will result in issued patents.
Our policy is to also protect our proprietary rights in our products and
operations through contractual obligations including nondisclosure agreements
with certain employees, customers, consultants, licensees and strategic
partners. We cannot assure you as to the degree of protection these contractual
measures may afford. We cannot assure you that patents will not be issued from
any pending applications, that the claims allowed under any patents will be
sufficiently broad to protect our technology, that any patents issued to us will
not be challenged, invalidated or circumvented, or as to the degree or adequacy
of protection any patents or patent applications may afford.
We have not filed for patent protection in certain potential major markets
such as India and Southeast Asia. Any agreements that we reach with partners in
these areas would have to be based on trade secrets and know-how. In the future,
we may seek patent protection in those areas. In addition, some foreign
countries in which we may do business provide significantly less patent and
proprietary rights protection than the United States.
We also rely on know-how and trade secrets to establish our battery
technologies for commercial applications and there is no assurance we can
adequately protect this information in our dealings with other companies. If
other competitors or organizations develop similar or better battery
technologies through their own efforts, these developments could have an adverse
effect on our business. We could incur substantial costs in prosecuting and
defending patent and other proprietary rights suits.
EVEN IF OUR PRODUCTS ARE A SUCCESS, WE MAY BE UNABLE TO MEET DEMAND.
Rapid growth of our advanced rechargeable battery business or other
segments of our business may significantly strain our management, operations and
technical resources. If we are successful in obtaining rapid market penetration
of our rechargeable batteries, we will wish to either deliver large volumes of
quality products to our customers on a timely basis at a reasonable cost to
those customers or license our technology to others who can manufacture and
distribute our products. We currently have limited manufacturing capability and
no experience in large-scale manufacturing of our advanced rechargeable
batteries or in automated assembly and packaging technology. We currently intend
to equip a U.S. facility with two automated lines. The Joint Venture also
intends to expand its manufacturing capability. We cannot assure you that our
business will achieve rapid growth or that our efforts (or the efforts of those
companies which are granted licenses to our technology) to expand manufacturing
or the number of employees will be successful. In addition, we cannot assure you
that we will not have difficulties meeting necessary quality control standards
as we expand manufacturing. Our business, financial condition and results of
operations may be harmed if we encounter difficulties in effectively managing
the budgeting, forecasting, quality control and other process control issues
presented by rapid growth. Nor can we assure you that we or our licensees will
be able to satisfy commercial-scale production requirements on a timely and
cost-effective basis.
5
<PAGE> 10
OUR ABILITY TO RECOGNIZE THE FINANCIAL BENEFITS OF THE JOINT VENTURE AND THE NAN
YA LICENSE AGREEMENT MAY DEPEND UPON THE ASSIGNMENT OF THESE AGREEMENTS TO US
FROM FUELCELL.
We expect that a substantial portion of our business will relate to the
Joint Venture (and related license agreement) and to a technology transfer and
license agreement, the Nan Ya License Agreement. Currently, we are not a party
to these agreements. FuelCell has sought the consent of Three Circles Co., Ltd.
and the Joint Venture and the approval of the appropriate Chinese authorities to
transfer these agreements to us. We are not certain that we or FuelCell will
receive these consents and approvals on a timely basis or at all. A failure or
delay in obtaining these consents and approvals could have a material adverse
effect on our operations and revenues because we will be able to enforce our
rights under these agreements only through FuelCell. We entered into a license
assistance agreement with FuelCell in which we agree to fulfill FuelCell's
obligations under the Joint Venture (and related license agreement) and the Nan
Ya License Agreement, until FuelCell is able to transfer its rights under those
agreements to us. The other parties to these agreements could take exception to
the license assistance agreement and claim that, by entering into the license
assistance agreement, FuelCell is in default under the Nan Ya License Agreement
and the Joint Venture and related license agreement. In addition, these
agreements could be terminated based on other actions or omissions by FuelCell
that we cannot control. These events or the termination of these agreements
would have a material adverse effect on our revenues and results of operations.
We will be relying upon FuelCell to realize the benefits of the Joint
Venture (and related license agreement) and the Nan Ya License Agreement until
all consents and approvals to the transfer and assignment of these agreements
are obtained. Conflicts of interest between us and FuelCell could arise in
connection with these agreements. Should FuelCell undergo bankruptcy or
insolvency, we could be prevented from receiving funds due to us under the
agreements, even if those funds were paid to FuelCell.
RISKS RELATED TO THE PRC
THERE ARE CERTAIN RISKS ASSOCIATED WITH DOING BUSINESS IN THE PRC AND TAIWAN.
Currently, the Nan Ya License Agreement and the Three Circles License
Agreement are with companies located in the PRC and Taiwan. The Joint Venture
was formed to establish a manufacturing plant in Xiamen, PRC that it intends to
use as its primary production facility. We intend to sell our products to
customers in the PRC and Taiwan. The following risk factors relating to
conducting business in the PRC could result in a material adverse effect on our
business, financial condition and results of operations.
INTERNAL POLITICAL CHANGES IN THE PRC MAY AFFECT OUR ABILITY TO CONDUCT
OPERATIONS THROUGH THE JOINT VENTURE AND THE NAN YA LICENSE AGREEMENT.
Our business operations in the PRC, interest in the Joint Venture (and
related license agreement) and our rights under the Nan Ya License Agreement may
be adversely affected by the political environment in the PRC. The People's
Republic of China 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 in the PRC may have a significant adverse effect on
policies related to the PRC's current economic reform program, other policies
affecting business and the general political, economic and social environment in
the PRC. The relationship between the PRC and Taiwan has been marked with
political and economic tension. In addition, we have relationships with
individuals in the PRC whose status could be adversely affected as a result of
political changes. Any such changes in the
6
<PAGE> 11
political leadership or current economic reform policies or the imposition of
additional restrictions on foreign-owned enterprises could have a material
adverse effect on the business of the Joint Venture, our interest in the Joint
Venture and our rights and revenues under the Nan Ya License Agreement.
WE MAY HAVE DIFFICULTY PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS IN THE PRC.
We protect our intellectual property rights in the PRC through a
combination of patent applications, contractual arrangements and trade secrets.
Patent and other intellectual property rights receive substantially less
protection in the PRC than is available in the United States. There can be no
assurance that we will be able to protect our proprietary rights in the PRC. The
unauthorized use of our technology by others in the PRC could have a material
adverse effect on our business, financial condition and results of operations.
RESTRICTIONS ON REPATRIATION OF FOREIGN CURRENCY OR FOREIGN CURRENCY EXCHANGE
AND VOLATILITY OF EXCHANGE RATES COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN
REVENUES FROM OUR AGREEMENTS WITH OUR PRC PARTNERS.
We expect a substantial portion of our revenues to relate to activities in
the PRC. The People's Republic of China regulates the repatriation 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. As a result, we may be prevented from receiving amounts from
the Joint Venture (and related license agreement) even if they are needed to
meet obligations of our business or would be better employed in our business
outside of the PRC. In addition, distributions from the Joint Venture (and
related license agreement) may be subject to taxation by the PRC as well as
domestic tax authorities.
In addition, there has been significant volatility in the exchange rate of
Renminbi to U.S. Dollars. We expect that the Joint Venture and our 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 remitting these funds to us as return of capital,
dividends or license payments. Under the Joint Venture (and related license
agreement) and the Nan Ya License Agreement, FuelCell is entitled to receive
(and under the License Assistance Agreement is required to remit to us)
distributions and royalties based on sales using our technology and other
distributions from the Joint Venture (and related license agreement). The Joint
Venture may be unable to convert sufficient Renminbi into foreign currency to
enable them to comply with their foreign currency payment obligations, including
royalty payments distributions to FuelCell. In the event of a depressed market
in Renminbi, the cost of foreign currency could be high enough to prevent the
Joint Venture and our other PRC partners from meeting any foreign financial
obligations incurred in the future or from paying distributions and license fees
to us. Moreover, fluctuations in the exchange rate of the Renminbi into U.S.
Dollars could have an adverse effect on the license fees owed to us.
LAWS, REGULATIONS AND POLICIES IN THE PRC MAY NEGATIVELY AFFECT US DUE TO
INCONSISTENT APPLICATION OR ADVERSE INTERPRETATION, ENFORCEMENT OR EVOLUTION.
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, 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.
7
<PAGE> 12
In circumstances where adequate laws exist, it may not be possible to obtain
timely and equitable enforcement thereof.
THE PRC'S FAILURE TO OBTAIN "MOST FAVORED NATION" TRADING STATUS COULD ADVERSELY
AFFECT US.
A significant portion of the economic activity in the PRC is export-driven
and, therefore, is affected by developments in the economies of the PRC's
principal trading partners. The United States Congress annually considers the
renewal of "Most Favored Nation" trading status for the PRC, and may attach
conditions to such renewal. There can be no assurance that Congress will renew
such status or that future renewal will not be linked to human rights issues or
other requirements which the PRC may decline or be unable to meet. Revocation or
conditional extension by the United States of the PRC's "Most Favored Nation"
trading status could have a material adverse effect upon us.
EXPROPRIATION OF JOINT VENTURE PROPERTY BY THE PRC GOVERNMENT WOULD ADVERSELY
AFFECT US.
Following the formation of the PRC in 1949, the PRC government renounced
various debt obligations incurred by predecessor governments, which obligations
remain in 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 of our assets in the PRC.
Such an expropriation would result in a total loss of our investment in the PRC.
ADDITIONAL RISKS RELATED TO OUR BUSINESS
OUR SUCCESS DEPENDS UPON THE SUCCESS OF THE MANUFACTURERS WHO MAY USE OUR
PRODUCTS OR LICENSE OUR TECHNOLOGY.
A substantial portion of our business will depend upon the success of
products sold by manufacturers that may use our batteries or license our
technology. For example, one factor determining the quantity of purchase orders
we may receive from a scooter manufacturer in the future is the success of that
company's scooter. We are subject to many risks beyond our control that
influence the success or failure of such manufacturers' particular products
including, among others factors:
- Competition faced by those manufacturers in their particular industry;
- Market acceptance of the manufacturers' products;
- The engineering, sales and marketing and management capabilities of those
manufacturers;
- Technical challenges unrelated to our technology or problems faced by any
of those manufacturers in developing their products; and
- The financial and other resources of those other manufacturers.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IF WE FAIL TO KEEP PACE WITH RAPIDLY
CHANGING TECHNOLOGIES.
The battery industry has experienced, and is expected to continue to
experience, rapid technological change. Our growth and future success will
depend, in part, on our ability to enhance and modify existing products and to
introduce new products in new markets. Our product development efforts require
and are expected to continue to require substantial
8
<PAGE> 13
investments by us for research, refinement and testing, and we cannot assure you
that we will have the resources to do this.
INTENSE COMPETITION AND THE EMERGENCE OF A COMPETING TECHNOLOGY COULD ADVERSELY
AFFECT THE SALE OF OUR PRODUCTS.
The disposable 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 ours. We are subject to competition
from manufacturers of traditional rechargeable batteries, from manufacturers of
rechargeable batteries with advanced technologies, as well as from companies
engaged in the development of batteries incorporating new technologies. There
can be no assurance that we 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 ours 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 our 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 our products, there may be a
material adverse effect on our business, financial condition and results of
operations. The market for our products, as well as the products that use our
batteries and technology, is characterized by changing technology and evolving
industry standards, often resulting in product obsolescence or short product
lifecycles. We cannot assure you that competitors will not develop technologies
or products that would render our technology and products obsolete or less
marketable.
OUR ABILITY TO ADEQUATELY LICENSE OUR TECHNOLOGY MAY AFFECT OUR SUCCESS.
Our growth and success will be dependent to a substantial extent on our
reputation. Since we anticipate licensing our technology to others, our
reputation may be affected by the performance of those companies to which we
license our technology. Our licenses may grant exclusivity with respect to
certain uses or geographic areas. As a result, we will be wholly dependent on
the success of the licensee for success in any exclusive use or geography. We
cannot assure you that we will be successful in granting our licenses to those
who are likely to succeed. 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 which benefit us may be subject to restrictions in foreign
laws that limit our ability to enforce such contractual provisions. In addition,
it may be more difficult to register and protect our proprietary rights in
certain foreign countries. Our failure to obtain suitable licensees of our
technology or the failure of our licensees to achieve our manufacturing or
quality control standards or otherwise meet our expectations could have a
material adverse effect on our business, financial condition and results of
operations.
OUR ABILITY TO ENTER INTO JOINT VENTURES MAY AFFECT OUR SUCCESS.
We intend to enter into other joint venture arrangements in the future to
sell our battery technology. The Joint Venture is with a foreign partner and we
anticipate that future joint ventures may be with foreign partners or entities.
As a result, such future joint ventures may be subject to the political climate
and economies of the foreign countries where such partners reside. There can be
no assurance that our joint venture partners will provide us with the support we
anticipate, 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
9
<PAGE> 14
will be successful in manufacturing and marketing their batteries for such
products once developed. Any of our international operations 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 our benefit may be subject to restrictions in foreign
laws that limit our ability to enforce such contractual provisions. Failure of
these joint ventures to be successful could have a material adverse effect on
our business and prospects.
OUR SUCCESS DEPENDS ON THE RETENTION AND HIRING OF CERTAIN KEY PERSONNEL.
Because of the specialized, technical nature of our business, we are highly
dependent on certain members of our management, marketing, engineering and
technical staff including Robert L. Kanode, President and Chief Executive
Officer, and Allen Charkey, Executive Vice President and Chief Operating
Officer, the loss of whose services could have a material adverse effect on our
business, financial condition and results of operations. Based on our
commercialization and expansion plans, we will require a significant increase in
the number of our employees and the employees of the Joint Venture. Our success
will depend upon, among other factors, attracting and retaining additional
highly skilled and experienced managerial, sales, marketing, engineering and
technical personnel. There can be no assurance that we will be able to recruit
or retain such personnel.
CERTAIN AGREEMENTS BETWEEN FUELCELL AND US WERE NOT SUBJECT TO ARM'S LENGTH
NEGOTIATIONS.
We entered into certain agreements with FuelCell, including a distribution
agreement, a tax sharing agreement, a services agreement and the License
Assistance Agreement for the purpose of defining our ongoing relationship with
FuelCell and to provide certain services during the transition. The agreements
between us and FuelCell, and us and the officers and directors of FuelCell, were
not the subject of arm's length negotiations and, therefore, the terms of such
agreements may contain terms that are not comparable to those that would have
been obtained from negotiations between unaffiliated parties.
THE ADDITION OR MODIFICATION OF ENVIRONMENTAL LAWS MAY ADVERSELY AFFECT BOTH OUR
FUTURE AND PAST OPERATIONS.
Foreign, federal, state and local regulations impose various environmental
controls on the manufacture, storage, use and disposal of batteries and certain
chemicals used in the manufacture of batteries. We cannot assure you that
conditions relating to our 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 us or
otherwise subject us to future liabilities. Our batteries contain a limited
amount of lead in the negative electrodes. We cannot assure you that the EPA or
other governmental agencies in U.S. or abroad will not determine that such lead
content or the nickel in our batteries makes them unsuitable for landfill
disposal. Although we believe we are presently in compliance with all federal,
state and local governmental regulations, we cannot assure you that additional
or modified regulations relating to the manufacture, transportation, storage,
use and disposal of materials used to manufacture our batteries or restricting
disposal of batteries will not be imposed or as to the effect such regulations
may have on us or our customers.
10
<PAGE> 15
WE MAY BE ADVERSELY AFFECTED BY OUR DEPENDENCE UPON CERTAIN RAW MATERIALS USED
IN THE PRODUCTION OF OUR BATTERIES.
Our principal raw materials for the production of our battery products are
nickel and zinc. Prices for both nickel and zinc are subject to market forces
beyond our control. Our future profitability may be materially adversely
affected by increased nickel or zinc prices to the extent we are unable to pass
on higher raw material costs to our customers. To attempt to reduce such risks,
we may engage in forward purchases and hedging transactions to manage raw
material costs and inventory relative to anticipated production requirements. We
cannot assure you that such activities will be successful or will not result in
increased losses.
ONE OF THE MATERIALS WE USE IN OUR BATTERIES IS ONLY AVAILABLE FROM ONE
SUPPLIER.
Certain separator materials used in our batteries are only available from
one supplier. We cannot assure you that alternate materials would be available
to us at an acceptable price, or quickly enough so as not to disrupt production.
WE ANTICIPATE OFFERING AN EXTENDED WARRANTY ON SOME OF OUR PRODUCTS, AND WE HAVE
NO EXPERIENCE AS TO OUR POTENTIAL LIABILITY.
We intend to offer an extended warranty for our trolling motor batteries.
Our warranty would be substantially greater than the existing warranties of most
of our competitors. We have no experience to evaluate the potential liability
that could be created by that warranty. If the claims made under that extended
warranty exceed expected levels against which we have reserved, our results of
operations and financial condition could be adversely affected.
PRODUCT LIABILITY CLAIMS COULD RESULT IN COSTS TO US OR IMPEDE DEMAND FOR OUR
PRODUCTS.
The sale of our products may expose us to product liability claims from
consumers. We currently do not maintain product liability insurance and do not
intend to do so in the future. Certain materials we use in our batteries could,
if used improperly, cause injuries to others. In addition, because our batteries
are new products, any accident involving them or other battery products could
impede demand for our products.
RISKS RELATED TO OUR COMMON STOCK
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We cannot be certain that additional financing will be available to us on
favorable terms when required, or at all. If we raise additional funds through
the issuance of equity, equity-related or debt securities, such securities may
have rights, preferences or privileges senior to those of the rights of our
common stock and our shareholders may experience additional dilution. In the
past, we have experienced negative cash flow from operations. We currently
anticipate that the net proceeds of this offering, together with our available
funds, will be sufficient to meet our anticipated needs for working capital and
capital expenditures through at least 2001. We may need to raise additional
funds prior to the expiration of this period if, for example, we pursue business
acquisitions or experience operational losses that exceed our current
expectations. We do not have any credit facilities in place and we cannot assure
you that we will be able to put in place any facilities that will address our
future capital needs, in whole or in part.
11
<PAGE> 16
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL SHAREHOLDERS.
The market price for our common stock has been highly volatile. We expect
that our quarterly operating results will fluctuate significantly. As a result,
the market price for our common stock is likely to continue to be highly
volatile and subject to wide fluctuations. Factors, many of which are beyond our
control, that may affect our quarterly results include:
- Announcements of technological innovations or new products or services or
pricing changes by us or our competitors;
- Conditions or trends in the battery or electric vehicle industries;
- Changes in the economic performance and/or market valuations of other
battery or electric power companies;
- Announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- Additions or departures of key personnel;
- Currency fluctuations;
- Release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock; or
- Potential litigation.
Many companies that have experienced volatility in the market price of
their stock have been the subject of securities class action litigation. We may
be involved in a securities class action lawsuit in the future. Such litigation
often results in substantial costs and a diversion of management's attention and
resources and could harm our business, financial condition and results of
operations.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our shareholders sell substantial amounts of our common stock, including
shares issued upon the conversion of our Series A Preferred Stock or the
exercise of outstanding options and warrants, in the public market following
this offering, the market price of our common stock could fall. Such sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate. Upon completion of
this offering, we will have outstanding 7,233,258 shares of common stock,
assuming no exercise of the underwriters' over-allotment option, no conversion
of our Series A Preferred Stock and no exercise of outstanding options or
warrants, other than conversion of Series A Preferred Stock and exercise of
warrants by the selling shareholders. Of these shares, 5,420,996 shares are
freely tradable. Of the remaining shares, 1,812,262 will be eligible for sale in
the public market beginning 180 days after the date of this prospectus, subject
to volume and other restrictions pursuant to Rule 144 under the Securities Act.
However, Adams, Harkness & Hill, Inc. may, in its sole discretion and at any
time or from time to time, without notice, release all or any portion of the
securities subject to lock-up agreements. An additional 2,131,698 shares of
common stock may be issued upon conversion of the Series A Preferred Stock and
exercise of outstanding options and warrants.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The public offering price per share will be substantially higher than the
net tangible book value per share immediately after the offering. If you
purchase common stock in this offering, you will incur immediate and substantial
dilution in the net tangible book value per share of the common stock from the
price you paid. We have a large number of preferred
12
<PAGE> 17
shares which are convertible into our common stock at prices significantly below
the public offering price of our common stock. We also have a large number of
outstanding stock options and warrants to purchase our common stock with
exercise prices significantly below the public offering price of our common
stock. To the extent that the holders of these options or warrants convert or
exercise them, you will experience further dilution.
WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any cash dividends in the foreseeable
future.
PROVISIONS OF DELAWARE AND CONNECTICUT LAW AND OF OUR CHARTER AND BY-LAWS MAY
MAKE A TAKEOVER MORE DIFFICULT.
Provisions in our certificate of incorporation and by-laws and in the
Delaware and Connecticut corporate law may make it difficult and expensive for a
third party to pursue a tender offer, change in control or takeover attempt that
is opposed by our management and Board of Directors. Public shareholders who
might desire to participate in such a transaction may not have an opportunity to
do so. These anti-takeover provisions could substantially impede the ability of
public shareholders to benefit from a change in control or change our management
and Board of Directors. See "Description of Capital Stock."
13
<PAGE> 18
FORWARD-LOOKING STATEMENTS
This prospectus contains and incorporates by reference forward-looking
statements that are subject to a number of risks and uncertainties. All
statements, other than statements of historical facts, are forward-looking
statements. Such statements may include words such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe" and other words or terms of
similar meaning and are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
These forward-looking statements include statements relating to:
- Our strategy, future operations and financial plans;
- Competition;
- The development of our battery technology;
- The assignment to us by FuelCell of agreements to which it is currently a
party;
- Acquisition and expansion strategy;
- Development of products;
- Use of proceeds;
- Projected capital expenditures;
- Liquidity;
- Our intention to reinvest Joint Venture earnings back into the Joint
Venture;
- Development of additional revenue sources;
- Doing business in the PRC;
- Development and maintenance of strategic alliances;
- Market acceptance of our battery technology;
- Ability to develop brand identification; and
- Global expansion.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including inaccurate
assumptions we might make or known or unknown risks and uncertainties, including
all the risks discussed in Risk Factors and elsewhere in this prospectus. We
caution you not to place undue reliance on these forward-looking statements.
14
<PAGE> 19
USE OF PROCEEDS
We estimate that the net proceeds to us from our sale of 1,250,000 shares
of our common stock in this offering will be approximately $ million, at a
public offering price of $ per share and after deducting the underwriting
discounts and commissions and our estimated offering expenses. We expect to
receive approximately $ million in additional net proceeds if the
underwriters' over-allotment option is exercised in full.
We currently intend to use the net proceeds as follows:
- Approximately $8.0 million to build an automated manufacturing line in
our United States production facility, and an additional $8.0 million to
build a second manufacturing line within approximately 12 months
thereafter, both specifically for the manufacture of nickel-zinc
rechargeable batteries;
- Approximately $3.0 million to increase the production capacity of the
Joint Venture, which will produce our nickel-zinc batteries for sale and
distribution in the PRC, Europe and Southeast Asia;
- Approximately $1.0 million to equip our new production facilities in the
United States; and
- The balance for general corporate purposes and working capital, which may
include acquiring additional businesses, products and technologies or
establishing joint ventures. We have no specific agreements or
commitments to enter into any acquisitions or joint ventures.
We will retain broad discretion in the allocation of the net proceeds of
this offering. Pending the uses described above, we intend to invest the net
proceeds of the offering in short-term and intermediate-term interest-bearing
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
we do not intend to pay any cash dividends in the near future. At this time, we
intend to retain our future earnings to fund the expansion of our business. Our
dividend policy may be reviewed by our Board of Directors from time to time,
based on our performance and our financial condition.
15
<PAGE> 20
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low sales prices of
our common stock for the quarters indicated, as reported by Nasdaq.
Our common stock has been traded on the Nasdaq Small Cap Market since April
5, 1999. We have applied to have our common stock listed on the Nasdaq National
Market System.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
CALENDAR 2000
- ------------------------------------------------------------
First Quarter............................................... $30.75 $12.00
Second Quarter (through April 5, 2000)...................... $23.00 $15.00
CALENDAR 1999
- ------------------------------------------------------------
Second Quarter.............................................. $ 6.13 $ 2.41
Third Quarter............................................... $ 7.41 $ 4.25
Fourth Quarter.............................................. $12.88 $ 5.19
</TABLE>
On April 5, 2000, the last reported sale price for the common stock on the
Nasdaq Small Cap Market was $20.00 per share. As of April 4, 2000, there were
approximately 177 holders of record of common stock.
16
<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- On an actual basis; and
- Pro forma as adjusted to give effect to the sale of 1,250,000 shares of
common stock by us in this offering, after deducting the underwriting
discounts and offering expenses payable by us, at an offering price of
$ per share, and the issuance of 202,000 shares of common stock upon
conversion of 55,550 shares of Series A Preferred Stock.
