SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2000
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from: _____________ to ________________
Commission File Number: 0-25411
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EVERCEL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1528142
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification Number)
Organization)
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)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, par value
$.01 as of October 25, 2000 was 7,293,865.
<PAGE>
EVERCEL, INC.
FORM 10-Q
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements
Condensed Balance Sheets as of
September 30, 2000 and December 31, 1999
Condensed Statements of Operations
for the three months ended September 30, 2000
and September 30, 1999
Condensed Statements of Operations
for the nine months ended September 30, 2000
and September 30, 1999
Condensed Statements of Cash Flows
for the nine months ended September 30, 2000
and September 30, 1999
Notes to Unaudited Condensed
Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
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EVERCEL, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2000 1999
------- (UNAUDITED)
-------------------------------
Current assets:
Cash and cash equivalents $ 9,596 $ 6,117
Accounts receivable 49 193
Inventories 598 159
Other current assets 406 35
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Total current assets 10,649 6,504
Property, plant and equipment, net 3,213 1,703
Other assets, including deposits on new
equipment, net 5,311 603
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TOTAL ASSETS $ 19,173 $ 8,810
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,208 $ 391
Accrued liabilities 1,259 351
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Total current liabilities 2,467 742
Long-term liabilities 115 --
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Total liabilities 2,582 742
Shareholders' equity:
Preferred Stock ($0.01 par value); 1,000,000
shares authorized: 264,000 issued and
outstanding at September 30, 2000 and
December 31, 1999 (with cumulative
dividends at 8%) 3 3
Common Stock ($0.01 par value); 30,000,000
shares authorized: 7,137,504 and 5,722,090
issued and outstanding at September 30,
2000 and December 31, 1999, respectively 71 57
Additional paid-in-capital 30,103 14,084
Note receivable from shareholder (300) (300)
Accumulated deficit (13,286) (5,776)
-------- --------
Total shareholders' equity 16,591 8,068
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 19,173 $ 8,810
======== ========
See notes to condensed financial statements.
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EVERCEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
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Revenues $ 30 $ --
Cost and expenses:
Cost of revenues 41 --
Administrative and selling expenses 1,864 587
Research and development 1,366 712
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Total operating costs and expenses 3,271 1,299
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Loss from operations (3,241) (1,299)
Interest income, net 220 42
License fee income -- --
Losses of unconsolidated affiliate (71) --
Other income (expense) -- --
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Loss before income taxes (3,092) (1,257)
Income tax expense -- --
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Net loss (3,092) (1,257)
Preferred stock dividends (132) --
------- -------
Net loss - common shareholders $(3,224) $(1,257)
======= =======
Basic and diluted loss per share $ (0.45) $ (0.22)
======= =======
Basic and diluted shares outstanding 7,128 5,722
======= =======
See notes to condensed financial statements.
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EVERCEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
Revenues $ 94 $ --
Cost and expenses:
Cost of revenues 286 --
Administrative and selling expenses 5,079 1,817
Research and development 3,063 1,946
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Total operating costs and expenses 8,428 3,763
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Loss from operations (8,334) (3,763)
Interest income, net 454 80
License fee income 572 --
Losses of unconsolidated affiliate (114) --
Other income (expense) -- (1)
------- -------
Loss before income taxes (7,422) (3,684)
Income tax expense (benefit) 88 (111)
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Net loss (7,510) (3,573)
Preferred stock dividends (396) --
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Net loss - common shareholders $(7,906) $(3,573)
======= =======
Basic and diluted loss per share $ (1.22) $ (0.80)
======= =======
Basic and diluted shares outstanding 6,455 4,466
======= =======
See notes to condensed financial statements.
5
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EVERCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,510) $(3,573)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 286 128
(Increase) decrease in operating assets:
Accounts receivable 144 13
Inventories (439) (155)
Other current assets (371) --
Increase (decrease) in operating liabilities:
Accounts payable 817 49
Accrued liabilities 798 297
Other, net 152 291
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Net cash used in operating activities (6,123) (2,950)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,887) (1,107)
Investment in subsidiaries (2,654) --
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Net cash used in investing activities (6,541) (1,107)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from FuelCell Energy, Inc -- (821)
Preferred stock dividends paid (286) --
Proceeds from common stock issued 16,429 7,735
Contributions from FuelCell Energy, Inc. -- (340)
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Net cash provided by financing activities 16,143 6,574
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Net increase in cash and cash equivalents 3,479 2,517
Cash and cash equivalents - beginning of period 6,117 1
------- -------
Cash and cash equivalents - end of period $ 9,596 $ 2,518
======= =======
CASH PAID DURING THE PERIOD FOR:
Income taxes $ 88 $ --
======= =======
See notes to condensed financial statements.