You should read the information in conjunction with our financial
statements and the related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; 264,000 shares of Series A Stock issued and
outstanding with cumulative dividends at 8%, actual;
208,450 shares of Series A Stock issued and outstanding,
as adjusted............................................... $ 3 $ 2
Common stock, $.01 par value; 10,000,000 shares authorized;
5,722,090 shares issued and outstanding, actual; 7,222,090
shares issued and outstanding, as adjusted................ 57 72
Note receivable from shareholder............................ (300) (300)
Additional paid-in capital.................................. 14,084
Accumulated deficit......................................... (5,776) (5,776)
------- -------
Total shareholders' equity........................ 8,068
------- -------
Total capitalization.............................. $ 8,068 $
======= =======
</TABLE>
The above table excludes:
- 960,000 shares (actual) and 758,000 shares (pro forma as adjusted) of our
common stock issuable upon the conversion of our Series A Preferred Stock
outstanding as of December 31, 1999;
- 595,268 (actual) and 547,268 (pro forma as adjusted) shares of our common
stock issuable upon exercise of warrants outstanding as of December 31,
1999, at an exercise price of $8.25 per share; and
- 627,098 shares of our common stock issuable upon exercise of stock
options outstanding as of December 31, 1999 at a weighted average
exercise price of $3.38 per share.
The table also assumes no exercise of the underwriters' over-allotment
option.
17
<PAGE> 22
DILUTION
As of December 31, 1999, our net tangible book value on a pro forma basis
was $3.2 million, or $0.54 per share of common stock. Pro forma net tangible
book value per share represents the amount of our total tangible assets reduced
by the amount of our total liabilities and the liquidation preference of our
preferred stock, divided by the number of shares of our outstanding common
stock, excluding the conversion of all outstanding preferred stock into common
stock and the exercise of all outstanding warrants and options for common stock,
except for the issuance of 202,000 shares of common stock upon conversion of
55,550 shares of Series A Preferred Stock and the issuance of 48,000 shares of
common stock upon exercise of warrants. As of December 31, 1999, our net
tangible book value, as adjusted for the sale of 1,250,000 shares of our common
stock based on the assumed public offering price of $20.00 per share, and after
deducting the underwriting discounts and commissions and our estimated offering
expenses, would have been approximately $3.68 per share. This represents an
immediate increase of $3.14 per share to existing stockholders and an immediate
dilution of $16.32 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $20.00
Pro forma net tangible book value per common share at
December 31, 1999...................................... $ 0.54
Increase in net tangible book value per share attributable
to new investors....................................... 3.14
------
Net tangible book value per share after this offering....... 3.68
------
Dilution per share to new investors......................... $16.32
======
</TABLE>
The computation above is based on the pro forma number of shares of our
common stock outstanding as of December 31, 1999, as adjusted for the shares of
Series A Preferred Stock converted and warrants exercised in connection with
this offering, and which does not include 758,000 shares of common stock
issuable upon the conversion of Series A Preferred Stock outstanding as of
December 31, 1999, 547,268 shares of our common stock issuable upon exercise of
the warrants outstanding as of December 31, 1999, or 627,098 shares of our
common stock issuable upon exercise of outstanding stock options. To the extent
that shares are issued upon conversion of the Series A Preferred Stock or
exercise of warrants or options, there will be further dilution to new
investors.
18
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data set forth below is for the years ended October
31, 1995, 1996, 1997, 1998 and 1999 and the two months ended December 31, 1998
and 1999. You should read this information together with our financial
statements and the notes to those statements beginning on page F-7 of this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The statement of
operations data for the years ended October 31, 1997, 1998 and 1999 and the
balance sheet data as of October 31, 1998 and 1999 and December 31, 1999 are
derived from our financial statements which have been audited by KPMG LLP,
independent accountants, and are included elsewhere in this prospectus.
Historical results are not necessarily indicative of the results to be expected
in the future, and results of interim periods are not necessarily indicative of
results for the entire year.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues......................... $ 164 $ 355 $ 436 $ 438 $ 196
Costs and expenses:
Cost of revenues............... 101 246 98 87 694
Administrative and selling..... 149 199 268 1,805 2,244
Depreciation and
amortization................. 31 34 40 45 181
Research and development....... 516 644 897 1,832 2,449
------ ------ ------- ------- -------
Total operating costs and
expenses................... 797 1,123 1,303 3,769 5,568
------ ------ ------- ------- -------
Loss from operations............. (633) (768) (867) (3,331) (5,372)
Interest income, net............. -- -- -- -- 90
Equity in net loss of
affiliate...................... -- -- -- -- (36)
Other expense.................... -- -- -- -- (3)
------ ------ ------- ------- -------
Loss before income tax benefit... (633) (768) (867) (3,331) (5,321)
Income tax benefit............... (215) (261) (295) (1,006) (360)
------ ------ ------- ------- -------
Net loss......................... (418) (507) (572) (2,325) (4,961)
Preferred stock dividends........ -- -- -- -- --
------ ------ ------- ------- -------
Net loss -- common
shareholders................... $ (418) $ (507) $ (572) $(2,325) $(4,961)
====== ====== ======= ======= =======
Basic and diluted loss per
share.......................... $(0.15)(a) $(0.18)(a) $ (0.21)(a) $ (0.84)(a) $ (1.11)
====== ====== ======= ======= =======
Basic and diluted shares
outstanding.................... 2,778(a) 2,778(a) 2,778(a) 2,778(a) 4,457(b)
====== ====== ======= ======= =======
<CAPTION>
TWO MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues......................... $ -- $ 13
Costs and expenses:
Cost of revenues............... -- 220
Administrative and selling..... 208 636
Depreciation and
amortization................. 8 54
Research and development....... 391 451
------- -------
Total operating costs and
expenses................... 607 1,361
------- -------
Loss from operations............. (607) (1,348)
Interest income, net............. -- 28
Equity in net loss of
affiliate...................... -- --
Other expense.................... -- --
------- -------
Loss before income tax benefit... (607) (1,320)
Income tax benefit............... (249) --
------- -------
Net loss......................... (358) (1,320)
Preferred stock dividends........ -- (22)
------- -------
Net loss -- common
shareholders................... $ (358) $(1,342)
======= =======
Basic and diluted loss per
share.......................... $ (0.13)(a) $ (0.23)
======= =======
Basic and diluted shares
outstanding.................... 2,778(a) 5,722(b)
======= =======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ -- $ -- $ -- $ 1 $ 1,820
Total assets..................... 166 163 289 1,176 4,290
Total current liabilities........ 33 52 78 753 1,011
Total shareholders' equity....... 133 111 211 423 3,279
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 1 $6,117
Total assets..................... 1,531 8,810
Total current liabilities........ 1,044 742
Total shareholders' equity....... 487 8,068
</TABLE>
- ------------------------
(a) Represents the pro forma loss per share and shares assumed to be outstanding
based on the number of shares outstanding immediately after our spin-off
from FuelCell.
(b) Due to losses we have incurred, dilutive instruments, consisting of shares
of Series A Preferred Stock, options and warrants, have been excluded from
diluted shares. At October 31, 1999, there were options exercisable for
625,098 shares of common stock. At December 31, 1999, there were 264,000
shares of Series A Preferred Stock convertible into 960,000 shares of common
stock, related warrants exercisable for 595,268 shares of common stock and
options exercisable for 627,098 shares of common stock.
19
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion does not contain all the information that may be
important to you. You should read the following discussion together with the
more detailed information contained in our financial statements, the notes to
those statements and the other information appearing elsewhere in this
prospectus, especially "Risk Factors" beginning on page 4.
We changed our fiscal year from October 31 to December 31 effective
December 31, 1999. As a result, portions of the following discussion cover the
two-month period from November 1, 1999 to December 31, 1999.
OVERVIEW
We develop, design and have begun to manufacture high-performance
rechargeable batteries. Much of the following discussion relates to our
operations prior to manufacturing when we were primarily engaged in research and
development activities. We recognize revenue on the date our products are
shipped. To date, revenues have primarily resulted from shipment of materials to
the Joint Venture and sample products to potential customers.
FuelCell has licensed the rights to manufacture scooter batteries through
the Joint Venture. Under our license assistance agreement with FuelCell, we have
assumed the rights and obligations of Fuel Cell's 50.5% ownership of the Joint
Venture, and FuelCell has agreed to transfer its rights to us and pay us all
sums accruing to FuelCell. We will account for our involvement in the Joint
Venture under the License Assistance Agreement using the equity method of
accounting, in which we record our share of earnings or losses from the Joint
Venture in our income statement.
On February 16, 1999, FuelCell transferred the principal assets,
intellectual property and liabilities related to its battery business group to
its subsidiary Evercel, Inc. On February 22, 1999, FuelCell distributed to its
shareholders shares of our common stock in a tax-free distribution. In April
1999, we received $7.8 million of net proceeds from the sale of shares of our
common stock at $3.00 per share pursuant to a rights offering. We continue to
pay FuelCell for certain administrative services in accordance with a services
agreement. Results shown before the period of the spin-off reflect our activity
as the battery business group of FuelCell.
RESULTS OF OPERATIONS
TWO MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH TWO MONTHS ENDED DECEMBER 31,
1998
We had revenues of $13,000 for the two months ended December 31, 1999
compared to none for the two months ended December 31, 1998. The revenues in the
1999 period were due to consumer samples sold in our efforts to commercialize
our nickel-zinc batteries. Cost of revenues of $220,000 for the two months
ending December 31, 1999 were due to the cost of the samples shipped and the
revaluation of inventory items at December 31, 1999. The revaluation reflects
the value of materials and their components at what we believe to be their
market value in accordance with the lower of cost or market valuation method.
Administrative and selling expenses increased 206% to $636,000 for the two
months ended December 31, 1999 from $208,000 for the two months ended December
31, 1998. The increase is the result of the increased staffing of administrative
functions during the 1999 period, including the addition of a Chief Executive
Officer, Controller and other administrative personnel, the costs of being an
independent publicly traded company, and
20
<PAGE> 25
selling, marketing and administrative activities to ready us for
commercialization of our nickel-zinc battery technology. Depreciation increased
575% to $54,000 for the two months ended December 31, 1999 compared with $8,000
for the same period in 1998 due to capital purchases in the 1999 period to
outfit our Danbury, Connecticut manufacturing facility.
Research and development expenses increased 15% to $451,000 for the two
months ended December 31, 1999 from $391,000 for the two months ended December
31, 1998 due to product development activity relating to the commercialization
of our battery technology.
Interest income of $28,000 for the two months ended December 31, 1999
increased from none for the two months ended December 31, 1998 due to interest
income on funds received from our rights offering in April 1999 and the private
placement of our Series A Preferred Stock in December 1999. We recognized a tax
benefit of $249,000 in the two months ended December 31, 1998 due to our
inclusion in the consolidated tax return of FuelCell. We have not recorded the
tax benefit of operating losses for the same period in 1999, pursuant to
Financial Accounting Standard No. 109, "Accounting for Income Taxes."
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
We had $196,000 in revenues for the year ended October 31, 1999, as
compared to $438,000 for the same period in 1998. Lower revenues resulting from
the termination of a license fee arrangement with Corning, Inc. in May 1998 were
partially offset by sales of materials of $195,000 to the Joint Venture during
the year ended October 31, 1999. We had cost of revenues of $694,000 for the
year ended October 31, 1999 as compared to $87,000 for the prior year. Higher
costs were due to the cost of the materials shipped and the revaluation of
inventory items at December 31, 1999 to adjust their costs to market value. The
revaluation reflects the value of materials and their components to reflect what
we believe will be their market value when we are in high volume production and
are able to negotiate more favorable pricing. Administrative and selling
expenses increased 24% to $2.2 million for the year ended October 31, 1999 from
$1.8 million in the year ended October 31, 1998. The increase was the result of
increased staffing to support the commercialization, production and distribution
of sample batteries and costs associated with the Joint Venture and related
license agreement. Depreciation increased to $181,000 from $45,000 from the year
ended October 31, 1998 reflecting increased capital purchases to outfit our
Danbury, Connecticut manufacturing facility.
Research and development expense increased 34% to $2.4 million for the year
ended October 31, 1999 from $1.8 million in the prior year. The increase
reflects product development activity relating to the commercialization of our
battery technology.
Net interest income of $90,000 in the year ended October 31, 1999 reflects
interest of $108,000 earned on funds raised from our rights offering in April
1999 and the private placement of our Series A Preferred Stock in December 1999,
offset by $18,000 of interest expense due to borrowings from banks and FuelCell
to finance operations prior to our rights offering. Our share of the Joint
Venture's losses amounted to $36,000 for the year ended October 31, 1999. We
recognized a tax benefit of $360,000 in the quarter ended January 31, 1999 due
to our inclusion in the consolidated tax return of FuelCell. We have recorded no
benefit for the losses incurred in the second, third and fourth quarters of the
year ended October 31, 1999, pursuant to Financial Accounting Standard No. 109,
"Accounting for Income Taxes."
21
<PAGE> 26
MARKET RISK
We held no derivative instruments as of December 31, 1999. We are exposed
to market fluctuations in foreign currency exchange and repatriation, interest
rates and commodity pricing. The nature of each is as follows:
FOREIGN CURRENCY EXCHANGE AND REPATRIATION
We currently have international operations in the PRC through the Joint
Venture. The currency of exchange is U.S. dollars for all current international
transactions. Although the PRC controls the rate of exchange for the Renminbi, a
devaluation or free market valuation could impair the Joint Venture's ability to
make payments for products sold or services rendered. In the PRC, we expect to
continue to reinvest all monies earned as net income of the joint venture for
the foreseeable future. The PRC may restrict the payments under the Joint
Venture. As a result, we might not be able to receive distributions from the
Joint Venture in the future even if they are needed to meet obligations of our
business or would be better employed in uses of our business outside of the PRC.
INTEREST RATES
We have invested and expect to invest excess funds in money market accounts
in U.S. financial institutions. Currently, we have no outstanding borrowings but
expect to sign financing agreements during the second calendar quarter of 2000.
We expect that these loans will be in the form of a term loan at a fixed
interest rate and a short term loan which will fluctuate with the LIBOR rate. We
do not currently plan to hedge against the fluctuation in LIBOR.
COMMODITY PRICING
We do not hedge against price fluctuation in the commodities used in the
manufacturing of its product. We will reevaluate this policy as needed
commensurate with the risk inherent in the business.
QUARTERLY RESULTS OF OPERATIONS
The unaudited pro forma quarterly results of operations for calendar 1999
are shown below. The information for each quarter has been prepared on
substantially the same basis as the audited statements included in other parts
of this prospectus and, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results of operations for such periods.
22
<PAGE> 27
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.......................... $ -- $ -- $ -- $ 209
Costs and expenses:
Cost of revenues................ -- -- -- 914
Administrative and selling...... 459 759 587 867
Depreciation and amortization... 22 51 68 86
Research and development........ 496 677 644 692
------ ------- ------- -------
Total operating costs
and expenses.......... 977 1,487 1,299 2,559
------ ------- ------- -------
Loss from operations.............. (977) (1,487) (1,299) (2,350)
Interest income, net.............. (15) 53 42 39
Equity in net loss of affiliate... -- -- -- (36)
Other expense..................... -- (1) -- (3)
------ ------- ------- -------
Loss before income tax benefit.... (992) (1,435) (1,257) (2,350)
Income tax benefit................ (111) -- -- --
------ ------- ------- -------
Net loss.......................... (881) (1,435) (1,257) (2,350)
Preferred stock dividends......... -- -- -- (22)
Net loss -- common shareholders... $ (881) $(1,435) $(1,257) $(2,372)
====== ======= ======= =======
Basic and diluted loss per
share........................... $(0.32)(a) $ (0.26) $ (0.22) $ (0.41)
====== ======= ======= =======
Basic and diluted shares
outstanding..................... 2,778(a) 5,528(b) 5,722(b) 5,722(b)
====== ======= ======= =======
</TABLE>
- ------------------------
(a) Represents the pro forma shares and loss per share assumed to be outstanding
based on the number of shares outstanding immediately after our spin-off
from FuelCell.
(b) Due to losses we have incurred, dilutive instruments, consisting of shares
of Series A Preferred Stock, options and warrants, have been excluded from
diluted shares. At June 30 and September 30, 1999, there were outstanding
options exercisable into 556,664 and 625,098 shares of common stock,
respectively. At December 31, 1999, there were 264,000 shares of Series A
Preferred Stock convertible into 960,000 shares of common stock, related
warrants exercisable for 595,268 shares of common stock and options
exercisable for 627,098 shares of common stock.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1999 was $5.8 million compared to a working
capital deficit of $905,000 at December 31, 1998. Cash was $6.1 million at
December 31, 1999, compared to $1,000 at December 31, 1998. In 1998, we were a
part of FuelCell and the balance sheet was an allocation of the FuelCell
consolidated balance sheet. Receivables, inventories and current liabilities
directly associated with FuelCell's battery business group were carried on the
battery group's balance sheet, but only a nominal cash balance of $1,000 was
allocated to assets.
To continue to meet our operating and capital requirements, we completed a
private placement offering in December 1999, raising $6.1 million, net of
expenses. We believe the net proceeds from the private placement and the
proceeds to be received from this offering will be sufficient to support our
planned operations for at least the next 12 months.
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<PAGE> 28
We are currently negotiating with state agencies and private financial
institutions in order to secure up to approximately $8.0 million in borrowings
in order to provide adequate financing and capital for opportunities or
contingencies.
It is our intention to outfit a facility in the United States with one
automated line of production in 2000 that, in addition to our other corporate
capital needs, is expected to require capital expenditures of approximately $8.0
million in 2000. We expect, but are not committed, to add a second automated
production line in 2001 at a cost of approximately $8.0 million. We have also
committed to investing approximately $3.0 million into the Joint Venture in 2000
in order to support our share of its expansion.
Our cash requirements will vary depending upon a number of factors, many of
which are beyond our control, including the demand for our products, the efforts
and success of our licensees and joint venture partners in developing and
marketing products incorporating our battery technology, the development of
battery markets, the level of competition that we face, our ability to develop,
market and license new products and our ability to effectively manage operating
expenses. Over time, we expect to continue to enter into license agreements and
to participate in joint manufacturing ventures.
Prior to having been spun off from FuelCell, we obtained all of our funding
from FuelCell. FuelCell provided funding for all battery research activities
under its research and development expense budget. On February 5, 1999, we
entered into a loan agreement pursuant to which we borrowed $1.6 million from a
bank and $300,000 from FuelCell for working capital and proposed capital
expenditures secured by all of our tangible and intangible personal property.
Repayment of the bank loan was guaranteed by FuelCell. In April 1999, we
received $7.8 million of net proceeds from the rights offering (after deducting
underwriting discounts and fees), including funds received from the sale of
unsubscribed shares pursuant to an agreement with the underwriters. A portion of
the net proceeds was used to pay in full the outstanding principal and interest
under the bank loan and the line of credit from FuelCell, and those agreements
were terminated in April 1999.
We have entered into a services agreement with FuelCell to provide us with
certain management and administrative services and office, research and
development and manufacturing support facilities and services. The net fees
which we paid to FuelCell pursuant to the services agreement were $67,000 and
$378,000 for the two months ended December 31, 1999 and the year ended October
31, 1999, respectively. These amounts exclude certain services billed on the
basis of usage, such as purchasing, analytical lab, microscope analysis, machine
shop and drafting. These amounts reflect FuelCell's additional costs related to
providing these services, and will decline as we bring those functions in-
house. We presently expect that these services will be provided by FuelCell
until the quarter ended September 30, 2000.
YEAR 2000
The "Year 2000" issue referred to the risk of disruptions of operations
caused by the failure of computer-controlled systems, including systems used by
third parties, to properly recognize date-sensitive information when the year
changed from 1999 to 2000. During the year ended December 31, 1999, we installed
new software as a part of an ongoing project to upgrade our financial and
management information systems. The cost of upgrading the software occurred in
the normal course of business and was not material to our results of operations
or financial condition.
We have not experienced any significant business disruptions due to year
2000 issues causing processing errors in our systems, or a third party's
systems, including the period of operation after January 1, 2000.
24
<PAGE> 29
BUSINESS
OVERVIEW
We have developed the first rechargeable nickel-zinc battery with
commercially acceptable cycle life. We are introducing this product to domestic
and international markets. We believe that our patented, independently tested
and proven technology is superior to the competing battery technologies in our
target markets. During 2000, we intend to manufacture and sell our rechargeable
batteries principally in two premium markets:
- The scooter market, which we estimate to have 1999 worldwide sales of
approximately 6 million new gas and electric powered scooters; and
- The electric trolling motor market, primarily focused on sport fishing
boats, which we estimate to have 1999 sales of approximately 3 million
batteries.
The Joint Venture is producing smaller batteries for the scooter market in
Xiamen, PRC. We intend to produce larger batteries in the United States for use
with trolling motors. The Joint Venture has received its first commercial order
from an unaffiliated scooter manufacturer to supply batteries for 1,500
scooters. We expect the Joint Venture to begin shipping these batteries during
the second quarter of 2000.
We are focusing our marketing efforts on specialty applications where our
technology has significant competitive advantages and where the channels of
distribution are relatively narrow, such as the scooter and the trolling motor
market. During the initial product launch of scooter batteries, we believe that
the Joint Venture will effectively and quickly generate high volume sales to
scooter manufacturers in geographically diverse markets.
We believe our batteries have a variety of other applications. We have
developed and are prepared to market batteries for lawn equipment. We are
currently developing batteries for neighborhood electric vehicles and electric
bicycles. In addition, we intend to develop batteries for additional
applications, such as uninterruptible power supplies, which use both nickel-zinc
and alternative chemistries.
OUR PRODUCTS
Our proprietary nickel-zinc rechargeable battery is the result of over 30
years of research and a substantial investment in the development of advanced
battery technologies. We believe that our technology resulting from this
investment has created significant barriers for competition to enter the market.
Our manufacturing process and patented technology allow us to produce batteries
with the following unique combination of characteristics:
- High specific energy and specific power content relative to the weight of
the battery;
- Sustained performance at high depths of discharge over the life of the
battery;
- Low material costs;
- Maintenance free, sealed unit construction; and
- Recyclable and environmentally acceptable for landfill disposal.
These characteristics combine to result in a high-power, low-weight,
low-maintenance battery with a lower lifetime cost when compared to other
technologies in our target markets.
VERIFICATION OF OUR TECHNOLOGY
From June 1999 to February 2000, JBI Corporation, an internationally
recognized independent testing laboratory, conducted a discharge test on two of
our batteries under
25
<PAGE> 30
controlled conditions. JBI repeatedly discharged 80% of the full energy of our
batteries. At the conclusion of the test in February 2000, our batteries had run
for over 500 cycles and the batteries' capacity remained at over 80% of the
original strength. Each cycle is one discharge and one charge. We believe that
this independent test result is evidence of our success in developing the first
commercially viable nickel-zinc battery.
During 1999, the Nan Ya Plastics Division of Formosa Plastics Corporation
conducted an internal test program for our nickel-zinc battery. The objective of
its testing was to confirm our claims of performance and cycle life. The testing
achieved over 600 cycles completed at an 80% depth of discharge.
In late 1999, the Nan Ya Plastics Division submitted one of our batteries
to the Taiwan Government Laboratory for testing in accordance with the
Government of Taiwan Incentive Standard for Electric Scooters. This test
simulates a severe driving environment for a scooter. The results of this test,
completed in December 1999, showed that our battery in simulation exceeded
14,000 kilometers. As a result, we believe scooter manufacturers installing our
battery will receive the highest subsidy allowed under Taiwan government
regulations for the year 2000.
Currently, additional testing of our batteries is being conducted by
potential customers and other independent sources.
MARKET OPPORTUNITY
In most deep discharge applications where the battery functions as the
primary power source, we believe our nickel-zinc batteries will offer superior
performance and lower lifetime cost than any other battery chemistries.
THE SCOOTER MARKET
We estimate that in 1999 approximately 6 million new gas and
electric-powered scooters were sold worldwide. The scooter market primarily
exists in the PRC, Southeast Asia, Japan and Europe. Of these sales of new
scooters, we estimate that approximately 5% of these scooters were electric
powered. The scooters which will initially use our technology will require a
battery which will be priced at approximately $900. Within the scooter market,
we expect that the substantial majority of our sales will be direct sales to
scooter manufacturers, with a small aftermarket for battery sales directly to
consumers.
The scooter market is a good fit for our technology because of the
particular characteristics of our batteries. Electric scooters require a power
source capable of providing adequate acceleration and load carrying through high
energy content at a low weight. Our technology enables scooter manufacturers to
incorporate a high energy power source relative to the weight of the battery.
The deep cycle capability of our technology provides significantly longer total
range than lower cost technologies. We believe the cost of ownership of our
battery over its entire life is less than other available technologies.