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EVERCEL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
On October 6, 1999, the Board of Directors voted to change the fiscal year end
of Evercel, Inc. from October 31 to December 31. The accompanying financial
statements represents our financial position as of September 30, 2000 and
December 31, 1999, and the results of operations of Evercel, Inc. for the three
and nine months ended September 30, 2000 , the three months ended September 30,
1999 and of the operations of the Battery Group of FuelCell Energy, Inc
("FuelCell") for the period January 1, 1999 through February 21, 1999 and of
Evercel from February 22, 1999 through September 30, 1999.
Comparative amounts for the three and nine months ended September 30 are
unaudited. In the opinion of management, the information presented in the
unaudited three and nine month statements reflects all adjustments necessary for
a fair presentation of our results of operations for those periods.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
We are 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 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 us by deconsolidating the
financial statements of Evercel and a Joint Venture from its consolidated
financial statements. As part of the spin-off , FuelCell transferred capital
assets (net), prepaid spin-off costs, accounts receivable and short-term
liabilities amounting to $1,228,000, $501,000, $36,000 and $1,096,000,
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, we completed a rights offering of our shares at $3.00 per share and began
trading.
In February 1998, FuelCell entered into 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 our 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 $5.0 million in three stages and a royalty for the exclusive
and non-exclusive territories. The payments include $1.5 million received by
FuelCell in 1998, of which $1.3 million and $0.2 million, respectively were
recorded on FuelCell's financial statements in 1999 and 1998. A further $2.0
million was to be paid to us based on cycle life testing that was substantially
achieved in December, 1999. Although we believe the principal milestone
conditions have been achieved and we have received $572,000, we cannot guarantee
that we will receive the remaining balance. If we receive the balance of the
$2.0 million payment, we may also be entitled to a final payment of $1.5 million
to be paid to us upon completion of duplication of the battery at its facilities
in China. The Nan Ya License Agreement provides that we have 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 our 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 million. In
connection with the Three Circles License Agreement, FuelCell also entered into
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a joint venture agreement with Xiamen Three Circles Co., Ltd., used this $3.0
million as its initial investment in the joint venture and subsequently
contributed an additional $80,500 to receive a 50.5% share of the joint venture
called Xiamen Three Circle-ERC Battery Corp. (the "Joint Venture"). Pursuant to
the Three Circles License Agreement, the Joint Venture must also pay us certain
royalties based upon the value of nickel-zinc batteries sold, leased or
transferred in the applicable territories. In addition, the Joint Venture may
sub-license our technology to third parties in China, Hong Kong, Taiwan and
Macao on a non-exclusive basis. In August 2000, we invested an additional $2.5
million in the joint venture.
In accordance with a License Assistance Agreement entered into between us and
FuelCell, we have 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 obtains the approval from the Chinese partner and appropriate Chinese
governmental authority for the assignment of such agreements to us. In return
for such assistance, FuelCell will pay to us an amount equal to the sum of all
money, dividends, profits, reimbursements, distributions and payments actually
paid to FuelCell pursuant to the Joint Venture contract and related license
agreement. We would pay FuelCell all payments made by FuelCell pursuant to the
Joint Venture contract and related license agreement. All expenses and costs
incurred by us in meeting the obligations under the License Assistance Agreement
shall be solely ours, and FuelCell shall not be liable for their payment. We
account for our involvement in the Joint Venture under the License Assistance
Agreement under the equity method of accounting because we do not have
significant control over the Joint Venture.
On July 13, 2000 Madison Capital Group, USA, LLC, acting as financial advisor to
the participating investors, announced the incorporation of OXYGEN, S.p.A. in
Italy. We have invested $154,000 in Oxygen, representing an initial investment
interest of 26.7%, and we will be the exclusive supplier of batteries to Oxygen,
which has been created to provide a complete transportation solution in Italy,
including non-polluting electric two-wheeled vehicles and the necessary
infrastructure to make these vehicles feasible and affordable.
(3) CAPITALIZATION
We 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.