We believe that the electric scooter market is expanding due to global
pollution concerns, increasing gasoline prices and restrictions on noise
pollution. For example, the government of Taiwan has asked that a minimum of 2%
of all new scooters produced be electric. Additionally, the Italian government
has provided for subsidies at the local and national level and has initiated
inner city travel restrictions for gas-powered engines.
THE TROLLING MOTOR MARKET
The electric trolling motor market exists almost exclusively in the United
States and specifically within the sport fishing industry. We estimate that
approximately 3 million lead acid batteries were sold in this market, priced at
$100 to $300, in 1999.
26
<PAGE> 31
We expect that our trolling motor batteries will be priced at approximately
$600. Our batteries will require a high-performance charger costing an
additional $100 to $300. We intend to offer a warranty which is superior to
existing warranties for trolling motor batteries.
Direct consumer sales make up 99% of the total trolling motor markets and,
therefore, we expect that our initial sales of trolling motor batteries will be
direct to the sport fisherman. In addition, we are working on building
relationships with premium boat manufacturers and expect that our market will
expand to include wholesale revenues. We believe, that due to the popularity of
sport fishing, many consumers are willing to spend in excess of $600 for a
premium trolling motor battery which will facilitate longer fishing and lower
maintenance costs. Our technology provides a deep discharge cycle life which
extends the total number of hours one can spend trolling. Other advanced
technologies such as lithium-ion and nickel-metal hydide are not practical in
this market due to their cost. Our maintenance-free design and fast-charge
capability also increase the value of our battery.
FUTURE MARKETS
Our technology lends itself to many other applications. We believe the
electric bicycle market, the majority of which is in the PRC and Japan, will
benefit from our technology. The same strengths that make the scooter market
accessible to our battery apply also to the electric bicycle market. We believe
that over 40 million bicycles are produced annually in the PRC, and a small
percentage of those are expected to be electric. Other potential applications
include lawn equipment, low-speed neighborhood vehicles and wheelchairs, the
general marine market (outside the trolling market) and uninterruptible power
supplies. Each of these markets varies in size from a few thousand units
annually for neighborhood electric vehicles to the estimated $1.5 billion market
in 1997 for uninterruptible power supplies. Our technology will be able to
address specialized segments of these markets well.
We expect to develop our technology to expand into additional markets as
opportunities arise. Certain states, including Arizona and California, are
strengthening environmental laws and granting tax breaks for purchasing electric
vehicles, and we expect this trend to continue. As the market for mass-produced
electric vehicles grows in the United States, we believe that we are well
positioned to be a major participant in this market.
BUSINESS STRATEGY
Our goal is to commercially introduce our battery technology to the motive
power market on a large scale. We intend to accomplish this by penetrating the
premium market segments particularly suited for our current products and, in
particular, the scooter and trolling motor markets. We intend to reach this goal
by leveraging our strengths to achieve the following specific benchmarks:
- Establish Evercel as a premium brand name in the motive power and
rechargeable battery markets;
- Create a manufacturing and distribution network capable of producing and
shipping our products globally;
- Sell scooter batteries directly to equipment manufacturers;
- Sell trolling motor batteries initially to the consumer to build brand
awareness and then to premium boat manufacturers;
- Continue to form strategic alliances such as joint ventures and licensing
relationships;
- License our technology to third parties in applications which are not
part of our core businesses; and
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<PAGE> 32
- Maintain our technical leadership and our technological market edge
through continued research and development of nickel-zinc batteries as
well as alternative battery chemistries.
We believe that we can achieve these benchmarks by leveraging three core
strengths of Evercel: our technology, relationships and management.
TECHNOLOGY
Through our focus on technical innovation in battery chemistry, we believe
we have created proprietary products that are particularly well suited for our
target markets. By modifying the preexisting technology relating to nickel-zinc
batteries, we have developed and patented unique technologies that will permit
scalable, high-volume manufacture of our rechargeable batteries. We believe our
batteries have longer cycle life, are lighter in weight and lower in cost than
comparable batteries currently available in our target markets. Despite the fact
that the basic characteristics of nickel-zinc technology have been known for
many years, our patents and proprietary production process create a significant
barrier of entry for potential competition in our chosen market. Our batteries
also have the additional advantage of lower environmental impact compared to
lead-acid or nickel-cadmium batteries.
RELATIONSHIPS
We believe that one of our greatest strengths lies in our relationships and
strategic alliances. To successfully commercialize our nickel-zinc technology,
we intend to pursue a range of battery markets whose performance requirements
match the attributes of our nickel-zinc batteries. However, since these markets
have diverse technical and manufacturing specifications driven by differing
applications, we will continue to rely on our relationships with our industry
partners.
In addition to the Joint Venture, we have created ties and licensing
arrangements with Formosa Plastics, one of the largest manufacturing companies
in Southeast Asia. We have also signed endorsement contracts with five
well-known bass fishing professionals in the United States who regularly appear
on television, both in competition and in instructional sport fishing programs.
We expect that these endorsements will generate support for our products in the
trolling motor market. Finally, we intend to continue to enter into joint
venture agreements and license our technology to companies with established
manufacturing or distribution capabilities in specific markets.
MANAGEMENT
Collectively, our management has over 80 years of experience in the
battery, electrochemical and consumer electronics industries. This experience
includes decades of research and development in batteries and consumer
electronics and the successful rollout of both power source and consumer
products. Our management has a proven track record of designing and constructing
domestic and foreign manufacturing facilities capable of scalable production of
consumer and technical products and then successfully marketing those products
on a global basis.
HISTORY OF EVERCEL AND OUR TECHNOLOGY
Our products are the culmination of decades of research in nickel-zinc
battery technology. The rechargeable nickel-zinc battery was first patented in
1923, but until now the technology has never been commercially viable. During
the early 1980's, extensive research and development efforts by other
researchers to develop a nickel-zinc battery were not successful due to
unacceptably short battery cycle life caused by dendrite formation and the
solubility of the zinc electrode.
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<PAGE> 33
We solved the short cycle life problem with our proprietary cell consisting
of layers of positive (nickel) electrodes and negative (zinc) electrodes
separated by both electrolyte absorptive layers and microporous separator
layers. By sealing the battery cell and reducing the solubility of the zinc
electrode, we have increased the cycle life of our batteries to commercially
viable levels. This is evidenced by independent tests that have achieved more
than 500 cycles per battery under deep discharge test standards. We believe that
the average user will realize superior cycle life performance under normal
operating conditions. Our patents reflect the methods we use to reduce the
solubility, as well as the construction features of our sealed cell technology.
Evercel operated as the battery business group of FuelCell between 1970 and
1999. FuelCell's main business was the development of carbonate fuel cells,
which were designed for stationary power systems. In February 1999, FuelCell
made a tax-free distribution of our stock to its shareholders, which resulted in
our current structure as an independent, publicly held company.
While we were part of Energy Research Corporation, we focused primarily on
the development and engineering of electricity production and storage by
electrochemical means. Prior to becoming independent, our product sales
emphasized high-performance battery cells for the submarine, aerospace and
military markets where application needs and engineering excellence outweighed
the concerns of cost. We pursued several battery technologies, including
silver-zinc, nickel-cadmium, and nickel-zinc. During the mid-1970's to early
1980's, we manufactured high energy density silver-zinc batteries for submarines
and submersibles for both main propulsion and auxiliary power. During the
1980's, we were contracted by the United States Navy to develop nickel-cadmium
batteries for nuclear submarines as well as the United States Department of
Energy to develop nickel-zinc batteries for electric vehicles. Historically, we
relied on corporate and government contracts for our revenue and as the source
of internal research and development funds.
We expect to continue working on improving the characteristics of our
nickel-zinc batteries and are pursuing research and development of other
rechargeable zinc battery technologies beyond our current nickel-zinc battery
technology.
COMPETITIVE BATTERY TECHNOLOGIES
There are two types of batteries, disposable and rechargeable batteries.
Our nickel-zinc batteries are rechargeable. Rechargeable batteries can often be
used in battery applications where disposable batteries are most commonly
employed. Disposable batteries are, in most cases, too costly for widespread use
in applications currently utilizing rechargeable batteries.
No one rechargeable battery system is ideal for all applications. There are
numerous performance variables that vary in importance by application. Important
variables in our markets include:
- Specific energy (energy capacity per unit weight);
- Specific power (how rapidly energy can be drawn from the battery relative
to its weight);
- Cycle life (which varies with discharge rate and depth of discharge,
response to ambient temperatures, rate of self-discharge, charged and
discharged shelf life, size, shape and design);
- Energy density (energy capacity per unit volume); and
- Cost of materials per kilowatt hour.
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<PAGE> 34
We believe nickel-zinc technology is suitable for our target markets
because of its potential to compete well in several rechargeable battery
applications. The following chart illustrates the primary performance
characteristics by which batteries are judged in our target markets and compares
nickel-zinc to certain other competitive battery technologies:
BATTERY PERFORMANCE CHARACTERISTICS
<TABLE>
<CAPTION>
NICKEL-
NICKEL-ZINC LEAD-ACID NICKEL-CADMIUM METAL HYDRIDE LITHIUM-ION
----------- --------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
SPECIFIC ENERGY
(WH/KG)............. 35-65(1) 20-30(1) 20-40(1) 40-65(1) 90(1)
53(2)
SPECIFIC POWER
(W/KG).............. 280(2) 200(4) 260(3) 190(3) Low(3)
CYCLE LIFE (NUMBER OF
DEEP DISCHARGE
CYCLES)............. 600(2) 250(1)-1,000(3) 300-2,000(1) 300-600(1) 60-300(3)
ENERGY DENSITY
(WH/L).............. 65-130(1) 40-80(1) 40-100(1) 105-185(1) 200(1)
85(2)
COST OF MATERIALS
($/KWH)............. #250(4) #50(5) #300(5) #500(5) #800(5)
</TABLE>
- ------------------------
(1) Handbook of Batteries, Edited by D. Linden (Second Edition), McGraw-Hill
Publisher (1995).
(2) Nan Ya Test Report, dated December 1999, for 12-volt module (7-cell
battery).
(3) Battery Report on Power Sources (DSMA Battery Committee) (1997).
(4) Evercel estimate of costs of materials for nickel-zinc batteries are based
on full-scale commercial production. Currently, our costs are higher than
those indicated. We cannot assure you that we will be able to achieve these
estimated costs for nickel-zinc batteries.
(5) Evercel estimate.
Our technology is well suited to our target markets due to the combination
of the characteristics listed in the table above. Specific energy provides extra
range or run time given a realistic weight limit in a scooter or boat. Specific
power provides the necessary acceleration for the vehicle to meet the
expectations of the user or, in a marine application that does not require
acceleration, the ability of the trolling motor to pull reliably in heavy wind
or current. Energy density provides extra range or run time given a realistic
size and configuration in a scooter or boat.
In the scooter and trolling markets, we believe the higher costs of our
nickel-zinc battery are justified by its cycle life. Cycle life directly affects
the economics of paying more for a premium battery. Longer cycle life correlates
to more miles in total range for a scooter or more total hours of trolling over
the life of the battery. We expect that our battery will generally perform for
at least five years when usage is measured by average fishermen. We believe that
lead-acid trolling batteries generally require replacement annually.
In addition to our nickel-zinc technology, the market for rechargeable
batteries consists of lead-acid, nickel-cadmium, nickel-metal hydride and
lithium-ion batteries.
- Lead-acid batteries are the most common rechargeable batteries and are
primarily used in automobile starting, uninterruptible power supplies and
motive power
30
<PAGE> 35
applications such as golf carts and fork lifts. Although lead-acid is the
lowest cost rechargeable technology currently available, these batteries
are characterized by low cycle life and low energy density. In addition,
these batteries must be recycled and are harmful to the environment.
- Nickel-cadmium is the oldest commercialized rechargeable battery system
in the market, primarily used in power tools and uninterruptible power
supplies. Nickel-cadmium is considered the most powerful and robust
technology in the rechargeable battery marketplace. In the last decade,
nickel-cadmium 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.
- Nickel-metal hydride technology, primarily used in portable electronics,
including mobile phones and computers, offers high energy density
relative to nickel-cadmium. Although the metal hydride electrode is
considered environmentally preferable to cadmium, nickel-metal hydride
cells and batteries typically carry a cost premium that detracts from the
appeal of this technology.
- Lithium-ion batteries, primarily used in portable electronics, offer the
highest energy density of all commercial rechargeable technologies
available today. On a weight basis, the technology offers two to three
times the energy content of nickel-cadmium and offers higher voltage than
nickel-metal hydride or nickel-cadmium technologies. However, lithium-ion
cells and batteries are expected to continue to be more expensive than
our nickel-zinc technology.
COMPETITION
Competition in our markets continues to be, and is expected to remain,
intense. Competitors range from development stage companies to major domestic
and international companies, many of which have resources significantly greater
than ours. Several of these companies are attempting to develop commercial
nickel-zinc batteries; however, we believe that their technology is less mature
than ours.
In our target scooter and trolling motor markets, we expect to compete
against suppliers of rechargeable lead-acid and, to a lesser extent,
nickel-cadmium and nickel-metal hydride batteries. We are competing on the basis
of battery performance and economics, as well as stability, safety and
environmental impact considerations.
The scooter market is dominated by gasoline powered, internal combustion
engines. However, electric battery powered scooters are becoming popular with
regulators, manufacturers and consumers alike. Our largest competitors in the
battery market for scooters are Saft S.A. and Panasonic Corporation.
The trolling motor battery market is supplied primarily by Delco Battery
and Johnson Controls, Inc., who are producing and distributing lead-acid
batteries. The major drawbacks of these batteries as compared to our nickel-zinc
batteries are power retention, cycle life and ability to charge quickly relative
to cycle life.
We intend to compete only in the specialized markets, in which we believe
consumers are willing to pay a price premium for superior performance. Major
suppliers of these batteries include Johnson Controls, Inc. and Exide
Corporation. Several other battery manufacturers are attempting to develop and
market higher performance versions of lead-acid batteries. We believe it is
unlikely that those developments will match the performance of nickel-zinc
batteries.
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<PAGE> 36
ENVIRONMENTAL IMPACT
Nickel-zinc batteries are more environmentally acceptable than other
commonly available rechargeable battery systems. Nickel-zinc batteries are
recyclable. In addition, nickel-zinc batteries contain no cadmium or mercury,
which are difficult to dispose of under current environmental regulation.
Although our nickel-zinc battery does contain a limited amount of lead in the
negative electrode, it has passed Environmental Protection Agency testing and is
approved for disposal in public landfills. In addition, we anticipate little
waste generation and no wastewater effluents due to our simple manufacturing
process. We use electrode materials in dough form that can be reprocessed and
reutilized, thereby producing low levels of waste. We also use solvent in the
electrode production process that can be reclaimed, purified and reintroduced
into the manufacturing process with low levels of waste. Lead-acid batteries,
our principal competitors, are harmful to the environment and must be recycled.
SALES AND MARKETING
Our sales and marketing organization is composed at present of a U.S. based
marketing staff and an independent sales and marketing organization in the Joint
Venture. We expect to hire additional staff during 2000 to support our expanding
production capabilities.
We are focusing our general sales and marketing efforts in the following
areas:
- Generating direct sales to equipment manufacturers and distributors in
selected applications and geographical territories and launching the
trolling battery through a multi-channel approach directly to consumers;
- Developing joint venture partnerships for manufacturing and distribution
in applications and territories where we believe strategic partners can
improve our sales revenues; and
- Licensing our technology and know-how to strategic partners in
applications for businesses other than our core applications, such as
consumer electronics.
In the scooter market we are primarily focused on marketing directly to
equipment manufacturers. We have contacted and briefed most of the major scooter
companies in Italy and Taiwan as well as several smaller manufacturers on the
advantages of our nickel-zinc batteries. We have conducted demonstrations, tests
and evaluations for several manufacturers, some of which are ongoing.
With regard to the trolling motor market, we have engaged a team of five
top professional bass fishermen to endorse and represent our product in this
market. We expect to launch this product and commence sales in 2000. We have
purchased print and television advertising, scheduled for distribution in 2000,
targeted specifically at the bass fishing market. We expect that this effort
will create a demand outside sport fishing in other marine-related markets based
on word of mouth and advertising leakage. We expect that telephone sales and
sales through our web site will be the primary sales channels in 2000. In 2001,
we expect to approach a mass distribution partner to further penetrate the
equipment manufacturing market. We expect to distribute our products through
third party catalogs and outdoor and fishing stores in 2002 after we establish
our volume production capability.
We expect to license our technology in situations where there is a strong
barrier to market entry, such as high capital cost, difficult political
environment, or unique market positioning. In these cases, we will ensure that
the licensee has sufficient motivation to aggressively pursue the implementation
and sale of our technology in their market or technical niche. We will use
quotas, compensation for results and up-front payments to motivate our licensees
to actively pursue high-volume sales.
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<PAGE> 37
PARTNERSHIPS, JOINT VENTURES AND LICENSES
We benefit from two primary strategic alliances:
- The Joint Venture; and
- The Nan Ya License Agreement.
In connection with our spin-off from FuelCell in 1999, we entered into a
license assistance agreement with FuelCell in which we agreed to fulfill
FuelCell's obligations under the Joint Venture and a related license agreement
and the Nan Ya License Agreement, until FuelCell is able to transfer its rights
under those agreements to us. In return, FuelCell has agreed to transfer its
rights to us and to pay us all sums accruing to FuelCell. FuelCell and we have
initiated a joint effort to obtain the required transfer consents from the
appropriate parties.
THE JOINT VENTURE
In July 1998, FuelCell entered into the Joint Venture Agreement with Xiamen
Three Circles Company, Ltd., a government-owned manufacturing company located in
Xiamen, PRC. The mission of the Joint Venture is the manufacture and sale of
nickel-zinc batteries based on our technology and the sublicensing of that
technology to third parties. FuelCell received a 50.5% ownership interest in the
Joint Venture and Xiamen Three Circles received a 49.5% ownership interest. The
Joint Venture is managed by a seven member board of directors, four of whom are
elected by us and three of whom are elected by Xiamen Three Circles.
Under the related license agreement, the Joint Venture made an initial
payment to FuelCell of $3.0 million, which FuelCell reinvested in the Joint
Venture. We intend to invest an additional $3.0 million in the Joint Venture out
of the proceeds of this offering. We expect that Xiamen Three Circles will also
make a pro rata investment in the Joint Venture. As a result, we expect the
current ownership interests in the Joint Venture will not change. The Joint
Venture has contracted to pay FuelCell, which is obligated to pay us, a royalty
of 2.67% of the net sales of nickel-zinc batteries in the exclusive territory,
which includes the PRC, Taiwan, Hong Kong and Macao and 2.0% of the net sales in
the non-exclusive territory, which consists of other specified southeast Asian
countries. The Joint Venture is obligated to pay Xiamen Three Circles a royalty
of 1.33% of sales in the exclusive territory and 1.0% of sales in the
non-exclusive territory. The Joint Venture will allocate the first $3.0 million
of sub-license revenues to Xiamen Three Circles and then two-thirds of any
additional sub-license revenues to FuelCell and one-third to Xiamen Three
Circles. Currently, the Joint Venture is not a party to any sublicense
arrangements.
The Joint Venture Agreement provides for the distribution of revenue after
payment of all operating expenses and costs required by law. We do not expect
any distribution of revenues in the foreseeable future, but rather that excess
revenues will be reinvested in the Joint Venture.
In July 1998, as part of the Joint Venture arrangement, FuelCell, Xiamen
Three Circles and the Joint Venture entered into the Three Circles License
Agreement in which FuelCell licensed certain intellectual property to the Joint
Venture for the development, manufacture and sale of nickel-zinc batteries for
two applications in the PRC and other countries in Southeast Asia. In addition,
the Joint Venture may sublicense our technology to third parties in the PRC,
Hong Kong, Taiwan and Macao on a non-exclusive basis. The Joint Venture
Agreement has a term of 20 years and contains a standard termination clause.
Our responsibilities to the Joint Venture include purchasing machinery,
equipment and materials outside the PRC, marketing, sales and distribution of
batteries outside the PRC and
33
<PAGE> 38
handling United States immigration and export licensing matters. Xiamen Three
Circles' responsibilities include handling all legal and regulatory matters in
the PRC, obtaining suitable land and facilities in the PRC, and purchasing,
marketing, sales and distribution in the PRC.
THE NAN YA LICENSE AGREEMENT
In February 1998, FuelCell, Xiamen Three Circles and Nan Ya Plastics
Corporation of Taiwan, a subsidiary of Formosa Plastics Group, entered into a
technology transfer and license agreement, the Nan Ya License Agreement, in
which FuelCell licensed certain intellectual property to a separate joint
venture formed by Nan Ya and Xiamen Three Circles for manufacture and sale of
nickel-zinc batteries for electric vehicles and hybrid electric vehicles in the
PRC, Taiwan, Hong Kong and Macao on an exclusive basis and certain other
countries in Southeast Asia on a non-exclusive basis. After January 1, 2001,
either FuelCell or the Nan Ya joint venture may, at its election, cause the
license to become non-exclusive with respect to exclusive territory.
Under the Nan Ya License Agreement, FuelCell received an initial payment of
$1.5 million in 1998, prior to our spin-off from FuelCell. We believe that the
principal milestone conditions to a second payment of $2.0 million have been
satisfied and we anticipate payment in the second quarter of 2000. We do not
expect any further milestone payments to be made under the Nan Ya License
Agreement, other than the $2.0 million payment. In addition, FuelCell is
entitled to receive from the Nan Ya joint venture and under the license
assistance agreement is required to remit to us a 3% royalty on the net sales of
nickel-zinc batteries for a period of 10 years beginning from the first
commercial sales. If the license becomes non-exclusive, the royalty shall be
reduced to 1.5% of net sales. To date, no commercial sales have been made by the
Nan Ya Joint Venture.
MANUFACTURING AND RAW MATERIALS
Our manufacturing plan is to produce smaller batteries for use in scooters
and similar applications in Xiamen, PRC and larger batteries for use in marine
trolling motors, industrial utility vehicles and similar applications at a
facility in the United States. In the PRC, we are establishing a manual
production process due to the availability of relatively inexpensive labor. The
Joint Venture installed production equipment in a 32,000 square foot facility in
Xiamen, PRC which we believe, when fully operational, will enable annual battery
production capacity of an estimated 30,000 kilowatt hours, or the equivalent of
20,000 scooter batteries. The Joint Venture also plans to continue to acquire
additional manufacturing space and equipment in 2000 to allow for capacity of
90,000 kWh annually by January 2001.
Our primary facility in Danbury, Connecticut produces prototypes and
product samples and houses research and development and administrative
functions. We are negotiating to occupy manufacturing space in the United States
by the middle of calendar year 2000. The automated nature of the new facility
will enable us to reduce our reliance on relatively expensive domestic labor. We
expect the new facility will have the capability to produce 100,000 kWh, or the
equivalent of 100,000 trolling motor batteries, annually, per line of
automation. We expect to invest an estimated $8.0 million in each line of
automation and will require 20,000-30,000 square feet of manufacturing space per
line. Initially, we expect to install one line of automation in 2000. We will
construct the second line as needed and expect that, following this offering,
our existing working capital will be sufficient to complete both lines.
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<PAGE> 39
The following chart reflects expected manufacturing capacity of both
Evercel and the Joint Venture:
EXPECTED PRODUCTION CAPACITY BY DECEMBER 31, 2000
<TABLE>
<CAPTION>
MANUFACTURING LOCATION MARKET CAPACITY NUMBER OF BATTERIES
- ---------------------- -------- ----------- -------------------
<S> <C> <C> <C>
UNITED STATES.......................... Trolling 100,000 kWh 100,000
PRC.................................... Scooter 90,000 kWh 60,000
</TABLE>
While we expect to achieve and fully utilize our manufacturing capacity, no
assurance can be given that we will be able to do so. Even if we are able to
fully utilize our capacity, no assurance can be given that there will be
adequate demand for our products.
The automated facility will be designed to be flexible enough to produce
batteries for our different target markets in the United States. We will produce
different size batteries by combining different numbers of a common cell design
into varying combinations of cells in series and parallel arrangements. This
planned 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, we intend to progressively
automate production to further reduce production costs.
The chemical materials required to manufacture our nickel-zinc battery are
readily available from multiple sources in North America and the PRC. Certain
separator materials are only available from one U.S. supplier. Prices for both
nickel and zinc, the primary raw materials which are commodities, are subject to
market forces beyond our control. We do not currently utilize financial
instruments to mitigate risk of component prices.
BACKLOG
The Joint Venture has received an order from Taiwan EVT Technology Co.,
Ltd., an unaffiliated scooter manufacturer, to supply batteries and chargers for
1,500 scooters for a total price of $1.4 million. The Joint Venture expects to
begin shipping these batteries during the second quarter of 2000. The order to
the Joint Venture is subject to cancellation and is not necessarily indicative
of future revenues.
PATENTS AND TRADEMARKS
We have nine United States patents which, combined, have an average of 10
years remaining before expiration. Our patents expire at various times through
2017. We do not believe that the expiration of any of our earlier patents will
have a material adverse effect on our business. We have applied to use "Evercel"
as a trademark. We seek to protect our technology through U.S. patents and trade
secrets and other agreements. Many of these patents are also filed in Canada,
Europe, Japan, and the PRC.
RESEARCH AND DEVELOPMENT
We continue to improve our advanced battery technologies by conducting
additional research and development. Research and development expenses were
$897,000 in the year ended October 31, 1997, $1.8 million in the year ended
October 31, 1998, $2.4 million in the year ended October 31, 1999 and $451,000
in the two months ended December 31, 1999.
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<PAGE> 40
EMPLOYEES
At present, we employ a staff of approximately 30 people. Approximately
seven full-time employees and 10 temporary manufacturing workers operate our
Danbury, Connecticut manufacturing facility. This number is expected to increase
with planned automation and accelerated production. We consider relations with
our employees to be good.
The Xiamen Joint Venture employs approximately 50 people, most of whom are
engaged in the manufacturing process.
FACILITIES
We lease approximately 28,500 square feet of space in Danbury, Connecticut,
that is used as our corporate headquarters. The lease term is five years,
expiring in December 2003, with an option for us 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.
We expect to move into a new facility in which we will install two
automated production lines. These lines will each have the capability to produce
100,000 kWh, or the equivalent of 100,000 trolling motor batteries annually.
Initially, we expect to install one line of automation in 2000. We will
construct the second line as needed and expect that our existing working capital
will be sufficient to complete both lines.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 41
MANAGEMENT
The following table sets forth information with respect to our executive
officers, directors and certain key employees:
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert L. Kanode..................... 49 President, Chief Executive Officer and
Director
Allen Charkey........................ 58 Executive Vice President, Chief Operating
Officer and Director
Gregory W. Schulte................... 33 Chief Financial Officer, Treasurer and
Secretary
Jerry D. Leitman..................... 57 Chairman
Warren D. Bagatelle.................. 61 Director
Robert Gable......................... 69 Director
James D. Gerson...................... 56 Director
John H. Gutfreund.................... 70 Director
Thomas L. Kempner.................... 72 Director
William A. Lawson.................... 65 Director
</TABLE>
Robert L. Kanode has been our President, Chief Executive Officer and a
director since April 1999. Prior to joining us, Mr. Kanode served as President
of Varta Batteries North America, a battery manufacturer, from 1995 to 1999. Mr.
Kanode also held numerous positions with IBM, including the IBM ThinkPad team
and other permanent and consulting positions focused on electronic manufacturing
and operations.
Allen Charkey has been a director since our formation and Executive Vice
President and Chief Operating Officer since October 1998. He joined FuelCell in
1970 and held various positions at FuelCell and was Vice President of the
Battery Group from January 1997 until October 1998. Prior to joining FuelCell,
Mr. Charkey was employed by Yardney Electric Corporation, a battery
manufacturer, from 1963 to 1970 as a battery scientist.
Gregory W. Schulte has been our Chief Financial Officer, Treasurer and
Secretary since February 2000 and was our Controller from September 1999 through
January 2000. Mr. Schulte is a certified public accountant. Mr. Schulte was
previously Manager of Planning and Analysis for Quest Diagnostics Corporation, a
clinical laboratory, from 1998 to 1999. Prior to that, Mr. Schulte was a Senior
Business Analyst at Bic Corporation, a consumer products company, from 1997 to
1998. Mr. Schulte was a senior accountant at GTE Corporation, a provider of
telephone communications services, from 1995 to 1997.
Jerry D. Leitman has been our Chairman since our formation. He has been
President, Chief Executive Officer and a Director of FuelCell 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
company, 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., a manufacturer serving the aerospace and defense
markets.
Warren D. Bagatelle has been a director since September 1998. He has been a
Managing Director of Loeb Partners Corporation, a financial services company,
and a general partner of Loeb Investors Co. LXXV, an affiliate of Loeb Partners
Corporation, an investment company, since 1988. Mr. Bagatelle is a director of
FuelCell.
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<PAGE> 42
Robert Gable has been a director of the Company since November 1999. He was
Chairman of the Board and Chief Executive Officer of Unitrode Corporation, a
manufacturer of power source and battery control technology, between 1990 and
1998.
James D. Gerson has been a director of the Company since September 1998. He
has been a Vice President of Fahnestock & Co., Inc., a financial services
company, since March 1993. Mr. Gerson also serves as a director of FuelCell, Ag
Services of America, Inc., a company financing farm inputs, and American Power
Conversion Corp., a company producing uninterruptible power supplies.
John H. Gutfreund has been a director since January 2000. He is the former
Chairman and Chief Executive Officer of Salomon Brothers Inc. and former Vice
Chairman of the New York Stock Exchange. He is President of Gutfreund & Company,
Inc., an investment banking and consulting firm. He is also a director of AMBI,
Inc., a manufacturer of nutrition products; Ascent Assurance, Inc., an insurance
holding company; Baldwin Piano & Organ Company, Inc., a musical instruments
company; Foamex International, Inc., a manufacturer of plastic foam products;
LCA-Vision, Inc., a provider of services to outpatient eye surgery facilities;
and Universal Bond Fund.
Thomas L. Kempner has been a director 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, an investment company. Mr. Kempner is a director of Alcide
Corporation, an agricultural products company, IGENE Biotechnology, Inc., a
microbiology products company, Intermagnetics General Corporation, CCC
Information Services Group, Inc., a claims management company, Insight
Communications Company, Inc., a cable television systems operation, and Roper
Starch Worldwide, Inc. and director emeritus of Northwest Airlines, Inc. Mr.
Kempner is a director of FuelCell and was the Chairman of the Board of Directors
of FuelCell from March 1992 to August 1997.
William A. Lawson has been a director since September 1998. He has been
President of W.A. Lawson Associates, an industrial and financial consulting
firm, since 1987. Mr. Lawson is Chairman of the Board of Directors of Newcor,
Inc., a manufacturer of motor vehicle parts, and Mr. Lawson was the Chairman and
Chief Executive Officer of Bernal International Inc. (formerly, Atlantic Eagle
Inc.) a manufacturer of industrial marketing and equipment, from 1997 to 1999.
Mr. Lawson is a director of FuelCell.
KEY EMPLOYEES
Glen V. Bowling has been our Vice President of Marketing and Sales since
November 1999 and our Director of Marketing and Sales since 1998. Prior to
joining us, 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. From 1991 to 1997, he was Director of Sales and Marketing for the Lithium
Battery Division in Valdese, North Carolina, where he was responsible for all
commercial activities for the facility.
Dr. Chao Ming Huang has been our Vice President of Far East Operations
since July 1999 and has served as a director of Xiamen Three Circles Battery
Corporation since its formation in August 1998 and General Manager since January
1999. He joined FuelCell in 1994 where he held various positions, including
Director for Advanced Materials Research.
CLASSIFICATION OF THE BOARD AND BOARD COMMITTEES
Our Board of Directors has recently been divided into three classes. Each
Board member will be elected for a term of three years. Currently, it is
intended that Messrs. Kempner and Lawson be elected at the annual meeting of
shareholders to be held May 2000 for terms
38
<PAGE> 43
expiring in 2003. The terms of Messrs. Bagatelle, Gerson and Gable will expire
in 2001 and the terms of Messrs. Leitman, Charkey, Kanode and Gutfreund will
expire in 2002.
Our Board has established an audit committee and a compensation committee.
Our audit committee consists of three independent Directors. Currently, our
audit committee consists of Messrs. Bagatelle (Chairman), Lawson and Gerson. The
audit committee selects the firm of independent accountants that will audit our
financial statements, reviews the scope and result of the audit and other
services provided by our independent auditors and reviews and evaluates our
internal control functions.
Our compensation committee consists of at least three disinterested
Directors who are non-employee directors. Currently, our compensation committee
consists of Messrs. Lawson (Chairman) and Gerson and the Board must appoint a
third Director. The compensation committee reviews, approves and recommends to
the Board of Directors the terms and conditions of incentive bonus plans
applicable to corporate officers and key management personnel, reviews and
approves the annual salary of our chief executive officer, and administers our
1998 Equity Incentive Plan.
DIRECTOR COMPENSATION
Prior to April 1, 2000, we paid an annual retainer of $12,000 to each
director who was not an employee of the Company. Since April 1, 2000, we pay
each non-employee director an annual retainer of $10,000. In addition, we
granted each non-employee director an option to buy 4,000 shares of our common
stock at the fair market value on the day the option is granted. The options
vest over four years. The Chairman and each committee chair are paid an
additional $4,000 and $2,000, respectively, per year. We reimburse each
non-employee director for out-of-pocket expenses incurred in connection with
attending board meetings.
Pursuant to an Option Agreement entered into by FuelCell and Mr. Leitman in
1997, FuelCell granted to Mr. Leitman options to acquire 375,000 shares of
FuelCell common stock. In connection with our spin-off from FuelCell, we have
agreed to issue to Mr. Leitman one share of our common stock for every 2.25
shares of FuelCell common stock which he purchases pursuant to his exercise of
the FuelCell options. The FuelCell options began to vest in August 1998 in an
initial installment of 150,000 shares and annual installments of 75,000 shares
thereafter and will become fully vested in August 2001. FuelCell and we have
agreed to allocate the exercise price of the FuelCell options between us based
upon the relative fair market values of the FuelCell common stock and our common
stock at the time of exercise.
We also granted Mr. Leitman in January 1999 an option to acquire 166,666
shares of our common stock exercisable at $3.00 per share. This option is
exercisable to acquire 66,666 vested shares of our common stock and 100,000
restricted shares. Of the restricted shares, 33,333 shares have vested as of the
date of this prospectus, an additional 33,333 shares will vest in August 2000,
and the balance will vest in August 2001. Mr. Leitman exercised this option in
March 1999 and issued to us a nonrecourse note in the amount of $300,000, for
total exercise price of the restructed shares. The note is payable in equal
installments on the remaining vesting dates. Until the applicable installment of
the note is paid, the shares will remain restricted. In the event the note is
not fully paid by August 4, 2001, the shares for which payment has not been made
will be forfeited to us for no consideration.
We have also agreed to register, under the Securities Act, the shares of
common stock to be issued to Mr. Leitman pursuant to the exercise of these
options.
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<PAGE> 44
EXECUTIVE COMPENSATION
The table below sets forth information concerning the compensation we paid
to our chief executive officer and the other executive officer whose salary and
bonus exceeded $100,000 in 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARD
------------
ANNUAL COMPENSATION SECURITIES
------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
--------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert L. Kanode(1).......... 1999 $187,512 $45,000(2) 200,000 $ 1,154(3)
President and Chief
Executive Officer
Allen Charkey(4)............. 1999 150,000 40,500(2) -- 5,850(3)
Executive Vice President 1998 122,512 18,000 66,666 14,500(3)
and Chief Operating 1997 116,168 9,000 -- 11,265(3)
Officer
</TABLE>
- ------------------------
(1) Mr. Kanode joined us as President and Chief Executive Officer on April 5,
1999.
(2) Of these amounts, in the case of Mr. Kanode, $25,000 and, in the case of Mr.
Charkey, $15,000, were earned in 1999 and paid in 2000.
(3) Represents employer contributions to qualified pension plans and Section
401(k) plans. In November 1999, we adopted a Section 401(k) Plan. Prior to
the spin-off, Mr. Charkey received benefits from the FuelCell Defined
Contribution Pension Plan and employer contributions to the FuelCell Section
401(k) Plan.
(4) Includes compensation received as an employee of FuelCell prior to February
16, 1999.
OPTION GRANTS IN LAST YEAR
The following table sets forth information regarding options granted in the
year ended December 31, 1999 to the executive officers named in the Summary
Compensation Table above. Amounts represent the hypothetical gains that could be
achieved from the respective options if exercised at the end of the option term.
These gains are based on assumed rates of stock appreciation, mandated by the
rules of the Securities and Exchange Commission, of 5% and 10% compounded
annually from the date the respective options were granted to their expiration
date based upon the grant price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SHARES PERCENTAGE PRICE APPRECIATION FOR
UNDERLYING OF TOTAL EXERCISE OPTION TERM
OPTIONS OPTIONS PRICE EXPIRATION ----------------------
NAME GRANT (#) GRANTED ($/SHARE) DATE 5% 10%
- ---- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Kanode...... 200,000(1) 43.8% $3.00 3/23/09 $337,337 $956,245
Allen Charkey......... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Options vest equally over four years beginning on March 23, 2000.
40
<PAGE> 45
1999 YEAR-END OPTION VALUES
The following table contains information about the aggregate value of the
unexercised options for our common stock that were held at the end of 1999 by
the executive officers named in the Summary Compensation Table above. No options
were exercised by these officers in 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert L. Kanode................... -- 200,000 $ -- $1,875,000
Allen Charkey...................... 33,333 33,333 312,470 312,470
</TABLE>
EMPLOYMENT, CHANGE OF CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
We have entered into an employment agreement with Robert L. Kanode, our
President and Chief Executive Officer. Pursuant to the agreement, Mr. Kanode
receives a minimum annual salary of $250,000 and a bonus of up to 40% of his
annual salary based on performance objectives established by the Compensation
Committee of the Board of Directors. Mr. Kanode will receive continued salary
and benefits for a period of one year if we terminate his employment without
cause. Mr. Kanode also holds options to purchase 200,000 shares of common stock
at $3.00 per share, of which 25% vest each year in four annual installments. If
we experience a change of control, all of the options will automatically vest.
We have also entered into an employment agreement with Allen Charkey, our
Executive Vice President and Chief Operating Officer. Pursuant to the agreement,
Mr. Charkey receives an annual salary of $150,000. Mr. Charkey will receive
continued salary and benefits for a period of one year if we terminate his
employment without cause. Mr. Charkey also holds options to purchase 66,666
shares of common stock at $3.00 per share. Of these options, 33,333 are vested
and the balance vest in equal installments in 2000 and 2001. If we experience a
change of control, all of the options will automatically vest.
STOCK OPTION PLAN
Our Board of Directors has adopted the 1998 Stock Option Plan. The Plan
provides for the issuance of options to purchase up to 600,000 shares of common
stock, all of which have been granted to our officers, key employees and
Directors, of which options to purchase 177,334 shares have been exercised. An
additional 172,000 options have been awarded by the Board subject to shareholder
ratification of an increase in the number of options available under the Plan.
Our management intends to recommend to the Board of Directors, subject to
ratification by our shareholders, that the number of options under the Plan be
increased to 1,300,000. Under the terms of the Plan, the Board of Directors is
authorized to grant incentive stock options and nonqualified options and stock
appreciation rights to our officers and key employees and may grant nonqualified
options and stock appreciation rights to members of the Board of Directors and
consultants.
The transferability of stock options granted under the Plan is restricted.
The Plan states that the option exercise price shall be fixed by the Board of
Directors but, in the case of incentive stock options, shall not be granted at
an exercise price less than 100% of the fair market value of the shares subject
to the option on the date the option is granted. The Board determines the
vesting restrictions applicable to each grant under the Plan. Except for options
granted to Mr. Charkey, all stock options that have been granted under the Plan
to date are exercisable commencing one year after grant at the rate of 25% each
year.
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<PAGE> 46
RELATED PARTY TRANSACTIONS
A number of our directors are also directors of, and have a significant
investment in, FuelCell. Accordingly, these directors may be deemed to have an
indirect interest in certain transactions with us because of their relationship
with FuelCell.
We entered into certain agreements with FuelCell, including a distribution
agreement, a tax sharing agreement, a services agreement and the license
assistance agreement for the purpose of defining our ongoing relationship with
FuelCell and to provide certain services during the transition. The distribution
agreement provides for the transfer of the business and principal assets of the
battery business group to us and the assumption by us of certain liabilities and
obligations relating to that business.
The tax sharing agreement defines the rights and obligations of FuelCell
and us with respect to filing of returns, payments, deficiencies and refunds of
federal, state and other income, franchise or certain other taxes relating to
our operations after the spin-off. The tax sharing agreement is intended to
allocate the tax liability of FuelCell between FuelCell and us as if we were
separate taxable companies.
The services agreement sets forth the terms under which FuelCell provides
to us certain management and administrative services, as well as the use of
certain office, research and development and manufacturing and support
facilities and services. We paid FuelCell $378,000 under this agreement in the
fiscal year ended October 31, 1999 and $67,000 for the two months ended December
31, 1999.
The license assistance agreement is intended to transfer to us FuelCell's
benefits and obligations to us under the Joint Venture contract and the Three
Circles License Agreement while together we seek formal approval for that
transfer. The license assistance agreement provides that we will provide the
services and assistance necessary to effectively fulfill, on behalf of FuelCell,
all of FuelCell's obligations under the Joint Venture contract and related
license agreement. In exchange for our assuming all of the obligations of these
arrangements, FuelCell agreed to transfer its rights to use and pay us all same
accruing to FuelCell and to act according to our instructions in connection with
matters of Joint Venture governance and agreed not to permit the amendment of
the related documents without our consent.
In February 1999, we borrowed $300,000 from FuelCell for working capital
and capital expenditures. This loan was secured by all of our assets. At the
same time, we borrowed an additional $1.6 million from a bank, which was
guaranteed by FuelCell. These loans were repaid in April 1999.
In March 1999, Jerry D. Leitman, our Chairman, exercised options for
100,000 shares of our common stock at $3.00 per share by issuing to us a
nonrecourse, non-interest-bearing note in the original principal amount of
$300,000 payable in equal installments through 2001. No principal payments have
yet been made on this note. If this note is not paid, Mr. Leitman's shares will
be forfeited.
In December 1999, James Gerson and John Gutfreund, each a director, and a
retirement plan for Robert Kanode, our President and a director, bought 20,000,
2,000 and 1,200 shares of Series A Preferred Stock and accompanying warrants at
$25.00 per share. For a description of the Series A Preferred Stock and
Warrants, see "Description of Capital Stock."
Loeb Partners Corporation, an affiliate of Thomas Kempner and Warren
Bagatelle, each a director, received $174,000 plus expenses as standby
underwriter in connection with our 1999 rights offering. As standby underwriter,
Loeb Partners Corporation purchased 411,000 shares not purchased in the rights
offering in April 1999 at a 4.0% discount.
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<PAGE> 47
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 1, 2000, and as adjusted to reflect
the sale of common stock offered by this prospectus by:
- Each shareholder known by us to beneficially own more than 5% of our
outstanding common stock;
- Each of our executive officers;
- Each of our directors;
- All directors and executive officers as a group; and
- Each selling shareholder in this offering.
A person has beneficial ownership of shares if the individual has the power
to vote or dispose of shares. This power can be exclusive or shared, direct or
indirect. In addition, a person beneficially owns shares underlying options or
warrants that are presently exercisable or will become exercisable within 60
days of April 1, 2000, and shares to be acquired upon conversion of our
preferred stock. These shares are considered to be outstanding for the purpose
of calculating the percentage of outstanding shares of our common stock owned by
a particular shareholder but are not considered to be outstanding for the
purpose of calculating the ownership percentage of any other person. In the
following table, applicable percentage ownership prior to the offering is based
on 5,733,258 shares of common stock outstanding as of April 1, 2000 and
applicable percentage ownership after the offering is based on 7,233,258 shares
of common stock to be outstanding upon completion of this offering. Except as
otherwise noted, to our knowledge, the shareholders named in the table have sole
voting and investment power for all shares shown as beneficially owned by them.
The table below assumes that the underwriters have not exercised their
over-allotment option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER THE OFFERING
------------------------- NUMBER OF -------------------------
PERCENTAGE OF SHARES OF PERCENTAGE OF
NUMBER OF BENEFICIAL COMMON STOCK NUMBER OF BENEFICIAL
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP OFFERED SHARES OWNERSHIP
- ------------------------ --------- ------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Loeb Investors Co. LXXV(1)......... 528,216 9.2% -- 528,216 7.3%
61 Broadway
New York, NY 10006
EXECUTIVE OFFICERS AND DIRECTORS:
James D. Gerson(1)................. 748,303 12.8% -- 741,030 10.2%
c/o Fahnestock and Co.
780 3rd Avenue
New York, NY 10017
Warren D. Bagatelle(2)............. 714,372 12.5% -- 714,372 9.9%
c/o Loeb Investors Co. LXXV
61 Broadway
New York, NY 10006
Thomas L. Kempner(2)............... 528,216 9.2% -- 528,216 7.3%
c/o Loeb Investors Co. LXXV
61 Broadway
New York, NY 10006
Jerry D. Leitman(3)................ 266,666 4.6% -- 266,666 3.6%
Robert L. Kanode(4)................ 58,764 1.0% -- 58,764 *
William A. Lawson.................. 51,220 * -- 51,220 *
Allen Charkey(5)................... 33,333 * -- 33,333 *
John H. Gutfreund(6)............... 11,273 * -- 11,273 *
Robert Gable(7).................... 6,000 * -- 6,000 *
Gregory W. Schulte................. -- -- -- -- --
All directors and executive
officers as a group (10
Persons)(1)(2)(3)(4)(5)(6)(7).... 1,889,930 31.1% -- 1,882,657 24.9%
</TABLE>
43
<PAGE> 48
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING AFTER THE OFFERING
------------------------- NUMBER OF -------------------------
PERCENTAGE OF SHARES OF PERCENTAGE OF
NUMBER OF BENEFICIAL COMMON STOCK NUMBER OF BENEFICIAL
NAME OF BENEFICIAL OWNER SHARES OWNERSHIP OFFERED SHARES OWNERSHIP
- ------------------------ --------- ------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
SELLING SHAREHOLDERS:
Barbara Gerson c/f Fred
Gerson(8)........................ 604,694 9.5% 3,636 597,422 7.6%
Barbara Gerson c/f Simon
Gerson(8)........................ 604,694 9.5% 3,636 597,422 7.6%
Forum Capital 2, Ltd.(9)........... 129,628 2.2% 25,000 104,628 1.8%
Willow Creek Capital Partners,
CP(10)........................... 112,726 1.9% 56,363 -- --
Willow Creek Offshore Fund(10)..... 112,726 1.9% 56,363 -- --
Fahnestock & Co., Inc.(11)......... 79,004 1.4% 44,128 34,876 *
Ruth Joffe(12)..................... 48,177 * 7,272 40,905 *
LAMBDA IV, LLC(9).................. 28,180 * 6,600 21,580 *
Goren Brothers LTD(13)............. 22,545 * 22,545 -- --
Albert G. Lowenthal(9)............. 16,909 * 10,909 6,000 *
Lisa Ann Pruzan(14)................ 12,036 * 3,636 8,400 *
Daryl E. Lowenthal(9).............. 5,636 * 3,636 2,000 *
Robert S. Lowenthal(9)............. 5,636 * 3,636 2,000 *
Aaron M. Lamport(9)................ 4,509 * 700 3,809 *
Sarah W. Laurence(9)............... 3,382 * 940 2,442 *
Andrew M. Blum(9).................. 2,818 * 1,000 1,818 *
</TABLE>
- ------------------------
* Less than one percent.
(1) Mr. Gerson's shareholdings include 71,078 shares held by his wife as
custodian for two children (of which 22,545 shares are issuable upon
conversion of Series A Preferred Stock and exercise of related warrants)
and 21,064 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 also
holds 122,545 shares (of which 22,545 are issuable upon conversion of
Series A Preferred Stock and exercise of elated warrants) in Sontek
Industries, Inc., of which he is Chairman and a principal shareholder. Mr.
Gerson's other holdings also include 90,182 shares issuable upon conversion
of Series A Preferred Stock and exercise of related warrants.
(2) Messrs. Bagatelle and Kempner, by virtue of being general partners of Loeb
Investors Co. LXXV, may each be deemed to beneficially own the 528,216
shares held by 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 528,216 shares of
common stock.
(3) Includes 100,000 shares which may be acquired upon exercise of options
within 60 days.
(4) Includes 50,000 shares which may be issued upon exercise of options and
6,764 shares which may be issued upon conversion of Series A Preferred
Stock and exercise of related warrants.
(5) Represents shares which may be issued upon exercise of options within 60
days.
(6) Represents shares which may be issued upon conversion of Series A Preferred
Stock and related warrants.
(7) Represents shares held by his wife as to which he disclaims beneficial
interest.
(8) Ms. Gerson's shareholdings include 71,078 common shares held as custodian
for two children. These shares include 22,545 shares of common stock
issuable upon conversion of Series A Preferred Stock and exercise of
related warrants. As part of this offering, Ms. Gerson is selling 3,636
shares of common stock for each of the children's accounts. Ms. Gerson also
has beneficial ownership of 533,616 shares held by her husband, who is a
member of our Board. Mr. Gerson's holdings include 90,182 common shares
issuable upon conversion of Series A Preferred Stock and exercise of
related warrants. Mr. Gerson is not offering any shares for sale as part of
this offering.
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<PAGE> 49
(9) Represents common shares issuable upon conversion of Series A Preferred
Stock and exercise of related warrants. The number of shares of common
stock offered includes Series A Preferred Stock convertible into common
shares.