On May 12, 2000 we completed a stock offering of 1,250,000 common shares at
$12.50 per share, and on May 22, 2000 the underwriter, Burnham Securities Inc.,
exercised an over-allotment option of 141,080 shares resulting in total net
proceeds of $15,940,000.
On July 19, 2000 at our Annual Meeting, our shareholders approved an increase in
the number of common shares authorized from 10 million to 30 million and
expanded the authorization of shares under the 1998 Equity Incentive Plan from
600,000 to 1,300,000 shares.
(4) INVENTORY
Inventories consists of the following:
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September 30, December 31,
2000 1999
---- ----
Raw Materials $ 501 $ 123
Work in Progress 97 23
Finished Goods - 13
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Total Inventories $ 598 $ 159
====== ======
(5) SUBSEQUENT EVENTS
On October 12, 2000, we signed a joint Memorandum of Understanding with Oxygen,
S.p.A. and Eurosolare, the solar energy division of the ENI Group of Italy to
develop a series of solar powered electric vehicle maintenance and charging
stations in key areas of major cities in Italy for use with our nickel-zinc
batteries and traditional batteries. The charging stations will be used with
Oxygen's electric scooters, as well as other electric vehicles. The first
"stations" are planned for Rome (two) and Palermo (one) by December 31, 2000.
Currently there are no further financial commitments to either Oxygen or
Eurosolare.
9
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EVERCEL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This report contains forward looking statements, including statements
regarding the Company's plans and expectations regarding the development and
commercialization of its nickel-zinc battery technology. When used in this
Report, the words "expects", "anticipates", "estimates", "should", "will",
"could", "would", "may", and similar expressions are intended to identify
forward-looking statements. All forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those projected. Factors that could cause such a difference include, without
limitation, the risk that cost reduction in the manufacturing process will not
be achieved to the extent necessary to facilitate commercialization, the risk
that the company will not initiate commercial sales as currently scheduled, the
risk that the Company's manufacturing capacity will not be increased as planned,
general risks associated with product development, manufacturing and
introduction, rapid technological changes and competition as well as other risks
set forth in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements contained herein speak only as of the date of
this Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any such statement to reflect any
change in the Company's expectations or any change in events, conditions or
circumstances on which any such statement is based.
OVERVIEW
We develop, design and have begun to manufacture high-performance
rechargeable batteries. To date, our operations have mainly consisted of
research and development activities with commercial and manufacturing operations
continuing to accelerate in year 2000. We recognize revenue on the date our
products are shipped. To date, revenues have primarily resulted from shipment of
sample products to potential customers.
FuelCell Energy, Inc. ("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, benefits and obligations of
Fuel Cell's 50.5% ownership of the Joint Venture. 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 statement of operations.
On February 16, 1999, FuelCell transferred the principal assets,
intellectual property and liabilities related to its battery business group to
us. On February 22, 1999, FuelCell distributed to its shareholders shares of our
common stock in a tax-free distribution. 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 Group of
FuelCell.
We have located our North American manufacturing operation in a 97,600
square foot building in Newport News, Virginia. We have nearly completed
installing our first automated manufacturing line. The initial product to come
off this new line will be our trolling motor marine battery for the North
America sport fishing market.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1999
We had revenues of $30,000 for the three months ended September 30, 2000
compared to none for the three months ended September 30, 1999. The revenues in
the 2000 period were due to consumer samples sold in our efforts to
commercialize our nickel-zinc batteries. Cost of revenues of $41,000 for the
three months ended September 30, 2000 represent the costs to produce the sample
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batteries, which approximate revenues, as well as freight charges. There were no
cost of revenues for the same period in 1999.
Administrative and selling expenses increased 218% to $1,864,000 for the
three months ended September 30, 2000 from $587,000 for the three months ended
September 30, 1999. The increase is the result of additional staffing of
administrative, financial and sales and marketing functions, relocation,
severance and other employee costs, legal and financial costs of being an
independent publicly traded company, and selling, marketing and administrative
activities to prepare us for commercialization of our nickel-zinc battery
technology.
Research and development expenses increased 92% to $1,366,000 for three
months ended September 30, 2000 from $712,000 for the three months ended
September 30, 1999 due to additional staffing and product development activity
relating to the commercialization of our battery technology.