(10) The numbers of shares owned by each of Willow Creek Capital Partners, CP
and Willow Creek Offshore Fund include 56,363 shares of common stock
issuable upon conversion of Series A Preferred Stock and the exercise of
related warrants. Each may be deemed to beneficially own the other's
shares.
(11) Fahnestock & Co., Inc.'s shareholdings include 78,904 shares of common
stock issuable upon conversion of Series A Preferred Stock and exercise of
related warrants. The number of shares of common stock offered represents
shares of common stock issuable upon conversion of Series A Preferred
Stock.
(12) Ms. Joffe's shareholdings include 22,545 common shares issuable upon
conversion of Series A Preferred Stock and exercise of related warrants.
The number of shares of common stock offered represents shares of common
stock issuable upon conversion of Series A Preferred Stock.
(13) Goren Brothers LTD's ownership interest represents 22,545 common shares
issuable upon conversion of Series A Preferred Stock and exercise of
related warrants.
(14) Ms. Pruzan's shareholdings include 5,636 shares of common stock issuable
upon conversion of Series A Preferred Stock and exercise of related
warrants. The number of shares of common stock offered represents shares of
common stock issuable upon conversion of Series A Preferred Stock.
45
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 10,000,000 shares of common stock,
$.01 par value per share and 1,000,000 shares of preferred stock, $.01 par value
per share. The Board of Directors has determined to increase the number of
authorized common shares to 30,000,000. This increase will be submitted for
ratification by the shareholders of the Company at their next Annual Meeting,
currently expected to be held in May, 2000.
As of April 1, 2000, there were 5,733,258 shares of common stock
outstanding and 264,000 shares of Series A Preferred Stock outstanding. After
giving effect to the sale of the 1,250,000 shares of our common stock and the
conversion of 55,550 shares of Series A Preferred Stock into 202,000 shares of
common stock and the exercise of warrants to purchase 48,000 shares common stock
in this offering, there will be 7,233,258 shares of common stock outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. The election of
directors is determined by a plurality of the votes cast and, except as
otherwise required by law, all other matters are determined by a majority of the
votes cast. Our shareholders do not have cumulative voting rights. Accordingly,
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors. Holders of common stock
are entitled to receive any dividends declared by the Board of Directors out of
funds legally available for that purpose, subject to any preferential dividend
rights of outstanding shares of preferred stock. Upon the liquidation,
dissolution or winding up of Evercel, the holders of common stock are entitled
to receive pro-rated shares of our net assets after we have paid all debts and
other liabilities. Holders of the common stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of common stock may be adversely affected by the rights of the holders
of shares of any class or series of preferred stock which we may designate and
issue in the future.
PREFERRED STOCK
Under our certificate of incorporation, our Board of Directors, without further
action by our shareholders, is authorized to issue up to an aggregate of
1,000,000 shares of preferred stock in one or more classes or series. Our Board
of Directors may, without shareholder approval, issue any class or series of
preferred stock with dividend rights, dividend rates, conversion rights,
redemption rights, preferences on liquidation or dissolution, voting rights and
any other preferences, which could adversely affect the voting power of the
holders of common stock. Issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions or other corporate
purposes, could make it more difficult for a third party to acquire, or could
discourage or delay a third party from acquiring, a majority of our outstanding
stock.
We have created a class of Series A Preferred Stock. On December 16, 1999,
we sold 264,000 shares of Series A Preferred Stock in a private placement.
Following conversion of 55,550 shares of Series A Preferred Stock in connection
with this offering, there will be 208,450 shares of Series A Preferred Stock.
Burnham Securities Inc., one of the underwriters of this offering, acted as
placement agent for this private placement. Each share of Series A Preferred
Stock is convertible into common stock at a conversion price of $6.88 per share.
Each share of Series A Preferred Stock is currently convertible into 3.64 shares
of common stock. Each share of Series A Preferred Stock accrues dividends at the
rate of $2.00 per year, payable either in cash or in shares of Series A
Preferred Stock at our option. Each share of Series A Preferred Stock bears a
liquidation preference of $25.00 per share and is entitled to
46
<PAGE> 51
one vote for each share of common stock into which it is convertible on all
matters submitted to shareholders. Each holder of Series A Preferred Stock is
entitled to purchase its pro rata share of any issuance of Common Stock, or
shares convertible or exercisable into Common Stock, if the price per share is
less than the Series A conversion price, other than shares sold pursuant to a
registration statement under the Securities Act, options to employees and
directors and shares issued upon conversion of the Series A Preferred Stock or
upon the exercise of warrants. We may redeem that Series A Preferred Stock for
$25.00 per share at any time after one year following the issue date if certain
common stock price levels are reached. Each owner of Series A Preferred Stock is
subject to our call to purchase additional shares of Preferred Stock in an
amount equal to 50% of its investment in Series A Preferred Stock. Effective
upon consummation of this offering, we have agreed to forfeit our right to
require holders of Series A Preferred Stock to purchase shares of additional
Series A Preferred Stock.
WARRANTS
Each share of Series A Preferred Stock also carries a five-year warrant, which
is exercisable into two shares of common stock at $8.25 per share. Warrants for
48,000 shares of common stock will be exerised in connection with this offering.
Burnham Securities Inc., one of the underwriters for this offering, acted as
placement agent for the sale of the Series A Preferred Stock and received 67,268
identical warrants. Upon prior notice, we may redeem the warrants at any time
after one year following the issue date if certain common stock price levels are
reached. We have also issued 6,000 five-year warrants to a consultant, which are
each exercisable for one share of common stock at $23.09 per share.
REGISTRATION RIGHTS
The holders of Series A Preferred Stock and the warrants issued in
connection with the Series A Preferred Stock have demand and piggy-back rights
to cause us, with certain limitations, to register the common stock issuable
upon conversion of the Series A Preferred Stock and exercise of their warrants.
In addition, we have agreed to register the shares of common stock to be issued
to Mr. Leitman upon exercise of his warrants. We have agreed to pay many of the
expenses of those registrations. We have also agreed to indemnify those warrant
holders who exercise registration rights against certain claims arising from
untrue statements or omissions in connection with the sale of their shares. It
is our intent to register as soon as practicable the common stock issuable upon
conversion of the Series A Preferred Stock and exercise of the related warrants.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions of our certificate of incorporation and bylaws could make the
acquisition of Evercel and the removal of incumbent officers and directors more
difficult. These provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of Evercel to negotiate with us first, but these provisions may
be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a shareholder might consider in its best
interests, including those attempts that might result in a premium over the
market price for shares held by shareholders.
AUTHORIZED BUT UNISSUED SHARES
Our Board of Directors has the authority to issue and to establish the
rights of substantial amounts of preferred stock without shareholder approval,
upon such terms and conditions, and having such rights, privileges and
preferences, as our Board of Directors may determine. This authority may be used
to create voting impediments, hinder changes in
47
<PAGE> 52
control or to dilute the stock ownership of holders of common stock seeking to
obtain control of Evercel. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions,
financings and other corporate transactions, may have the effect of
discouraging, delaying or preventing a change in control.
STAGGERED BOARD
Our Board of Directors is divided into three classes. Each class is elected
for a three-year term. This provision makes more difficult any attempt for a
bidder to acquire control. The existence of a staggered Board of Directors is
considered a deterrent to a takeover attempt, even though it may be in the best
interest of our shareholders.
DELAWARE ANTI-TAKEOVER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, or the anti-takeover law, which regulates corporate
acquisitions. The law generally prohibits business combinations between a
publicly held Delaware corporation and an interested shareholder.
- An interested shareholder is a person who, together with any affiliates,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a corporation.
- A business combination includes mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation.
Section 203 prohibits any business combination that results in a financial
benefit to an interested stockholder for three years following the date the
person became an interested shareholder.
CONNECTICUT ANTI-TAKEOVER PROVISIONS
The laws of the State of Connecticut, where our principal executive offices
are located, impose restrictions on certain transactions between certain foreign
corporations and significant shareholders. Section 33-840 of the Connecticut
Business Corporation Act prohibits certain publicly held foreign corporations
that are based in Connecticut from engaging in a "business combination"
(including the issuance of equity securities which have an aggregate market
value of 5% or more of the total market value of the outstanding shares of the
company) with an "interested shareholder" as defined in the Connecticut Business
Corporation Act for a period of five years from the date of the shareholder's
purchase of stock unless approved in a prescribed manner. The application of
this statute could prevent a change of control. Generally, approval is required
by our Board of Directors and by a majority of our non-employee directors and by
80% of the outstanding voting shares and two-thirds of the voting power of the
outstanding shares of the voting stock other than shares held by the interested
shareholder. We can give no assurance that these provisions would not prevent us
from entering into a business combination that otherwise would be beneficial to
our shareholders.
LIMITATION ON LIABILITY
Our certificate of incorporation and bylaws contain provisions relating to
the limitation of liability and indemnification of directors and officers. Our
certificate of incorporation
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<PAGE> 53
specifies that none of our directors shall be personally liable to us or our
shareholders for monetary damages for a breach of fiduciary duty, except for
liability:
- For any breach of the duty of loyalty;
- For acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
- For the payment of unlawful dividends and other actions prohibited by
Delaware General Corporation Law; or
- For any transaction resulting in receipt of an improper personal benefit
by the director.
Our bylaws require us to indemnify our directors and officers, so long as
their actions are in good faith, are in the best interests of the corporation,
and are not unlawful. Our bylaws also permit us to purchase and maintain
insurance on behalf of our directors, officers and agents. We intend to obtain
directors' and officers' liability insurance to provide our directors and
officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, New York, New York.
49
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 7,233,258 shares of our
common stock outstanding, 7,458,258 shares if the underwriters' overallotment
option is exercised in full, assuming no exercise of options or warrants or
conversion of Series A Preferred Stock. All of the 1,500,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act by
persons other than "affiliates" as that term is defined in Rule 144 under the
Securities Act (whose sales would be subject to certain limitations and
restrictions described below).
All of our executive officers and directors and certain other shareholders
have agreed to a "lock-up" at the request of the underwriters. In the aggregate,
this group holds 1,812,282 shares of our common stock, options to purchase
537,332 shares of our common stock, warrants to purchase 628,868 shares of our
common stock, and Series A Preferred Stock convertible into 960,000 shares of
our common stock, without giving effect to the shares to be sold in this
offering. Under the lock-up, they agreed not to offer, sell, contract to sell,
or otherwise dispose of, directly or indirectly, any shares of common stock or
securities convertible into or exercisable for common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Adams, Harkness & Hill, Inc. When the lock-up expires, approximately 1,812,262
additional shares that are restricted securities will be eligible for sale under
Rule 144. Shares acquired in transactions exempt from registration under the
Securities Act are "restricted securities" as that term is defined under Rule
144. Restricted shares may be vested only if they are registered under the
Securities Act or are sold under an exemption from registration, such as the
exemption in Rule 144. We soon intend to register the shares of our common stock
issuable upon conversion of the Series A Preferred Stock and exercise of the
related warrants for resale after the expiration of the lock-up referred to
above.
Under Rule 144, a person who has beneficially owned shares for at least one
year, including an affiliate, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of our common stock (approximately
72,332 shares immediately following the offering); and
- The average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale.
As of the date of this prospectus, immediately after consummation of the
offering, 1,553,288 shares not eligible for resale under Rule 144(k) will be
eligible for resale in the public market subject to the volume, manner of sale
and other limitations of Rule 144.
We have filed a registration statement on Form S-8 with respect to 600,000
shares of common stock issuable under our Stock Option Plan. As the number of
shares available under the Plan is increased, we intend to register those shares
as well. Shares issued upon the exercise of stock options after the effective
date of the Form S-8 registration statement will be eligible for resale in the
public market without restriction, except that affiliates must comply with Rule
144.
In addition, shares held by persons deemed not to have been affiliates of
ours at any time during the 90 days preceding a sale and who have beneficially
owned the shares for at least two years can be sold under Rule 144(k) without
regard to the volume limitations, manner of sale provisions or other limitations
of Rule 144.
50
<PAGE> 55
UNDERWRITING
Evercel, the selling shareholders and the underwriters named below have
entered into an underwriting agreement covering the common stock to be offered
in this offering. Subject to certain conditions, each underwriter has severally
agreed to purchase from us the number of shares of common stock shown opposite
its name below. Adams, Harkness & Hill, Inc., FAC/Equities, a division of First
Albany Corporation, and Burnham Securities Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Adams, Harkness & Hill, Inc.................................
FAC/Equities, a division of First Albany Corporation........
Burnham Securities Inc......................................
Total.............................................
</TABLE>
The underwriting agreement provides that the underwriters' obligation to
purchase shares of common stock depends on the satisfaction of certain
conditions. The conditions in the underwriting agreement include the requirement
that the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver to
the underwriters' customary closing documents. The underwriters have committed
to purchase all shares of common stock offered if any of the shares are
purchased.
The representatives of the underwriters have advised us that the
underwriters propose to offer the shares of common stock directly to the public
at the public offering price set forth on the cover page of this prospectus, and
to dealers, who may include the underwriters, at the public offering price less
a selling concession not in excess of $
per share. The underwriters may also allow, and dealers may reallow, a
concession not in excess of $ per share to brokers and dealers. After the
offering, the underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option to purchase up to 225,000
additional shares of common stock, exercisable solely to cover over-allotments,
if any, at the public offering price less the underwriting discount shown on the
cover page of this prospectus. The underwriters may exercise this option at any
time until 30 days after the date of the underwriting agreement. If this option
is exercised, each underwriter will be committed, so long as the conditions of
the underwriting agreement are satisfied, to purchase a number of additional
shares of common stock proportionate to the underwriters' initial commitment as
indicated in the preceding table and we will be obligated, under the
over-allotment option, to sell the shares of common stock to the underwriters.
The following table shows the per share and total underwriters'
compensation and estimated expenses we will pay. This information is presented
assuming both no exercise and full exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
TOTAL
-----------------------------
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Underwriting discount and commissions
payable by us............................
Expenses payable by us.....................
Underwriting discounts and commissions
payable by the selling shareholders......
</TABLE>
51
<PAGE> 56
The total proceeds before expenses to be received by us from this offering
will be approximately $ million, assuming no exercise of the
over-allotment option. The expenses of this offering, exclusive of the
underwriting discount, are estimated at $500,000 and are payable by us.
We have agreed that, without the prior consent of Adams, Harkness & Hill,
Inc., we will not directly or indirectly, offer, sell or otherwise dispose of
any shares of common stock or any securities which may be converted into or
exchanged for any such shares of common stock for a period of 180 days from the
date of this prospectus. Our executive officers and directors and certain other
shareholders have agreed under lock-up agreements that, without the prior
written consent of Adams, Harkness & Hill, Inc., they will not, directly or
indirectly, offer, sell or otherwise dispose of any shares of common stock or
any securities that may be converted into or exercised for any such share for
the period ending 180 days after the date of this prospectus, except pursuant to
the exercise of options under the stock option plan.
We will indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
In connection with the offering, the underwriters may purchase and sell
shares of our common stock on the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of our common stock. As a result, the price of our
common stock may be higher than the price that otherwise might exist in the open
market. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
Burnham Securities Inc., one of the underwriters in this offering, acted as
placement agent in connection with our private placement of Series A Preferred
Stock in December 1999. In connection with that private placement, Burnham
Securities received $462,000, plus expenses, and warrants to purchase 33,600
shares of our common stock. Burnham will also receive 4% of the exercise price
of the warrants issued to the investors in the private placement, which would
equal $174,240 were all the warrants to be exercised. See "Description of
Capital Stock -- Warrants." The common stock issuable upon conversion of the
Series A Preferred Stock and exercise of the warrants are entitled to the rights
under the registration rights agreement among us and the purchasers of the
Series A Preferred Stock and related warrants. See "Description of Capital
Stock -- Registration Rights." Burnham Securities also acted as standby
underwriter in connection with our 1999 rights offering, and received
consideration of $184,000, plus expenses. As standby underwriter, Burnham
Securities purchased 402,882 of the shares unsold in the offering in April 1999
at a 4.0% discount.
As permitted by Rule 103 under the Exchange Act, certain underwriters and
selling group members, if any, may act as "passive market makers" in the common
stock which
52
<PAGE> 57
means they may make bids for or purchases of common stock in the Nasdaq National
Market until a stabilizing bid has been made. Rule 103 generally provides:
- A passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such stock for the two
full consecutive calendar months, or any 60 consecutive days ending
within 10 days, immediately preceding the filing date of the registration
statement of which this prospectus is a part;
- A passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers; and
- Bids made by passive market makers must be identified as such.
LEGAL MATTERS
Robinson & Cole LLP, Stamford, Connecticut will pass upon the validity of
the shares of common stock offered by this prospectus. Choate, Hall & Stewart,
Boston, Massachusetts, has acted as counsel for the underwriters in connection
with certain legal matters relating to the common shares offered by this
prospectus.
EXPERTS
The financial statements of Evercel, Inc. as of December 31, 1999 and
October 31, 1999 and 1998, and for the two-month period ended December 31, 1999
and for each of the years in the three-year period ended October 31, 1999, have
been included in this prospectus and the registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information with respect to Evercel
and the common stock, you should refer to the registration statement and the
related exhibits and schedules. You may read and copy any document we file at
the SEC's public reference rooms located at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at its regional offices in Chicago, Illinois and New York, New
York. Copies of these materials can be obtained from the SEC at prescribed
rates. Please call the SEC at 1-800-SEC-0330 for further information about the
public reference rooms. Our SEC filings are also available to the public from
the SEC's website at www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allow us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and information that we later file with the SEC
will automatically update and supersede the information contained or
incorporated by reference in this prospectus. Accordingly, we incorporate by
reference our annual report on Form 10-K for the year ended October 31, 1999 and
the two-month transition period ended December 31, 1999, as
53
<PAGE> 58
amended, and any future filings we make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
termination of this offering.
All documents which we subsequently file pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 prior to the termination of
this offering shall be deemed to be incorporated by reference into this
prospectus from the date of filing of such documents. These documents are or
will be available for inspection or copying at the locations identified above
under the caption "Where You Can Find More Information."
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any and all of the documents that have been incorporated by reference in
this prospectus (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference but not delivered with this prospectus).
You should direct requests for documents to Robert L. Kanode, Evercel, Inc., 2
Lee Mac Avenue, Danbury, Connecticut 06810. The telephone number is (203)
825-3900.
54
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets -- October 31, 1998 and 1999 and December 31,
1999...................................................... F-3
Statements of Income (Loss) for the Years ended October 31,
1997, 1998 and 1999 and the Two Months ended December 31,
1998 and 1999............................................. F-4
Statements of Changes in Shareholders' Equity for the Years
ended October 31, 1997, 1998 and 1999 and the Two Months
ended December 31, 1999................................... F-5
Statements of Cash Flows for the Years ended October 31,
1997, 1998 and 1999 and the Two Months ended December 31,
1998 and 1999............................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evercel, Inc.:
We have audited the accompanying balance sheets of Evercel, Inc. as of
December 31, 1999 and October 31, 1999 and 1998, and the related statements of
income (loss), changes in shareholders' equity and cash flows for the two months
ended December 31, 1999 and for each of the years in the three-year period ended
October 31, 1999. 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 Evercel, Inc. as of December
31, 1999 and October 31, 1999 and 1998 and the results of their operations and
their cash flows for the two months ended December 31, 1999 and for each of the
years in the three-year period ended October 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
--------------------------------------
KPMG LLP
March 22, 2000
Stamford, CT
F-2
<PAGE> 61
EVERCEL, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 1 $ 1,820 $ 6,117
Accounts receivable....................... 17 214 193
Inventories............................... -- 192 159
Other current assets...................... -- 56 35
------ ------- -------
Total current assets.............. 18 2,282 6,504
Property, plant and equipment, net........ 825 1,991 2,289
Other assets, net......................... 333 17 17
------ ------- -------
Total Assets...................... $1,176 $ 4,290 $ 8,810
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................. $ 603 $ -- $ --
Accounts payable.......................... 53 538 391
Accrued liabilities....................... 97 473 351
------ ------- -------
Total current liabilities......... 753 1,011 742
Shareholders' equity:
Preferred Stock ($0.01 par value);
1,000,000 shares authorized: 264,000
issued and outstanding at December 31,
1999 (with cumulative dividends at
8%).................................... -- -- 3
Common Stock ($0.01 par value); 10,000,000
shares authorized: 5,722,090 issued and
outstanding at October 31, 1999 and
December 31, 1999...................... -- 57 57
Additional paid-in-capital................ -- 7,978 14,084
Note receivable from shareholder.......... -- (300) (300)
Accumulated deficit....................... -- (4,456) (5,776)
Net assets of Battery Group............... 423 -- --
------ ------- -------
Total shareholders' equity........ 423 3,279 8,068
------ ------- -------
Total Liabilities and
Shareholders' Equity............ $1,176 $ 4,290 $ 8,810
====== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 62
EVERCEL, INC
STATEMENTS OF INCOME (LOSS)
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 AND
TWO MONTHS ENDED DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED
--------------------------------------- ----------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 436 $ 438 $ 196 $ -- $ 13
Costs and expenses:
Cost of revenues..................... 98 87 694 -- 220
Administrative and selling........... 268 1,805 2,244 208 636
Depreciation and amortization........ 40 45 181 8 54
Research and development............. 897 1,832 2,449 391 451
--------- --------- --------- --------- ---------
Total operating costs and
expenses.................... 1,303 3,769 5,568 607 1,361
--------- --------- --------- --------- ---------
Loss from operations................... (867) (3,331) (5,372) (607) (1,348)
Interest income, net................... -- -- 90 -- 28
Equity in net loss of affiliate........ -- -- (36) -- --
Other expense.......................... -- -- (3) -- --
--------- --------- --------- --------- ---------
Loss before income tax benefit......... (867) (3,331) (5,321) (607) (1,320)
Income tax benefit..................... (295) (1,006) (360) (249) --
--------- --------- --------- --------- ---------
Net loss............................... (572) (2,325) (4,961) (358) (1,320)
Preferred stock dividends.............. -- -- -- -- (22)
--------- --------- --------- --------- ---------
Net loss -- common shareholders........ $ (572) $ (2,325) $ (4,961) $ (358) $(1,342)
========= ========= ========= ========= =========
Basic and diluted loss per share....... $ (0.21)(a) $ (0.84)(a) $ (1.11) $ (0.13)(a) $ (0.23)
========= ========= ========= ========= =========
Basic and diluted shares outstanding... 2,778,000(a) 2,778,000(a) 4,456,538(b) 2,778,000(a) 5,722,090(b)
========= ========= ========= ========= =========
</TABLE>
- ---------------
(a) Represents the pro forma loss per share and shares assumed to be outstanding
based on the number of shares outstanding immediately after our spin-off
from FuelCell.
(b) Due to losses we have incurred, dilutive instruments, consisting of shares
of Series A Preferred Stock, options and warrants, have been excluded from
diluted shares. At October 31, 1999, there were options exercisable for
625,098 shares of common stock. At December 31, 1999, there were 264,000
shares of Series A Preferred Stock convertible into 960,000 shares of common
stock, related warrants exercisable for 595,268 shares of common stock and
options exercisable for 627,098 shares of common stock.
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 63
EVERCEL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 AND
TWO MONTHS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET
NOTE ASSETS
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE OF TOTAL
------------------ ---------------- PAID-IN ACCUMULATED FROM BATTERY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHAREHOLDER GROUP EQUITY
--------- ------ ------- ------ ---------- ----------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31,
1996.................... -- $-- -- $-- $ -- $ -- $ -- $ 111 $ 111
Net loss.................. -- -- -- -- -- -- -- (572) (572)
Contribution from
FuelCell................ - -- -- -- -- -- -- 672 672
--------- --- ------- --- ------- ------- ----- ------- -------
BALANCE AT OCTOBER 31,
1997.................... -- -- -- -- -- -- -- 211 211
Net loss.................. -- -- -- -- -- -- -- (2,325) (2,325)
Contribution from
FuelCell................ -- -- -- -- -- -- -- 2,537 2,537
--------- --- ------- --- ------- ------- ----- ------- -------
BALANCE AT OCTOBER 31,
1998.................... -- -- -- -- -- -- -- 423 423
Net intercompany
activity................ -- -- -- -- -- -- -- 96 96
Net loss pre-spin......... -- -- -- -- -- -- -- (505) (505)
Common stock issued....... 2,777,712 28 -- -- (14) -- -- (14) --
Stock issued under rights
offering................ 2,777,712 28 -- -- 7,493 -- -- -- 7,521
Stock options exercised... 166,666 1 -- -- 499 -- (300) -- 200
Net loss post spin-off.... -- -- -- -- -- (4,456) -- -- (4,456)
--------- --- ------- --- ------- ------- ----- ------- -------
BALANCE AT OCTOBER 31,
1999.................... 5,722,090 57 -- -- 7,978 (4,456) (300) -- 3,279
Preferred stock issued.... -- -- 264,000 3 6,128 -- -- -- 6,131
Net loss.................. -- -- -- -- -- (1,320) -- -- (1,320)
Preferred stock
dividends............... -- -- -- -- (22) -- -- -- (22)
--------- --- ------- --- ------- ------- ----- ------- -------
BALANCE AT DECEMBER 31,
1999.................... 5,722,090 $57 264,000 $ 3 $14,084 $(5,776) $(300) $ -- $ 8,068
========= === ======= === ======= ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 64
EVERCEL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 AND
TWO MONTHS ENDED DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED
--------------------------------------- ---------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.......................... $(572) $(2,325) $(4,961) $(358) $(1,320)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and
amortization............... 40 45 181 8 54
(Increase) decrease in
operating assets:
Accounts receivable........ 9 16 (197) (19) 21
Inventories................ -- -- (192) (102) 33
Other current assets....... (42) 42 (56) -- --
Increase (decrease) in
operating liabilities:
Accounts payable........... 12 36 485 61 (147)
Accrued liabilities........ 1 32 376 12 (144)
Other, net................... -- (332) 290 (65) 21
----- ------- ------- ----- -------
Net cash used in operating
activities................... (552) (2,486) (4,074) (463) (1,482)
----- ------- ------- ----- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures............ (120) (652) (1,321) (177) (352)
----- ------- ------- ----- -------
Net cash used in investing
activities................... (120) (652) (1,321) (177) (352)
----- ------- ------- ----- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings from FuelCell........ -- 603 -- 218 --
Repayment to FuelCell........... -- -- (603) -- --
Proceeds from common stock
issued....................... -- -- 7,721 -- --
Proceeds from preferred stock
issued....................... -- -- -- -- 6,131
Contributions from FuelCell..... 672 2,536 96 422 --
----- ------- ------- ----- -------
Net cash provided by
financing activities....... 672 3,139 7,214 640 6,131
----- ------- ------- ----- -------
Net increase in cash and cash
equivalents..................... -- 1 1,819 -- 4,297
Cash and cash equivalents --
beginning of period............. -- -- 1 1 1,820
----- ------- ------- ----- -------
Cash and cash equivalents -- end
of period....................... $ -- $ 1 $ 1,820 $ 1 $ 6,117
===== ======= ======= ===== =======
CASH PAID DURING THE PERIOD FOR:
Interest........................ $ -- $ -- $ 18 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 65
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
On October 6, 1999, the Board of Directors voted to change the fiscal year
end of Evercel, Inc. (the "Company") from October 31 to December 31. The
accompanying financial statements represent the financial position and results
of operations of the Company as of and for the two months ended December 31,
1999; the financial position of the Company at October 31, 1999 and the results
of operations of the Battery Group of FuelCell Energy, Inc. ("FuelCell") for the
period from November 1, 1998 through February 21, 1999 and the results of
operations of the Company from February 22, 1999 through October 31, 1999; the
financial position and the results of operations of FuelCell's Battery Group as
of and for the two months ended December 31, 1998 (unaudited); the financial
position and results of operations of FuelCell's Battery Group as of and for the
twelve months ended October 31, 1998; and the results of operations of
FuelCell's Battery Group for the twelve months ended October 31, 1997.
Comparative amounts for the two months ended December 31, 1998 are
unaudited. In the opinion of management, the information presented in the
unaudited two-month statement reflects all adjustments necessary for a fair
presentation of the Company's results of operations for that period.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is engaged in the design and manufacture of innovative,
patented nickel-zinc rechargeable batteries, as well as the research and design
of other advanced battery technologies. The Company believes the nickel-zinc
battery has commercial applications in markets requiring long cycle life, light
weight and relative cost efficiency.
SPIN-OFF FROM FUELCELL ENERGY, JOINT VENTURES AND LICENSE AGREEMENTS
On February 22, 1999, FuelCell effected a spin-off of the Company by
deconsolidating the financial statements of the Company and a joint venture from
its consolidated financial statements. As part of the spin-off of the Company,
FuelCell transferred capital assets (net), prepaid spin-off costs, accounts
receivable and short-term liabilities amounting to $1,228, $501, $36 and $1,096,
respectively. FuelCell distributed to its shareholders in a tax-free
distribution one share of Evercel common stock for every three shares of common
stock of FuelCell held on the record date of February 22, 1999. On April 5,
1999, the Company completed a rights offering of its shares at $3.00 per share
and began trading on the Nasdaq Small Cap market and the Boston Stock Exchange.
In February 1998, FuelCell entered into a the Nan Ya License Agreement with
a joint venture between Nan Ya 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 nickel-zinc batteries in electric and hybrid electric
vehicles in China, Taiwan, Hong Kong and Macao on an exclusive basis and for
certain other Southeast Asian countries on a non-exclusive basis. The license
agreement calls for the payment of $5,000 in three stages and a royalty for the
exclusive and non-exclusive territories. The payments include $1,500 received by
FuelCell in 1998, of which $1,300 and $200, respectively were recorded on
FuelCell's financial statements in 1999 and 1998. A further $2,000 is
F-7
<PAGE> 66
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
to be paid to the Company based on completion of cycle life testing that was
substantially achieved in December, 1999 and a final payment of $1,500 to be
paid to the Company upon completion of duplication of the battery at its
facilities in China. The Nan Ya License Agreement provides that the Company has
the right to invest the final payment in equity in the joint venture
manufacturing and sales organization formed between Nan Ya Plastics and Xiamen
Three Circles Co., Ltd.
In July 1998, FuelCell also entered into a Technology Transfer and License
Contract (the "Three Circles License Agreement") with Xiamen Three Circles-ERC
Battery Corp., Ltd. for the use of the Company's nickel-zinc batteries in
electric bicycles, scooters, three-wheel vehicles, off-road vehicles, and
miner's safety lamps in China on an exclusive basis and Southeast Asia on a
non-exclusive basis. The license included an initial payment to FuelCell of
$3,000. In connection with the Three Circles License Agreement, FuelCell also
entered into a joint venture agreement with Xiamen Three Circles Co., Ltd., used
this $3,000 as its initial investment in the joint venture and subsequently
contributed an additional $81 to receive a 50.5% share of the joint venture
called Xiamen Three Circles-ERC Battery Corp. (the "Joint Venture"). Through
December 31, 1999, the results of operations of the Joint Venture are
immaterial. Pursuant to the Three Circles License Agreement, the Joint Venture
must also pay the Company certain royalties based upon the net sales of
nickel-zinc batteries sold, leased or transferred in the applicable territories.
In addition the Joint Venture may sub-license the Company's technology to third
parties in China, Hong Kong, Taiwan and Macao on a non-exclusive basis.
In accordance with a License Assistance Agreement entered into between the
Company and FuelCell, the Company has agreed to provide all services and
assistance necessary for it to effectively fulfill, on behalf of FuelCell, all
of FuelCell's obligations under the Joint Venture and the related license
agreement until such time as FuelCell's obtains the approval from the Chinese
partner and appropriate Chinese governmental authority for the assignment of
such agreements to the Company. In return for such assistance, FuelCell will pay
to the Company and the Company will pay to FuelCell an amount equal to the sum
of all money, dividends, profits, reimbursements, distributions and payments
actually paid to FuelCell or paid by FuelCell in cash or in kind or otherwise
accruing to FuelCell pursuant to the Joint Venture contract and related license
agreement. 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 FuelCell shall not be liable for their payment. The Company
accounts for its involvement in the Joint Venture under the License Assistance
Agreement in a manner similar to the equity method of accounting as a result of
the fact that it does not have significant control over the Joint Venture.
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of money market deposits with financial
institutions.
INVENTORIES
Inventories consist principally of raw materials and are stated at the
lower of cost or market.
F-8
<PAGE> 67
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
REVENUE RECOGNITION
Revenue on product sales is recognized at the time of shipment.
INTELLECTUAL PROPERTY
Intellectual property including patents and know-how is carried at no
value.
STOCK OPTION PLAN
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employees stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
applies the recognition provisions of APB Opinion No. 25 and provides the pro
forma disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE (EPS)
Basic earnings per share are based upon the weighted average common shares
outstanding during the period. The Company has computed dilutive EPS without
consideration to potentially dilutive instruments due to the losses incurred by
the Company. If the Company had computed dilutive shares considering dilutive
instruments, the fully diluted shares outstanding would have been 7,940,456 at
December 31 and 6,353,188 at October 31, 1999.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the
F-9
<PAGE> 68
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Prior to the spin-off by FuelCell, the Battery Business Group was included
in the consolidated tax filings of FuelCell. The provision for income taxes of
the Company represents an allocation of a portion of the FuelCell consolidated
U.S. federal income tax provision to the battery group for the period during
which the Company was a part of FuelCell. The allocated tax provision is
determined based upon the income or loss of each group as if a separate tax
return was filed. If FuelCell 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 FuelCell 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.
ACCOUNTING CHANGES
Pursuant to Financial Accounting Standards Board ("FASB") Statement No.
130, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". The
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
For the Company, comprehensive income (loss) is the same as net income (loss).
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
requires that an entity recognize all derivative instruments as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. As amended, this statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of this statement to have a material impact on its financial position
or results of operations because it does not currently purchase derivative
instruments or enter into hedging activities.
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.
F-10
<PAGE> 69
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Joint Venture................... $-- $195 $174
U.S. Government................. 12 19 19
Commercial customers
(samples)..................... 5 5 5
Allowance for uncollectible
amounts....................... -- (5) (5)
--- ---- ----
Net Total............. $17 $214 $193
=== ==== ====
</TABLE>
(4) INVENTORY
Inventories at October 31, 1998 and 1999 and December 31, 1999 consisted of
the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Raw Materials................... $-- $146 $123
Work in Progress................ -- 69 23
Finished Goods.................. -- 2 13
-- ---- ----
Gross Inventories............... -- 217 159
Reserve for obsolescence........ -- (25) --
-- ---- ----
Net inventory balance........... $-- $192 $159
== ==== ====
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1998 and 1999 and December 31,
1999 consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31, ESTIMATED
1998 1999 1999 USEFUL LIFE
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Machinery and equipment... $1,068 $ 1,944 $ 2,073 3-8 Years
Furniture and fixtures.... 9 204 204 10 Years
Leasehold improvements.... -- 148 148 5 Years
Construction-in-progress... 603 705 928
------ ------- -------
1,680 3,001 3,353
Less, accumulated
depreciation and
amortization............ (855) (1,010) (1,064)
------ ------- -------
Total property, plant and
equipment............... $ 825 $ 1,991 $ 2,289
====== ======= =======
</TABLE>
F-11
<PAGE> 70
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(6) OTHER ASSETS
Other assets at October 31, 1998 and October 31, 1999 and December 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1998 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
Rights offering costs......... $307 $-- $--
Security Deposits............. 14 17 17
Organizational Costs.......... 12 -- --
---- --- ---
$333 $17 $17
==== === ===
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
On January 15, 1999, the Company entered into a lease for five years with
an option to extend for an additional five years. Minimum lease payments are
$171 for the first three years (1999, 2000 and 2001) with increases to $178 in
year four (2002) and $185 in year five (2003).
(8) STOCK OPTION PLAN
The Board had adopted the 1998 Stock Option Plan in anticipation of the
spin-off of the Company from Fuel Cell as a separate publicly held company.
Under the terms of the Plan, options to purchase up to 600,000 (177,334 shares
have been exercised) shares of common stock may be granted to officers, key
employees and directors of the Company. The Board of Directors has recommended
to the stockholders that the common shares issuable under the Plan be increased
to 1,300,000. Pursuant to the Plan, the Board is authorized to grant incentive
stock options or nonqualified options and stock appreciation rights to officers
and key employees of the Company and may grant nonqualified options and stock
appreciation rights to directors of the Company.
Stock options have restrictions as to transferability. The option exercise
price shall be fixed by the Board but, in the case of incentive stock options,
shall not be granted at an exercise price less than 100% of the fair market
value of the shares subject to the option on the date the option is granted.
Stock appreciation rights may be granted in conjunction with options granted
under the Plans. Stock options that have been granted are exercisable commencing
one year after grant at the rate of 25% of such shares in each succeeding year,
unless otherwise agreed.
In connection with the hiring of Mr. Leitman, our Chairman of the Board and
Chief Executive Officer, options were granted to purchase 166,666 and 200,000
shares of the Company's common stock at the purchase price of $3.00 per share
(the market value at the date of the grant). In addition, the Company and
FuelCell agreed to issue Mr. Leitman one share of the Company's Common Stock for
every 2.25 shares of FuelCell Common Stock which he purchases pursuant to his
exercise of FuelCell Options. Under this agreement, an option has been granted
to acquire a total of 166,666 shares of Common Stock at an exercise price based
proportionally upon the relative fair market value of FuelCell Common Stock and
the Company's Common Stock.
F-12
<PAGE> 71
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RISK FREE
DIVIDEND INTEREST RATE EXPECTED VOLATILITY
RATE RANGE LIFE FACTOR
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Two Months Ended December 31, 1999... 0% 4.70 - 6.35% 10 years .5971 - .6225
Year Ended October 31, 1999.......... 0% 4.31 - 6.35% 10 years .5495 - .6225
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have be reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
TWO MONTHS
YEAR ENDED ENDED
OCTOBER 31, DECEMBER 31,
1999 1999
----------- -------------
<S> <C> <C>
Net loss:
As reported........................................... $(4,961) $(1,320)
Pro forma............................................. (6,128) (1,350)
Loss per share:
As reported -- Basic.................................. $ (1.11) $ (0.23)
Pro forma -- Basic.................................... (1.38) (0.24)
</TABLE>
Pro forma net income reflects only options granted in 1999.
The following table summarizes the plan activity:
<TABLE>
<CAPTION>
NUMBER RANGE OF WEIGHTED AVERAGE
OF OPTIONS OPTION PRICES OPTION PRICE
---------- --------------- ----------------
<S> <C> <C> <C>
Outstanding at October 31,
1998........................... -- $ --
Granted........................ 649,764 $ 3.00 - $ 6.28 3.48
Exercised...................... (166,666) 3.00 - 3.00 3.00
Cancelled...................... (18,666) 5.72 - 5.72 5.72
-------- ------
Outstanding at October 31,
1999........................... 464,432 3.00 - 6.28 $ 3.52
Granted........................ 2,000 10.00 - 10.00 10.00
Cancelled...................... (6,000) 5.72 - 5.72 5.72
-------- ------
Outstanding at December 31,
1999........................... 460,432 3.00 - 10.00 $ 3.52
======== ======
</TABLE>
Options outstanding and exercisable at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.00 to $ 4.75 389,998 8.90 $3.09 98,498 $3.00
5.72 to 10.00 70,434 9.47 5.89 -- --
- --------------- ------- ---- ----- ------ -----
$3.00 to $10.00 460,432 8.99 $3.52 98,498 $3.00
=============== ======= ==== ===== ====== =====
</TABLE>
F-13
<PAGE> 72
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(9) PRIVATE PLACEMENT OF EQUITY SECURITIES
On December 16, 1999 the Company raised $6,600 in capital through the
private placement of equity securities and a commitment from these investors for
an additional $3,300, at Evercel's option (the "Private Placement"), for
manufacturing expansion in the United States, working capital and general
corporate purposes. Investors in the Private Placement received 264,000 Shares
of Series A Convertible Preferred Stock at an issue price of $25 per share, with
a dividend of 8 percent payable in additional Preferred Shares or in cash, which
are convertible to common shares at a conversion price of $6.88. The Preferred
Shares are callable by the Company three years following the issue date, or at
any time one year following the issue date if certain Common stock price levels
are reached. Each Preferred Share also carries a five-year warrant, which is
exercisable into two shares of common stock at $8.25 per Share. The warrants are
callable at any time after one year following the issue date if certain common
stock price levels are reached during the warrant's five-year period. Each owner
of Series A Shares is subject to a call by the Company to purchase additional
Convertible Preferred Shares in an amount equal to 50% of its investment in
Series A Shares. The call right by the Company expires August 31, 2000.
(10) EMPLOYEE BENEFITS
Subsequent to October 31, 1999, the Company started a defined contribution
401(K) plan ("The Safe Harbor Plan"). The plan provides for the Company to match
employee contributions to The Safe Harbor Plan up to a maximum of 3% of the
employees' gross W-2 earnings. For the years ended October 31, 1999 and 1998,
the Company participated in the FuelCell Capital Accumulation Plan. The Company
contributed $2 and $28 to this plan for those periods, respectively. For the two
months ended December 31, 1998, the Company contributed $8 to the Safe Harbor
Plan. The Company also participated in the FuelCell Pension Plan for the year
ended October 31, 1998, to which the Company contributed $33.
(11) INCOME TAXES
The components of income tax expense (benefit) were as follows for the
years ended October 31, 1998 and 1999 and the two months ended December 31,
1999:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Current:
Federal........................... $(1,006) $(315) --
State............................. -- (45) --
------- ----- --
(1,006) (360) --
------- ----- --
Deferred:
Federal........................... -- -- --
State............................. -- -- --
------- ----- --
Total income tax benefit............ $(1,006) $(360) $--
======= ===== ==
</TABLE>
F-14
<PAGE> 73
EVERCEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1998, OCTOBER 31, 1999 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The reconciliation of the statutory income tax rate to the Company's
effective income tax rate for the years ended October 31, 1999 and 1998 and the
two months ended December 31, 1999 was as follows:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Statutory federal income tax rate... (34.0)% (34.0)% (34.0)%
Nondeductible expenditures.......... 3.8% (0.4)% 1.1%
State tax, net of federal benefit... -- (0.9)% --
Valuation Allowance................. -- 28.5% 32.9%
----- ----- -----
Effective income tax rate........... (30.2)% (6.8)% 0.0%
===== ===== =====
</TABLE>
The Company's deferred tax assets and liabilities consisted of the
following at October 31, 1999 and December 31, 1999:
<TABLE>
<CAPTION>
OCTOBER 31, DECEMBER 31,
1999 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Incentive bonuses.............................. $ 6 $ --
Vacation accrual............................... 15 46
Allowance for doubtful accounts................ -- 2
Net operating loss carryforwards............... 1,929 2,451
------- -------
Gross deferred tax assets........................ 1,950 2,499
Valuation allowance............................ (1,937) (2,445)
------- -------
Deferred tax assets after Valuation allowance.... 13 54
------- -------
Deferred liability --
Accumulated depreciation....................... (30) (40)
Incentive bonuses.............................. -- (30)
Other.......................................... -- (1)
------- -------
Gross deferred tax liability................... (30) (71)
------- -------
Net deferred tax assets/(liability)............ $ (17) $ (17)
======= =======
</TABLE>
The Company has a federal net operating loss carryforward of approximately
$5,800, of which $4,400 will expire in 2018 and $1,400 will expire in 2019.
(12) SUBSEQUENT EVENT
The Company declared a 100% stock dividend having the effect of a 2-for-1
stock split payable on March 22, 2000 to shareholders of record on March 7,
2000. All share and per share data have been adjusted retroactively to give
effect to the stock dividend.
F-15
<PAGE> 74
The inside back cover contains four pictures with the Evercel logo at the
bottom of the page.
The first picture is of a rack of production batteries with a caption that
reads "Rack of production batteries ready for filing."
The second picture is of a person preparing electrodes with a caption that
reads "Electrode preparation."
The third picture is of the Xiamen manufacturing facility with a caption
that reads "Xiamen joint-venture manufacturing facility."
The fourth picture is of the Danbury manufacturing facility with a caption
that reads "Danbury manufacturing facility."
[INSIDE BACK COVER]
<PAGE> 75
1,500,000 SHARES
[EVERCEL LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
ADAMS, HARKNESS & HILL, INC.
FAC/EQUITIES
BURNHAM SECURITIES INC.
, 2000
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- --------
<S> <C>
SEC Registration Fee........................................ $ 8,505
NASD Filing Fee............................................. $ 3,721
Accounting Fees and Expenses................................ $ 75,000
Legal Fees and Expenses..................................... $175,000
Printing Expenses........................................... $150,000
Blue Sky Qualification Fees and Expenses.................... $ 10,000
Miscellaneous............................................... $ 77,774
--------
Total............................................. $500,000
========
</TABLE>
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law, our
certificate of incorporation provides that no director of Evercel shall be
personally liable to Evercel or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to Evercel or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) in respect of unlawful dividend payments or stock
redemptions or purchases, or (4) for any transaction from which the director
derived an improper personal benefit.
Our by-laws provide for indemnification by Evercel of its officers,
directors and from time-to-time its employees and agents, under certain
circumstances against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with prosecuting,
defending, investigating or being a witness in any threatened, pending or
completed legal proceeding in which any such person is involved by reason of the
fact that such person is or was an officer, director, employee or agent of the
registrant if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of Evercel,
and, with respect to criminal actions or proceedings, if such person had no
reasonable cause to believe his or her conduct was unlawful.
Prior to the offering, we will have entered into indemnification agreements
with each of our directors. The form of indemnification agreement provides that
we will indemnify our directors for expenses incurred because of their status as
a director to the fullest extent permitted by Delaware law, our certificate of
incorporation and our by-laws.
II-1
<PAGE> 77
ITEM 16. EXHIBITS
(a) EXHIBITS. The following is a complete list of exhibits filed or
incorporated by reference as part of this Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1 Form of Underwriting Agreement*
3.1 Form of Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to exhibit of the
same number contained in the Company's SB-2/A Amendment 2
dated February 9, 1999).
3.2 Certificate of the Designation, Powers, Preference and
Rights of the Series A Cumulative Convertible Preferred
Stock, the Series A-1 Cumulative Convertible Preferred Stock
and the Series B Cumulative Convertible Preferred Stock.**
3.3 Form of Warrant issued to holders of Series A Preferred
Stock and placement agent, dated December 16, 1999.**
3.4 Form of Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
4.1 Form of Specimen Stock Certificate (incorporated by
reference to exhibit of the same number contained in the
Company's SB-2/A Amendment 2 dated February 9, 1999).
4.2 Registration Rights Agreement dated December 16, 1999.**
5.1 Opinion of Robinson & Cole LLP.*
10.1 Sales Agency Agreement, dated December 16, 1999, between
Burnham Securities Inc. and the Company.**
23.1 Consent of KPMG LLP*
23.2 Consent of Robinson & Cole LLP (included in Exhibit 5.1)
24 Power of Attorney**
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
(b) FINANCIALS STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because
the required information is given in the consolidated financial statements or
notes to those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or
II-2
<PAGE> 78
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Danbury, state of Connecticut, on April 5, 2000.
EVERCEL, INC.
(Registrant)
By: /s/ ROBERT L. KANODE
------------------------------------
Name: Robert L. Kanode
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT L. KANODE President, Chief Executive April 5, 2000
- --------------------------------------------------- Officer and Director
Robert L. Kanode
* Executive Vice President April 5, 2000
- --------------------------------------------------- and Chief Operating
Allen Charkey Officer and Director
/s/ GREGORY SCHULTE Chief Financial and April 5, 2000
- --------------------------------------------------- Accounting Officer
Gregory Schulte
* Chairman of the Board of April 5, 2000
- --------------------------------------------------- Directors
Jerry D. Leitman
Director
- ---------------------------------------------------
Thomas L. Kempner
* Director April 5, 2000
- ---------------------------------------------------
William A. Lawson
* Director April 5, 2000
- ---------------------------------------------------
Warren D. Bagatelle
* Director April 5, 2000
- ---------------------------------------------------
James D. Gerson
Director
- ---------------------------------------------------
Robert Gable
* Director April 5, 2000
- ---------------------------------------------------
John H. Gutfreund
* /s/ GREGORY SCHULTE
- ---------------------------------------------------
Gregory Schulte
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1 Form of Underwriting Agreement*
3.1 Form of Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to exhibit of the
same number contained in the Company's SB-2/A Amendment 2
dated February 9, 1999).
3.2 Certificate of the Designation, Powers, Preference and
Rights of the Series A Cumulative Convertible Preferred
Stock, the Series A-1 Cumulative Convertible Preferred Stock
and the Series B Cumulative Convertible Preferred Stock.**
3.3 Form of Warrant issued to holders of Series A Preferred
Stock and placement agent, dated December 16, 1999.**
3.4 Form of Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
4.1 Form of Specimen Stock Certificate (incorporated by
reference to exhibit of the same number contained in the
Company's SB-2/A Amendment 2 dated February 9, 1999).
4.2 Registration Rights Agreement dated December 16, 1999.**
5.1 Opinion of Robinson & Cole LLP.*
10.1 Sales Agency Agreement, dated December 16, 1999, between
Burnham Securities Inc. and the Company.**
23.1 Consent of KPMG LLP*
23.2 Consent of Robinson & Cole LLP (included in Exhibit 5.1)
24 Power of Attorney**
</TABLE>
- ------------------------
* Filed herewith.
** Previously filed.
<PAGE> 1
EVERCEL, INC.
SHARES(1)
Common Stock
($0.01 par value per share)
---------------
Underwriting Agreement
April [__], 2000
Adams, Harkness & Hill, Inc.