Net interest income of $220,000 for the three months ended September 30,
2000 increased from $42,000 for three months ended September 30, 1999 due to
interest income on funds received from the May 2000 public offering. Our share
of Joint Venture losses in the quarter ended September 30, 2000 was $71,000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
We had revenues of $94,000 for the nine months ended September 30, 2000
compared to none for the nine months ended September 30, 1999. The revenues in
the 2000 period were due to consumer samples sold in our efforts to
commercialize our nickel-zinc batteries. Cost of revenues of $286,000 for the
nine months ended September 30, 2000 represents the costs to produce the sample
batteries, which approximate revenues and freight charges, as well as a charge
to adjust inventory to net realizable value. There were no cost of revenues for
the same period in 1999.
Administrative and selling expenses increased 180% to $5,079,000 for the
nine months ended September 30, 2000 from $1,817,000 for the nine months ended
September 30, 1999. The increase is the result of additional staffing of
administrative, financial and sales and marketing functions, relocation,
severance and other employee costs, legal and financial costs of being an
independent publicly traded company, and selling, marketing and administrative
activities to prepare us for commercialization of our nickel-zinc battery
technology.
Research and development expenses increased 57% to $3,063,000 for nine
months ended September 30, 2000 from $1,946,000 for the nine months ended
September 30, 1999 due to additional staffing and product development activity
relating to the commercialization of our battery technology.
Net interest income of $454,000 for the nine months ended September 30,
2000 increased from $80,000 for the nine months ended September 30, 1999 due to
interest income on funds received from the May 2000 public offering and interest
paid to FuelCell Energy in 1999 on short-term borrowings. License fee income of
$572,000 was received in the nine months ended September 30, 2000 related to the
Nan Ya license agreement. Our share of Joint Venture losses in the nine months
ended September 30, 2000 was $114,000. We recognized a tax expense of $88,000 on
the license fee payment in the nine months ended September 30, 2000 and a tax
benefit of $111,000 in the nine months ended September 30, 1999 due to our
inclusion in the consolidated tax return of FuelCell from January 1, 1999
through February 21, 1999. We have not recorded the tax benefit of operating
losses in the nine months ended September 30, 2000 or the period from February
22, 1999 through September 30, 1999 pursuant to Financial Accounting Standard
No. 109, "Accounting for Income Taxes."
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through cash generated from sales
of equity. On May 12, 2000 we concluded a stock offering of 1.25 million shares
of our common stock and on May 22, 2000 our underwriter, Burnham Securities
Inc., exercised an over-allotment option of 141,080 shares resulting in total
net proceeds of $15,940,000.
At September 30, 2000 we had working capital of $8,182,000, including cash
and cash equivalents of $9,596,000, compared to working capital of $5,762,000,
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including cash and cash equivalents of $6,117,000 at December 31, 1999. In
compliance with the terms of the Newport News, Virginia lease signed July 10,
2000 with Oakland Investors, L.C., we have executed a $1,000,000 letter of
credit as a form of rent security, which will restrict our use of cash and cash
equivalents by the same amount.
Preferred stock dividends accrued on the Series A Preferred Stock issued in
December 1999 were $132,000 and $396,000 in the three and nine months ended
September 30, 2000, respectively. Dividend payment for each quarter is due and
payable 15 days after the quarter end. As part of the December 1999 preferred
offering, investors and the underwriter, Burnham Securities Inc., were issued
warrants to purchase our common stock. If our common stock reaches certain price
levels, we can redeem the warrants. If all the warrants were exercised, we would
receive approximately $5.0 million in gross proceeds.
Our capital expenditures are incurred primarily for production equipment in
Newport News, Virginia. Capital expenditures were $1,520,000 and $3,887,000 for
the three and nine month periods ended September 30, 2000.
We are currently exploring various alternatives to raise capital over the
next three to six months and are confident in our ability to do so. We
anticipate that our existing capital resources, including those mentioned above,
along with our ability to obtain new financing and our anticipated revenues,
will be adequate to satisfy existing financial requirements and agreements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our investment portfolio. The investment portfolio includes money market
accounts in U.S. financial institutions. Cash is invested overnight with high
credit quality financial institutions. Based on the Company's overall interest
exposure, including all interest rate sensitive instruments, a near-term change
in interest rate movements of 100 basis points would increase or decrease our
net loss by $100,000.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
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SIGNATURES
In accordance with the requirements of the Securities Exchange of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EVERCEL, INC.
(Registrant)
By: /s/ Robert L. Kanode
------------------------------
Name: Robert L. Kanode
Date: November 13, 2000 Title: President and Chief Executive
Officer
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