FAC/Equities
Burnham Securities, Inc.
As representatives of the several
Underwriters named in Schedule I hereto,
c/o Adams, Harkness & Hill, Inc.
60 State Street
Boston, MA 02109
Ladies and Gentlemen:
Evercel, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to you and
the several Underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representatives (the
"Representatives") an aggregate of shares (the "Company Firm Shares")
of the Company's Common Stock, $0.01 par value per share (the "Common Stock")
and, at the election of the Underwriters, up to [________] additional shares
(the "Company Optional Shares") of Common Stock, and the shareholders listed on
Schedule II hereto (the "Selling Shareholders"), propose, subject to the terms
and conditions stated herein, to sell to the Underwriters an aggregate of
[________] shares of Common Stock in the amounts set forth opposite each Selling
Shareholder's name on Schedule II (the "Selling Shareholders' Firm Shares," and
together with the Company Firm Shares, the "Firm Shares") of Common Stock. The
Firm Shares and any Company Optional Shares that the Underwriters elect to
purchase pursuant to Section 3 hereof are herein collectively called the
"Shares."
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters that:
- ----------
(1) Includes shares subject to an option to purchase additional
shares to cover over-allotments.
<PAGE> 2
(a) A registration statement on Form S-3 (File No. 333-33090) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement including any pre-effective amendments thereto and any
post-effective amendment thereto, each in the form heretofore delivered to you,
and, excluding exhibits thereto, to you for each of the other Underwriters, have
been declared effective by the Commission in such form; other than a
registration statement, if any, increasing the size of the offering (a "Rule
462(b) Registration Statement"), filed pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial Registration Statement has
heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or any Rule 462(b) Registration Statement has been issued and
no proceeding for that purpose has been initiated or, to the Company's
knowledge, threatened by the Commission (any preliminary prospectus, included in
the Initial Registration Statement and incorporated by reference in any Rule
462(b) Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various parts of the Initial
Registration Statement and any Rule 462(b) Registration Statement, including all
exhibits thereto, including any exhibits incorporated by reference in any Rule
462(b) Registration Statement, and including the information contained in the
form of final prospectus filed with the Commission pursuant to Rule 424(b) under
the Act in accordance with Section 6(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the time it
was declared effective or any Rule 462(b) Registration Statement at the time it
became effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus");
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through you expressly for use therein. The Company acknowledges that
the statements set forth under the heading "Underwriting" in the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by the Representative specifically for inclusion in the
Registration Statement;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus, will conform, in all material respects, to the requirements of the
Act and the rules and regulations of the Commission thereunder and do not and
will not, as of the applicable effective date as to the Registration Statement
and any amendment thereto and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light
2
<PAGE> 3
of the circumstances under which they were made, not misleading; and, as of each
Time of Delivery (as hereinafter defined), neither the Registration Statement
nor the Prospectus nor any further amendment or supplement thereto made by the
Company prior to such Time of Delivery contains an untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, provided, however, that these representations and warranties shall
not apply to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by an Underwriter through
you expressly for use therein;
(d) There are not contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the Registration
Statement by the Act or by the rules and regulations of the Commission
thereunder which have not been described or filed as required; the contracts so
described in the Prospectus to which the Company or any of its subsidiaries is a
party have been duly authorized, executed and delivered by the Company or its
subsidiaries, constitute valid and binding agreements of the Company or its
subsidiaries and are enforceable against and by the Company or its subsidiaries
in accordance with their respective terms, and are in full force and effect on
the date hereof; and neither the Company nor any of its subsidiaries, nor, to
the best of the Company's knowledge, any other party is in breach of or default
under any of such contracts;
(e) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been any change in the capital stock (excluding grants of stock
options under the Company's 1998 Equity Incentive Plan which in any event have
not exceeded the unallocated reserve for such plan as described in the
Prospectus) or long-term debt of the Company or any of its subsidiaries or any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the business, management, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole (a "Material Adverse Change"), otherwise than as
set forth or contemplated in the Prospectus;
(f) The Company and each of its subsidiaries has good and marketable
title, free and clear of all liens, claims, encumbrances and restrictions except
liens for taxes not yet due and payable, to all property and assets described in
the Registration Statement as being owned by it. Except as disclosed in the
Prospectus and the financial statements of the Company, and the related notes
thereto, included in the Prospectus, neither the Company nor any subsidiary of
the Company owns any real property; any real property and buildings held under
lease by the Company are held by it under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its subsidiaries; the Company owns or leases all such properties as are
necessary to its operations as now conducted, except where the failure to so own
or lease would not result in a Material Adverse Change;
3
<PAGE> 4
(g) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation, each with full power and authority
(corporate and otherwise) to own its properties and conduct its business as
described in the Prospectus, and each has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which its owns or leases properties, or
conducts any business, so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so qualified in
any such jurisdiction;
(h) The Company has an authorized capitalization as set forth under the
heading "Capitalization" in the Prospectus, and all the issued shares of capital
stock of the Company have been duly and validly authorized and issued, are fully
paid and non-assessable, were not issued in violation of or subject to any
preemptive rights, registration rights, co-sale rights or other rights to
subscribe for or purchase any securities which have not been waived or satisfied
and conform in all material respects to the description of capital stock
contained in the Prospectus under the heading "Description of Capital Stock";
all of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and are owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims; except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company, and the related notes
thereto, included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights, registration
rights, co-sale rights or other rights to subscribe for or to purchase any
securities or obligation convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations; and the description of the Company's
stock option and stock purchase plans and the options or other rights granted
and exercised thereunder set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans,
options and rights;
(i) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform in all
material respects to the description of the Common Stock contained in the
Prospectus under the heading "Description of Capital Stock"; no preemptive
rights, registration rights, co-sale rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Shares by the
Company or, to the best of the Company's knowledge, the sale of the Selling
Shareholders' Firm Shares by the Selling Shareholders pursuant to this Agreement
which have not been waived or satisfied; no shareholder of the Company has any
right which has not been waived to require the Company to register the sale of
any shares of capital stock owned by such shareholder under the Act in the
public offering contemplated by this Agreement; and no further approval or
authority of the shareholders or the Board of Directors of the Company will be
required for the issuance and sale of the Shares to be sold by the Company or
for the sale of the Shares to be sold by the Selling Shareholders as
contemplated herein;
(j) The Company has full corporate power and authority to enter into
this Agreement; this Agreement has been duly authorized, executed and delivered
by the Company, constitutes a
4
<PAGE> 5
valid and binding obligation of the Company and is enforceable against the
Company in accordance with its terms;
(k) The issuance and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or Bylaws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws or the by-laws and rules of the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the purchase and distribution of
the Shares by the Underwriters;
(l) There are no legal or governmental actions, suits or proceedings
pending or, to the best of the Company's knowledge, threatened to which the
Company or any of its subsidiaries is or may be a party or of which property
owned or leased by the Company or any of its subsidiaries is or may be the
subject, or related to environmental or discrimination matters, which actions,
suits or proceedings, would, if determined adversely to the Company or its
subsidiaries individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a Material Adverse
Change; no labor disturbance by the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is imminent which might
be expected to result in a Material Adverse Change, and neither the Company nor
any of its subsidiaries is a party or subject to the provisions of any
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body;
(m) The Company and its subsidiaries possess all licenses,
certificates, authorizations or permits issued by the appropriate governmental
or regulatory agencies or authorities that are necessary to enable them to own,
lease and operate their respective properties and to carry on their respective
businesses as presently conducted and which are material to the Company and its
subsidiaries, and neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of any such
license, certificate, authority or permit which, singly or in the aggregate if
the subject of an unfavorable decision, would result in a Material Adverse
Change;
(n) KPMG LLP, who have certified certain financial statements of the
Company, are independent public accountants as required by the Act and the rules
and regulations of the Commission thereunder;
5
<PAGE> 6
(o) The consolidated financial statements and schedules of the Company,
and the related notes thereto, included in the Registration Statement and the
Prospectus present fairly the financial position of the Company and its
subsidiaries as of the respective dates of such financial statements and
schedules, and the results of operations and cash flows of the Company and its
subsidiaries for the respective periods covered thereby; such statements,
schedules and related notes have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis as certified by
KPMG LLP; no other financial statements or schedules are required to be included
in the Registration Statement; and the selected financial data set forth in the
Prospectus under the captions "Summary Financial Data," "Capitalization" and
"Selected Financial Data" fairly present the information set forth therein on
the basis stated in the Registration Statement;
(p) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks, trade
names, patent rights, copyrights, licenses, approvals and governmental
authorizations to conduct their business as now conducted; the Company has no
knowledge of any material infringement by the Company or any of its subsidiaries
of trademark, trade name rights, patent rights, copyrights, licenses, trade
secret or other similar rights of others; and there is no claim being made
against the Company or any of its subsidiaries regarding trademark, trade name,
patent, copyright, license, trade secret or other infringement;
(q) The Company and each of its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the Company
or any of its subsidiaries which would reasonably be expected to result in a
Material Adverse Change;
(r) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an investment company,
as such terms are defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(s) Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts which it deems adequate for its business, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect;
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any contribution in violation of
law, (ii) made any payment to any foreign, federal or state governmental officer
or official, or other person changed with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof, or (iii) violated any provisions of the Foreign
Corrupt Practices Act of 1977, as amended;
(u) The Company has not taken and will not take, directly or indirectly
through any of its directors, officers or controlling persons, any action which
is designed to or which has constituted
6
<PAGE> 7
or which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Shares;
(v) The Common Stock has been registered pursuant to Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"); the
Company is not required to take any further action for inclusion of the Shares
on the Nasdaq National Market and has received notification that the listing has
been approved, subject to notice of issuance of the Shares; and the Company has
no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the Common
Stock from the Nasdaq National Market;
(w) The Company does not know of any claims for services in the nature
of a finder's fee, brokerage fee or otherwise with respect to this offering for
which the Company or any of the Underwriters may be responsible;
(x) The Company has complied with all of the requirements and filed the
required forms as specified in Florida Statutes Section 517.075;
(y) The Company and each of its subsidiaries is conducting its business
in compliance with all the laws, rules and regulations of the jurisdictions in
which it is conducting business. Neither the Company nor any of its subsidiaries
has received any notification of any asserted present or past failure of the
Company or any of its subsidiaries to comply with any such laws, rules or
regulations;
(z) (i) Each of the Company and its Subsidiaries is in compliance in
all material respects with all rules, laws and regulation relating to the use,
treatment, storage and disposal of toxic substances and protection of health or
the environment ("Environmental Law") which are applicable to its business; (ii)
neither the Company nor its Subsidiaries has received any notice from any
governmental authority or third party of an asserted claim under Environmental
Laws; (iii) each of the Company and its Subsidiaries has received all permits,
licenses or other approvals required of it under applicable Environmental Laws
to conduct its business and is in compliance with all terms and conditions of
any such permit, license or approval; (iv) to the Company's knowledge, no facts
currently exist that will require the Company or its Subsidiaries to make future
material capital expenditures to comply with Environmental Laws; and (v) no
property which is or has been owned, leased or occupied by the Company or its
Subsidiaries has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation of Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et seq.) ("CERCLA") or otherwise designated as
a contaminated site under applicable state or local law. Neither the Company nor
any of its Subsidiaries has been named as a "potentially responsible party"
under CERCLA.;
(aa) The Company has filed all reports it has been required to file
under the Exchange Act and the rules and regulations thereunder; such reports
when filed conformed in all material respects to the requirements of the
Exchange Act; and none of such reports contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
to make the statements therein, in light of the circumstances under which they
were made, not misleading;
7
<PAGE> 8
(bb) The Company has reviewed its operations and those of its
subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries have been and will be affected by the Year
2000 Problem (that is, any significant risk that computer hardware or software
applications used by the Company and its subsidiaries will not, in the case of
dates or time periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring prior to January
1, 2000); as a result of such review, (i) the Company does not believe that (A)
there are any issues related to the Company's preparedness to address the Year
2000 Problem that are of a character required to be described or referred to in
the Registration Statement or Prospectus which have not been accurately
described in the Registration Statement or Prospectus and (B) the Year 2000
Problem will result in a Material Adverse Change, or result in any material loss
or interference with the business or operations of the Company and its
subsidiaries, taken as a whole; and (ii) the Company reasonably believes, after
due inquiry, that the suppliers, vendors, customers or other material third
parties used or served by the Company and such subsidiaries are addressing or
will address the Year 2000 Problem in a timely manner, except to the extent that
a failure to address the Year 2000 by a supplier, vendor, customer or material
third party would not result in a Material Adverse Change; and
(cc) The Company has not and will not distribute any offering material
in connection with the offering and sale of the Shares other than the
Registration Statement and the Prospectus.
2. REPRESENTATIONS OF THE SELLING SHAREHOLDERS. Each of the Selling
Shareholders, severally and not jointly, represents and warrants to, and agrees
with, each of the Underwriters that:
(a) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Shareholder of this Agreement and the
Power-of-Attorney and Custody Agreement (collectively, the "Custody Agreement")
hereinafter referred to, and for the sale and delivery of the Shares to be sold
by such Selling Shareholder hereunder, have been obtained; and such Selling
Shareholder has full right, power and authority to enter into this Agreement and
the Custody Agreement to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder hereunder;
(b) This Agreement and the Custody Agreement have each been duly
authorized, executed and delivered by such Selling Shareholder and each such
document constitutes a valid and binding obligation of such Selling Shareholder,
enforceable in accordance with its terms;
(c) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the sale of the Shares by such Selling Shareholder or the
consummation by such Selling Shareholder of the transactions on its part
contemplated by this Agreement and the Custody Agreement, except such as have
been obtained under the Act or the rules and regulations thereunder and such as
may be required under state securities or Blue Sky laws or the by-laws and rules
of the NASD in connection with the purchase and distribution by the Underwriters
of the Shares;
(d) The sale of the Shares to be sold by such Selling Shareholder
hereunder and the performance by such Selling Shareholder of this Agreement and
the Custody Agreement and the
8
<PAGE> 9
consummation of the transactions contemplated hereby and thereby will not result
in a breach or violation of any of the terms or provisions of, or constitute a
default under, or give any party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under, any material
indenture, mortgage, deed of trust, voting trust agreement, loan agreement,
bond, debenture, note agreement or other evidence of indebtedness, lease,
contract or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any of its properties is bound or
affected, or violate or conflict with any material judgment, ruling, decree,
order, statute, Rule or regulation of any court or other governmental agency or
body applicable to such Selling Shareholder;
(e) Such Selling Shareholder has, and at the First Time of Delivery (as
defined in Section 5 hereof) will have, good and valid title to the Shares to be
sold by such Selling Shareholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and upon delivery of such Shares and payment
therefor pursuant hereto, good and valid title to such Shares, free and clear of
all liens, encumbrances, equities or claims, will pass to each of the several
Underwriters who have purchased such Shares in good faith and without notice of
any such lien, encumbrance, equity or claim or any other adverse claim within
the meaning of Section 8-302 of the Massachusetts Uniform Commercial Code;
(f) Such Selling Shareholder has the authority to and has executed and
delivered a lockup agreement in the form attached hereto as Annex II;
(g) Such Selling Shareholder has not taken and will not at any time
take, directly or indirectly, any action designed, or which might reasonably be
expected, to cause or result in, or which will constitute, stabilization of the
price of shares of Common Stock to facilitate the sale or resale of any of the
Shares;
(h) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity with
written information furnished to the Company by such Selling Shareholder
expressly for use therein, such Preliminary Prospectus and the Registration
Statement did, and the Prospectus and any further amendments or supplements to
the Registration Statement and the Prospectus will, when they become effective
or are filed with the Commission, as the case may be, conform in all material
respects to the requirements of the Act and the rules and regulations of the
Commission thereunder and not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and
(i) Such Selling Shareholder has carefully reviewed the representations
and warranties of the Company contained in this Agreement and the information
contained in the Registration Statement. Based on the foregoing, the sale of the
Shares by such Selling Stockholder pursuant to this Agreement is not prompted by
any adverse information concerning the Company which is not set forth in the
Registration Statement.
9
<PAGE> 10
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act of
1982 with respect to the transactions herein contemplated, such Selling
Shareholder agrees to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
Each Selling Shareholder represents and warrants that a certificate in
negotiable form representing all of the shares of Series A Cumulative Preferred
Stock, par value $0.01 per share (the "Convertible Preferred Stock") which,
immediately prior to the consummation of the transactions contemplated hereby,
will, at the election of such Selling Stockholder, convert into all of the
Shares to be sold by such Selling Stockholder, has been placed in custody under
the Custody Agreement, in the form heretofore furnished to you, duly executed
and delivered by such Selling Shareholder to the Custodian (as defined in the
Custody Agreement), and that such Selling Shareholder has duly executed and
delivered a power-of-attorney, in the form heretofore furnished to you and
included in the Custody Agreement (the "Power-of-Attorney"), appointing Robert
L. Kanode and Gregory W. Schulte and each of them, as such Selling Shareholder's
attorney-in-fact (the "Attorneys-in-Fact") with authority to execute and deliver
this Agreement on behalf of such Selling Shareholder, to determine (subject to
the provisions of the Custody Agreement) the purchase price to be paid by the
Underwriters to such Selling Shareholder as provided in Section 3 hereof, to
authorize the delivery of the Shares to be sold by such Selling Shareholder
hereunder and otherwise to act on behalf of such Selling Shareholder in
connection with the transactions contemplated by this Agreement and the Custody
Agreement.
Each Selling Shareholders specifically agrees that the Shares
represented by the certificates held in custody for such Selling Shareholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by such Selling Shareholder for such
custody, and the appointment by such Selling Shareholder of the
Attorneys-in-Fact by the Power-of-Attorney, are to that extent irrevocable. Each
Selling Shareholder specifically agrees that the obligations of such Selling
Shareholder hereunder shall not be terminated by operation of law, whether by
the death or incapacity of such Selling Shareholder or, in the case of an estate
or trust, by the death or incapacity of any executor or trustee or the
termination of such estate or trust, or by the occurrence of any other event. If
such Selling Shareholder or any such executor or trustee should die or become
incapacitated, or if any such estate or trust should be dissolved, or if any
other such event should occur, before the delivery of the Shares hereunder,
certificates representing the Shares to be sold by such Selling Shareholder
shall be delivered by or on behalf of such Selling Shareholder in accordance
with the terms and conditions of this Agreement and of the Custody Agreement,
and actions taken by the Attorneys-in-Fact pursuant to the Power-of-Attorney
shall be as valid as if such death, incapacity, termination, dissolution or
other event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event.
3. SHARES SUBJECT TO SALE. (a) On the basis of the representations,
warranties and agreements of the Company and the Selling Shareholders contained
herein, and subject to the terms and conditions of this Agreement, (i) the
Company agrees to issue and sell the Company Firm Shares to the several
Underwriters, (ii) each of the Selling Shareholders agrees, severally and not
jointly,
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to sell its respective Selling Shareholder Firm Shares to the several
Underwriters, and (iii) each of the Underwriters agrees, severally and not
jointly, to purchase from the Company and the Selling Shareholders, at a
purchase price per share of $_________, the respective number of Firm Shares (to
be adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Firm Shares by a fraction, the numerator of
which is the aggregate number of Firm Shares to be purchased by such Underwriter
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all the Underwriters and (b) in the event and to the extent that the
Underwriters shall exercise the election to purchase Company Optional Shares as
provided below, (i) the Company agrees to issue and sell the Company Optional
Shares to the several Underwriters and (ii) each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 3, that portion of the number
of Company Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Company Optional Shares by a fraction the numerator
of which is the maximum number of Company Optional Shares which such Underwriter
is entitled to purchase as set forth opposite the name of such Underwriter in
Schedule I hereto and the denominator of which is the maximum number of the
Company Optional Shares which all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to [______] Company Optional Shares at the purchase price per
share set forth in the paragraph above, for the sole purpose of covering over
allotments in the sale of the Firm Shares. Any such election to purchase Company
Optional Shares may be exercised by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Company Optional Shares to be purchased
and the date on which such Company Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery or,
unless you, and the Company otherwise agree in writing, earlier than two or
later than three business days after the date of such notice.
4. OFFERING. Upon the authorization by you of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
5. CLOSING. Certificates in definitive form for the Shares to be purchased
by each Underwriter hereunder, and in such denominations and registered in such
names as Adams, Harkness & Hill, Inc. may request upon at least forty-eight
hours' prior notice to the Company, shall be delivered by or on behalf of the
Company and the Selling Shareholders to you for the account of such Underwriter,
against payment by such Underwriter or on its behalf of the purchase price
therefor by wire transfer or certified or official bank check or checks, payable
to the order of the Company and the Custodian on behalf of the Selling
Shareholders, respectively, in New York Clearing House funds, all at the office
of Adams, Harkness & Hill, Inc., 60 State Street, Boston, Massachusetts 02109.
The time and date of such delivery and payment shall be, with respect to the
Company Firm Shares, 9:30 a.m., Boston time, on [________________], 2000 or such
other time and date as you and the Company may agree upon in writing, and, with
respect to the Company Optional Shares, 9:30 a.m., Boston time, on the date
specified by you in the written notice given by you of the Underwriters'
election
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to purchase such Company Optional Shares, or at such other time and date as you
and the Company may agree upon in writing. Such time and date for delivery of
the Company Firm Shares is herein called the "First Time of Delivery," such time
and date for delivery of the Company Optional Shares, if not the Company First
Time of Delivery, is herein called the "Second Time of Delivery," and each such
time and date for delivery is herein called a "Time of Delivery." Such
certificates will be made available for checking and packaging at least
twenty-four hours prior to each Time of Delivery at such location as you may
specify.
6. COVENANTS OF THE COMPANY. The Company agrees with each of the
Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus which
shall be disapproved by you promptly after reasonable notice thereof; to advise
you, promptly after it receives notice thereof, of the time when the
Registration Statement, or any amendment thereto, has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish you copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop order or
of any order preventing or suspending the use of any Preliminary Prospectus or
Prospectus, of the suspension of the qualification of the Shares for offering or
sale in any jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for additional
information; and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, to use promptly its best efforts to obtain
its withdrawal;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of proceeds in any jurisdiction;
(c) To furnish the Underwriters with copies of the Prospectus in such
quantities as you may from time to time reasonably request, and, if the delivery
of a prospectus is required at any time prior to the expiration of nine months
after the time of issuance of the Prospectus in connection with the offering or
sale of the Shares and if at such time any events shall have occurred as a
result of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, or, if for any other reason it shall be necessary
during such same period to amend or supplement the Prospectus in order to comply
with the Act, to notify you and upon your request to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as you
may from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such
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<PAGE> 13
statement or omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the Shares
at any time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than fifteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including at the option of the Company Rule 158
under the Act);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to offer,
sell, contract to sell or otherwise dispose of any securities of the Company
which are substantially similar to the Shares, without your prior written
consent other than (i) the sale of the Shares to be sold by the Company
hereunder, (ii) the Company's issuance of options under its option plans in
amounts not in excess of the amount shown as available for future grant in the
Prospectus, (iii) the Company's issuance of shares of Common Stock upon the
conversion of outstanding shares of Convertible Preferred Stock and (iv) shares
of capital stock issued, with at least five business days prior notice to Adams,
Harkness & Hill, Inc., in connection with the acquisition by the Company of the
assets or capital stock of another person or entity, whether directly, through
merger or consolidation or otherwise, if the terms of such issuance provide that
such shares of capital stock shall not be resold for a period of 180 days
following the date of the Prospectus; provided, however, that the Company shall
not release any party from such resale restriction without your prior written
consent;
(f) During a period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, not to grant
options or warrants or other securities to purchase shares of Common Stock at a
price less than the initial public offering price;
(g) To furnish to its shareholders as soon as practicable after the end
of each fiscal year ending after the date of this Agreement an annual report
(including a balance sheet and statements of income, shareholders' equity and
cash flow of the Company and its consolidated subsidiaries certified by
independent public accountants) and as soon as practicable after the end of each
of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to shareholders generally, and
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission, the Nasdaq
National Market or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional information,
concerning the business and financial condition of the Company as you may from
time to time reasonably request (such financial statements to be on a combined
or consolidated
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<PAGE> 14
basis to the extent the accounts of the Company and its subsidiaries are
combined or consolidated in reports furnished to its shareholders generally or
to the Commission);
(i) To use the net proceeds acquired by it from the sale of the Shares
in the manner specified in the Prospectus under the caption "Use of Proceeds"
and in a manner such that the Company will not become an "investment company" as
that term is defined in the Investment Company Act; and
(j) Not to accelerate the vesting of any option issued under any stock
option plan such that any such option may be exercised within 180 days from the
date of the Prospectus.
7. COVENANTS OF THE SELLING SHAREHOLDERS. Each of the Selling Shareholders
agree to pay or cause to be paid all taxes, if any, on the transfer and sale of
the Shares to be sold by such Selling Shareholder hereunder and the fees and
expenses, if any, of counsel and accountants retained by such Selling
Shareholder. The Company agrees with the Selling Shareholders to pay all costs
and expenses incident to the performance of the obligations of the Selling
Shareholders under this Agreement (except as set forth above), including, but
not limited to, all expenses incident to the delivery of the certificates for
the Shares to be sold by the Selling Shareholders, the costs and expenses
incident to the preparation, printing and filing of the Registration Statement
(including all exhibits thereto) and the Prospectus and any amendments or
supplements thereto, the expenses of qualifying the Shares to be sold by the
Selling Shareholders under the state securities or Blue Sky laws, all filing
fees and the reasonable fees and expenses of counsel for the Underwriters
payable in connection with the review of the offering of the Shares by the NASD,
and the cost of furnishing to the Underwriters the required copies of the
Registration Statement and Prospectus and any amendments or supplements thereto;
provided that each Selling Shareholder agrees to pay or cause to be paid its pro
rata share (based on the percentage which the number of Shares sold by such
Selling Shareholder bears to the total number of Shares sold) of all
underwriting discounts and commissions.
8. EXPENSES. The Company covenants and agrees with the several
Underwriters that the Company will pay or cause to be paid the following: (i)
the fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memoranda and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offer and sale under state securities laws as provided in Section
6(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) the filing fees and the reasonable fees and expenses of
counsel to the Underwriters incident to securing any required review by the NASD
of the terms of the sale of the Shares; (v) the cost of preparing stock
certificates; (vi) the cost and charges of any transfer agent or registrar; and
(vii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section. It is understood,
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however, that, except as provided in this Section 8, Section 10 and Section 13
hereof, the Underwriters will pay all of their own costs and expenses, including
the fees of their counsel, stock transfer taxes on resale of any of the Shares
by them, and any advertising expenses connected with any offers they may make.
9. CONDITION OF UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters hereunder, as to the Shares to be delivered at each Time of
Delivery, shall be subject, in their discretion, to the condition that all
representations and warranties and other statements of the Company and the
Selling Shareholders herein are, at and as of such Time of Delivery, true and
correct, the condition that the Company and the Selling Shareholders shall each
have performed all of their respective obligations hereunder theretofore to be
performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 6(a)
hereof, no stop order suspending the effectiveness of the Registration Statement
or any part thereof shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been complied
with to your reasonable satisfaction;
(b) Choate, Hall & Stewart, counsel to the Underwriters, shall have
furnished to you such opinion or opinions, dated such Time of Delivery, with
respect to this Agreement, the Registration Statement, the Prospectus, and other
related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to enable
them to pass upon such matters;
(c) Robinson & Cole LLP, counsel to the Company, shall have furnished
to you their written opinion, dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus under the caption "Description of Capital Stock." All of the
issued shares of capital stock of the Company have been duly authorized and
validly issued, are, to the best of such counsel's knowledge, fully paid and
nonassessable and, to the best of such counsel's knowledge, were not issued in
violation of any preemptive right, registration right, right of first refusal or
other similar right to subscribe for or purchase any securities which have not
been waived. The Shares have been duly authorized and when issued and paid for
as contemplated by this Agreement will be validly issued, fully paid and
non-assessable and will conform in all material respects to the description of
the Common Stock contained in the Prospectus under the caption "Description of
Capital Stock";
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(iii) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws of each
other jurisdiction within the United States in which it owns or leases
properties, or conducts any business, so as to require such qualification, or is
subject to no material liability or disability by reason of failure to be so
qualified in any such jurisdiction (such counsel being entitled to rely in
respect of the opinion in this clause upon certificates of public officials and
in respect of matters of fact upon certificates of officers of the Company,
provided that such counsel provide you with copies of such certificates and
shall state that they believe that both you and they are justified in relying
upon such certificates);
(iv) Each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
jurisdiction of organization; and all of the issued shares of capital stock of
each such subsidiary have been duly and validly authorized and issued, are fully
paid and non-assessable, and are owned directly by the Company, to our
knowledge, free and clear of all liens, encumbrances, equities or claims (such
counsel being entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact upon certificates of
officers of the Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified in relying upon
such opinions and certificates);
(v) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings, actions
or suits pending or threatened to which the Company or any of its subsidiaries
is or may be a party or of which property owned or leased by the Company or any
of its subsidiaries is or may be the subject, or related to environmental or
discrimination matters, which actions, suits or proceedings, might, individually
or in the aggregate, prevent or adversely affect the transactions contemplated
by this Agreement or result in a material adverse change in or affecting the
general affairs, management, financial position, shareholders' equity or results
of operations of the Company; no labor disturbance by the employees of the
Company or any of its subsidiaries exists or is imminent which might be expected
to materially adversely affect such general affairs, management, financial
position, shareholders' equity or results of operations; and neither the Company
nor any of its subsidiaries is a party or subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory body,
administrative agency or governmental body;
(vi) The Company has full corporate power and authority to enter
into this Agreement and this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issuance and sale of the Shares being delivered at such
Time of Delivery by the Company and the performance by the Company of its
obligations under this Agreement and the consummation of the transactions herein
contemplated will not (i) result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument filed as an exhibit to
the Registration Statement to which the Company is a party or by which the
Company or any of its subsidiaries is a party or to which the Company or any of
its subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, (ii) violate the provisions of
the Certificate of Incorporation or Bylaws of the Company or (iii) violate any
statute or any order, rule
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or regulation of the State of Delaware or of the United States (except that such
counsel need express no opinion as to state securities or Blue Sky laws or as to
compliance with the antifraud provisions of federal and state securities laws);
(viii) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body of the State
of Delaware or of the United States is required for the issuance and sale of the
Shares or the consummation by the Company of the transactions contemplated by
this Agreement, except the registration under the Act of the Shares registration
of the Common Stock under the Exchange Act, and such consents, approval,
authorizations, registrations or qualifications as may be required under state
securities or Blue Sky laws or the bylaws and rules of the NASD in connection
with the purchase and distribution of the Shares by the Underwriters;
(ix) To the best of such counsel's knowledge, there are no
contracts or other documents required to be described in the Registration
Statement or to be filed as exhibits to the Registration Statement by the Act or
by the rules and regulations thereunder which have not been described or filed
as required;
(x) The statements under the captions "Liquidity and Capital
Resources," "Management--Employment Agreement," "Management--Stock Option Plan,"
"Related Party Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale" in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or matters of law, are
accurate summaries and fairly and correctly present in all material respects,
the information called for with respect to such documents and matters (provided,
however, that such counsel may rely on representations of the Company with
respect to the factual matters contained in such statements, and provided
further that such counsel shall state that nothing has come to the attention of
such counsel which leads them to believe that such representations are not true
and correct in all material respects);
(xi) Except as disclosed in the Prospectus, to the best of such
counsel's knowledge, the Company has not granted any rights, warrants or options
to acquire, instruments convertible into or exchangeable or exercisable for, or
entered into any commitments, plans, arrangements to issue any shares of capital
stock of the Company or any security convertible or exchangeable for capital
stock of the Company;
(xii) No holders of securities of the Company have rights under the
provisions of the Certificate of Incorporation or Bylaws of the Company or under
any agreement filed as an exhibit to the Registration Statement which have not
been waived or satisfied to the registration of shares of Common Stock or other
securities because of the filing of the Registration Statement by the Company or
the offering contemplated hereby;
(xiii) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company" as defined in the Investment Company Act;
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(xiv) The Shares have been authorized for inclusion on the Nasdaq
National Market, subject to notice of issuance; and
(xv) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time of
Delivery (other than the financial statements, including the notes and schedules
thereto, or any other financial or accounting information as set forth or
referred to therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the requirements of the Act and the rules
and regulations thereunder.
Such counsel shall also state that they have participated in discussion
with your representatives and those of the Company, and while they have not
independently verified and are not passing upon and do not assume the
responsibility for, the accuracy, fairness or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
such counsel's attention which gives them reason to believe that, as of its
effective date, the Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the financial
statements, including the notes and schedules thereto, or any other financial or
accounting information as set forth or referred to therein, as to which such
counsel need express no belief) contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that, as of its date, the
Prospectus or any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial statements, including
the notes and schedules thereto, or any other financial or accounting
information as set forth or referred to therein, as to which such counsel need
express no belief) contained an untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading or that, as of such
Time of Delivery, either the Registration Statement or the Prospectus or any
further amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements, including the notes and
schedules thereto, or any other financial or accounting information as set forth
or referred to therein, as to which such counsel need express no belief)
contains an untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and they do not know of any
amendment to the Registration Statement required to be filed which is not filed
as required.
Such counsel shall also include a statement in such opinion as to the
matters set forth in this paragraph. The Registration Statement has become
effective under the Act. To the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued by
the Commission nor has any proceeding been instituted or contemplated for that
purpose under the Act. The Prospectus has been filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations under the Act within the
time period required thereby.
(d) [______________], intellectual property counsel to the Company,
shall have furnished to you their written opinion, dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
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(i) Such counsel is familiar with the technology used by the
Company and its subsidiaries in their businesses and the manner of its use
thereof and has read the Registration Statement and the Prospectus, including
particularly the portions of the Registration Statement and the Prospectus
referring to trademarks, trade names, patents, copyrights, licenses, trade
secrets or other intellectual property rights;
(ii) Such counsel has no reason to believe that the Registration
Statement or the Prospectus (A) contains any untrue statement of a material fact
with respect to trademarks, trade names, patents, copyrights, licenses, trade
secrets or other intellectual property rights owned or used by the Company or
any of its subsidiaries, or the manner of its use thereof, or any allegation on
the part of any person that the Company or any of its subsidiaries is infringing
any trademarks, trade names, patent rights, copyrights, licenses, trade secrets
or other intellectual property rights of any such person or (B) omits to state
any material fact relating to trademarks, trade names, patents, copyrights,
license, trade secrets or other intellectual property rights owned or used by
the Company or any of its subsidiaries, or the manner of its use thereof, or any
allegation of which such counsel have knowledge, that is required to be stated
in the Registration Statement or the Prospectus or is necessary to make the
statements therein not misleading;
(iii) To the best of such counsel's knowledge, there are no
adversarial legal or governmental proceedings pending relating to trademarks,
trade names, patent rights, copyrights, licenses, trade secrets or other
intellectual property rights of the Company or any of its subsidiaries, and to
the best of such counsel's knowledge no such adversarial proceedings are
threatened or contemplated by governmental authorities or others;
(iv) Such counsel does not know of any contracts or other documents
relating to the Company's or any of its subsidiaries' trademarks, trade names,
patents, copyrights, licenses, trade secrets or other intellectual property
rights of a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or the
Prospectus that are not filed or described as required;
(v) To the best of such counsel's knowledge, neither the Company
nor any of its subsidiaries is infringing or otherwise violating any trademarks,
trade names, patents, copyrights, licenses, trade secrets or other intellectual
property rights of others, and to the best such counsel's knowledge there are no
infringements by any of the Company's or any of its subsidiaries' trademarks,
trade names, patents, copyrights, licenses, trade secrets or other intellectual
property rights which in the judgment of such counsel could affect materially
the use thereof by the Company or any of its subsidiaries; and
(vi) To the best of such counsel's knowledge, the Company or one of
its subsidiaries owns or possesses sufficient licenses, or other rights to use
all trademarks, trade names, patents, copyrights, licenses, trade secrets or
other intellectual property rights necessary conduct the business now being or
proposed to be conducted by the Company and its subsidiaries as described in the
Prospectus.
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(e) [_________________], counsel to the Selling Shareholders, shall
have furnished to you their written opinion, dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(i) This Agreement and the Custody Agreement have been duly
authorized, executed and delivered by or on behalf of each of the Selling
Shareholders; the Custodian has been duly and validly authorized to act as the
custodian of the Shares to be sold by each such Selling Shareholder; the
performance of this Agreement and the Custody Agreement and the consummation of
the transactions therein contemplated by the Selling Shareholders do not, to the
knowledge of such counsel, violate or conflict with any judgment, ruling,
decree, order, statute, rule or regulation of any court or other governmental
agency or body applicable to any Selling Shareholder (except that such counsel
need express no opinion as to state securities or Blue Sky laws or as to
compliance with the antifraud provisions of federal and state securities laws);
(ii) To such counsel's knowledge, no consent, approval,
authorization or order of, or any filing or declaration with, any court or
governmental agency or body is required for consummation by the Selling
Shareholders of the transactions on their part contemplated by this Agreement
and the Custody Agreement, except such as have been made or obtained under the
Act and as may be required under state securities or Blue Sky laws or the
by-laws and rules of the NASD in connection with the purchase and distribution
by the Underwriters of the Shares (as to which such counsel need express no
opinion) and such as have been obtained or made under the Act or the rules and
regulations thereunder;
(iii) Immediately prior to the date hereof, based solely on the
examination of the Company's stock record books and a certificate from each
Selling Stockholder, each Selling Shareholder was the sole registered owner of
the Shares to be sold by the Selling Shareholder on the date hereof, upon
registration of the Shares to be sold by the Selling Shareholder in the names of
the Underwriter in the stock records of the Company, assuming the Underwriters
purchased such Shares in good faith and without notice of any adverse claim
within the meaning of the applicable Uniform Commercial Code, the Underwriters
will have acquired the Shares free of any adverse claim, any lien in favor of
the Company and any restrictions on transfer imposed by the Company; and
(iv) Each of this Agreement and the Custody Agreement is a valid
and binding agreement of each Selling Shareholder, constitutes a valid and
binding obligation of each Selling Shareholder and is enforceable against each
Selling Shareholder in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights generally
or by general equitable principles and limitations on the availability of
equitable remedies.
(f) At 10:00 a.m., Boston time, on the effective date of the
Registration Statement and the effective date of the most recently filed
post-effective amendment to the Registration Statement and also at each Time of
Delivery, KPMG LLP shall have furnished to you a letter or letters, dated the
respective date of delivery thereof, in form and substance satisfactory to you,
to the effect set forth in Annex I hereto;
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<PAGE> 21
(g) (i) Neither the Company nor any of its subsidiaries have sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, other than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock (excluding the grant of stock options under the
Company's 1998 Equity Incentive Plan which in any event have not exceeded the
unallocated reserve for such plan as described in the Prospectus) or long-term
debt of the Company or any change, or any development involving a prospective
change, in or affecting the business, management, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries, other than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in clause (i) or (ii), is in your
judgment so material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being delivered
at such Time of Delivery on the terms and in the manner contemplated in the
Prospectus:
(h) On or after the date hereof there shall not have occurred any of
the following: (i) additional material governmental restrictions, not in force
and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such Exchange or in the over the counter
market by the NASD, or a general banking moratorium shall have been established
by federal or New York authorities, (ii) an outbreak of major hostilities or
other national or international calamity or any substantial change in political,
financial or economic conditions shall have occurred or shall have accelerated
or escalated to such an extent, as, in your judgment, to affect adversely the
marketability of the Shares, or (iii) there shall be any action, suit or
proceeding pending or threatened, or there shall have been any development or
prospective development involving particularly the business or properties or
securities of the Company or any of its subsidiaries or the transactions
contemplated by this Agreement, which, in your judgment, has materially and
adversely affect the Company's business or earnings and make it impracticable or
inadvisable to offer or sell the Shares;
(i) The Shares to be sold by the Company at such Time of Delivery shall
have been accepted for quotation, subject to notice of issuance, on the Nasdaq
National Market;
(j) Each director, executive officer, Selling Shareholder, stockholder
holding 3% or more of the Common Stock and holder of options or Convertible
Preferred Stock that upon exercise or conversion thereof would equal 3% or more
of the Common Stock shall have executed and delivered to you lock-up agreements
in the form attached hereto as Annex II; and
(k) The Company and the Selling Shareholders shall have furnished or
caused to be furnished to you at such Time of Delivery certificates of officers
of the Company and of the Selling Shareholders, respectively, satisfactory to
you, as to the accuracy of the representations and warranties of the Company and
of the Selling Shareholders, respectively, herein at and as of such Time of
Delivery, as to the performance by the Company and the Selling Shareholders of
all of their
21
<PAGE> 22
obligations hereunder to be performed at or prior to such Time of Delivery, and
as to such other matters as you may reasonably request and the Company shall
have furnished or caused to be furnished certificates as to the matters set
forth in subsections (a) and (g) of this Section, and as to such other
matters as you may reasonably request.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company and the Selling Shareholders, jointly and severally,
will indemnify and hold harmless each Underwriter and each person, if any, who
controls such Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or controlling person may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or the omission or alleged omission to state in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, and will reimburse each Underwriter for any
legal or other expenses reasonably incurred by such Underwriter in connection
with investigating or defending any such action or claim as such expenses are
incurred; provided, however, that neither the Company nor any Selling
Shareholder shall be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through you expressly for use
therein.
(b) Each Underwriter will indemnify and hold harmless the Company and
the Selling Shareholders against any losses, claims, damages or liabilities to
which the Company or the Selling Shareholders may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse the
Company and the Selling Shareholders for any legal or other expenses reasonably
incurred by the Company or the Selling Shareholders in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof
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<PAGE> 23
is to be made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission so
to notify the indemnifying party shall not relieve it from any liability which
it may have to any indemnified party otherwise than under such subsection to the
extent prejudiced by failure to notify. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party (who shall not, except
with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party. No indemnifying party shall be liable for
the settlement of any action or claim affected without its written consent.
(d) If the indemnification provided for in this Section 10 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Shareholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Shareholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Shareholders, respectively,
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholders
23
<PAGE> 24
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, the Selling Shareholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No Selling Stockholder
shall be liable for contribution under this Section 10 in circumstances where
such Selling Stockholder would not be required to provide indemnification if
indemnification were available. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company and the Selling Shareholders under
this Section 10 shall be in addition to any liability which the Company and the
Selling Shareholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriter under this Section 10
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and to each person, if any, who controls the
Company or any Selling Shareholder within the meaning of the Act.
(f) Notwithstanding anything to the contrary in this Section 10, the
liability of each Selling Shareholder under the indemnity agreements in this
Section 10 shall not exceed the total initial public offering price of the
Selling Shareholders' Firm Shares sold by such Selling Shareholder under this
Agreement, less underwriters' discounts.
11. TERMINATION.
(a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company and the Selling Shareholders shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In the event
that, within the respective prescribed periods, you notify the Company that you
have so arranged for the purchase of such Shares, or the Company and the Selling
24
<PAGE> 25
Shareholders notify you that they have so arranged for the purchase of such
Shares, you or the Company and the Selling Shareholders shall have the right to
postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company and the
Selling Shareholders shall have the right to require each non-defaulting
Underwriter to purchase the number of Shares which such Underwriter agreed to
purchase hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company and the
Selling Shareholders shall not exercise the right described in subsection (b)
above to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the Second
Time of Delivery, the obligations of the Underwriters to purchase and of the
Company to sell the Company Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company or the
Selling Shareholders, except for the expenses to be borne by the Company and the
Selling Shareholders and the Underwriters as provided in Section 8 hereof and
the indemnity and contribution agreements in Section 10 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
12. SURVIVAL. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company and
shall survive delivery of and payment for the Shares.
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<PAGE> 26
13. EXPENSES OF TERMINATION. If this Agreement shall be terminated pursuant
to Section 11 hereof, the Company or the Selling Shareholders shall not then be
under any liability to any Underwriter except as provided in Section 8 and
Section 10 hereof; but, if for any other reason this Agreement is terminated,
the Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so delivered, but the Company and
the Selling Shareholders shall then be under no further liability to any
Underwriter in respect of the Shares not so delivered except as provided in
Section 8 and Section 10 hereof.
14. NOTICE. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Adams, Harkness & Hill, Inc. on behalf of you as the
Representatives; and in all dealing with any Selling Shareholders hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of such Selling Shareholders made or given by any
or all of the Attorneys-in-Fact for such Selling Shareholders.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the Representatives in care of Adams, Harkness
& Hill, Inc., 60 State Street, Boston, MA 02109, Attention: Joseph W. Hammer; if
to the Company shall be delivered or sent by mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: President; and if to a Selling Shareholder shall be
delivered or sent by mail, telex or facsimile transmission to [________________]
on behalf of the Selling Shareholders; provided, however, that any notice to an
Underwriter pursuant to Section 10(d) hereof shall be delivered or sent by mail,
telex or facsimile transmission to such Underwriter at its address set forth in
its Underwriter's Questionnaire or telex constituting such Questionnaire, which
address will be supplied to the Company by you on request. Any such statements,
requests, notices or agreements shall take effect upon receipt thereof.
15. MISCELLANEOUS.
(a) This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters and the Company and the Selling Shareholders and,
to the extent provided in Sections 10 and 12 hereof, the officers and directors
of the Company and each person who controls the Company and the Selling
Shareholders or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
(b) Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
26
<PAGE> 27
(c) This Agreement shall be governed by and construed in accordance
with the laws of The Commonwealth of Massachusetts.
(d) This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company and the Selling Shareholders for examination, upon request, but without
warranty on your part as to the authority of the signors thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact
for the Selling Shareholders represents by so doing that he has been duly
appointed as Attorney-in-Fact by the Selling Shareholders pursuant to a validly
existing and binding Power-of-Attorney which authorizes such Attorney-in-Fact to
take such action.
Very truly yours,
EVERCEL, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE II ATTACHED HERETO
By:
-----------------------------------------
Name:
---------------------------------------
Title: Attorney-in-Fact
--------------------------------------
Accepted as of the date
hereof at Boston, Massachusetts
ADAMS, HARKNESS & HILL, INC.
FAC/EQUITIES
BURNHAM SECURITIES INC.
27
<PAGE> 28
By:
----------------------------------------
(Adams, Harkness & Hill, Inc.
on behalf of each of the underwriters)
28
<PAGE> 29
SCHEDULE I
<TABLE>
<CAPTION>
Number of Company
Total Number Optional Shares to be
of Purchased if
Firm Shares to be Maximum Option
Purchased Exercised
<S> <C> <C>
Adams, Harkness & Hill, Inc................
FAC/Equities...............................
Burnham Securities Inc. ...................
Total:............................... [________] [________]
</TABLE>
29
<PAGE> 30
SCHEDULE II
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Selling Shareholders'
Name of Selling Shareholder Firm Shares
<S> <C>
Total:..................................... [________]
</TABLE>
30
<PAGE> 31
ANNEX I
FORM OF COMFORT LETTER
31
<PAGE> 32
ANNEX II
FORM OF LOCK-UP AGREEMENT FOR EXECUTION BY THE
COMPANY'S OFFICERS, DIRECTORS,
3% SHAREHOLDERS AND SELLING SHAREHOLDERS
32
<PAGE> 1
LAW OFFICES
www.rc.com
Financial Centre
P.O. Box 10305
Stamford, CT 06904-2305
203-462-7500
Fax 203-462-7599
EXHIBIT 5.1
April 4, 2000
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Re: EVERCEL, INC.
REGISTRATION STATEMENT ON FORM S-3
COMMISSION FILE NO. 333-33090
Ladies and Gentlemen:
We are counsel for Evercel, Inc. (the "Company") which has filed a
Registration Statement on Form S-3 (the "Registration Statement") for
registration of 1,725,000 shares of common stock of the Company, par value $.001
per share ("Common Stock").
For purposes of this opinion, we have reviewed such questions of law
and examined such corporate records, certificates and other documents as we have
considered necessary or appropriate. We have also examined such certificates of
public officials, corporate documents and records, and other certificates,
opinions and instruments, and have engaged in such other investigation as we
have deemed necessary in connection with the opinion hereinafter set forth. We
have assumed the authenticity of all documents submitted to us as originals, the
genuineness of all signatures, the legal capacity of natural persons, the
conformity to the originals of all documents submitted to us as copies, the
valid execution of all agreements and documents referred to herein by all
parties thereto other than the Company and the enforceability of such agreements
against all parties other than the Company.
Based on the foregoing we are of the opinion that when up to 1,475,000
shares of Common Stock are issued by the Company pursuant to the Registration
Statement and up to 250,000 shares are sold by the selling shareholders named
therein, such shares will, when sold and paid for in accordance with the
Registration Statement, be validly issued, fully paid and nonassessable.
Very truly yours,
ROBINSON & COLE LLP
Richard A. Krantz
<PAGE> 2
Securities and Exchange Commission
April 4, 2000
Page 2
RAK/bmg
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Evercel, Inc.:
We consent to the inclusion and incorporation by reference in the
registration statement (No. 333-33090) on Form S-3 of Evercel, Inc. of our
report dated March 22, 2000 relating to the balance sheets of Evercel, Inc. as
of December 31, 1999 and October 31, 1999 and 1998 and the related statements of
income (loss), changes in shareholders' equity and cash flows for the two months
ended December 31, 1999 and for each of the years in the three-year period ended
October 31, 1999, and to the reference to our firm under the headings "Selected
Financial Data" and "Experts" in the Prospectus.
/s/ KPMG LLP
--------------------------------------
KPMG LLP
Stamford, CT
April 6, 2000
