UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB (MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: October 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-24852
EVERCEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------------------------------
DELAWARE 06-1528142
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2 LEE MAC AVENUE
DANBURY, CONNECTICUT 06810
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (203) 825-3900
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of class)
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 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $80,331,376, which is based on the closing price of
$38.69 on January 31, 2000. On January 31, 2000 there were 2,861,045 shares of
Common Stock of the registrant issued and outstanding.
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EVERCEL, INC.
INDEX
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Description Page Number
- ----------- -----------
Part I
- ------
Item 1 Business 3
Item 2 Properties 18
Item 3 Legal Proceedings 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Part II
- -------
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 19
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7 Financial Statements 21
Item 8 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 35
Part III
- --------
Item 9 Directors and Executive Officers of the Registrant 35
Item 10 Executive Compensation 36
Item 11 Security Ownership of Certain Beneficial Owners and Management 36
Item 12 Certain Relationships and Related Transactions 37
Item 13 Exhibits and Reports on Form 8-K 38
Signatures
2
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FORWARD-LOOKING STATEMENT DISCLAIMER
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. Such statements include statements
relating to the Company's continued development and commercialization schedule
for its patented nickel-zinc ("Ni-Zn") rechargeable battery technology and its
joint venture partners, expansion plans, licensing opportunities, the expected
cost competitiveness of its technology, and the timing and availability of
products under development. These and other forward-looking statements contained
in this Report are subject to risks and uncertainties, known and unknown, that
could cause actual results to differ materially from those forward-looking
statements, including, without limitation, general risks associated with product
development and introduction, changes in worldwide environmental laws and
policies, potential volatility of material costs, government appropriations,
rapid technological change, and competition, as well as other risks. 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.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Evercel, Inc. (the "Company") is engaged in the design and manufacture of
innovative, patented nickel-zinc ("Ni-Zn") rechargeable batteries, as well as
the research and design of other advanced battery technologies. The Company was
spun-off from its former parent, FuelCell Energy, Inc. ("FCE"), formerly Energy
Research Corporation, by means of a tax free distribution (the "Distribution")
effected on February 22, 1999 to FCE stockholders of one share of common stock
of the Company for every three shares of FCE common stock. On February 16, 1999,
FCE had transferred to the Company the intellectual property and principal
assets related to its battery business group (the "Battery Group") and certain
liabilities related to those assets.
Immediately after the Distribution, the Company granted at no cost to holders of
its common stock as of February 22, 1999, transferable subscription rights
("Rights") to subscribe for and purchase additional shares of the Company common
stock at $6.00 per share (the "Rights Offering"). In connection with the
Distribution, 1,388,856 shares of Company common stock were issued. On April 5,
1999, 921,915 shares of common stock were issued pursuant to the exercise of
Rights. An additional 466,941 shares were sold on April 12, 1999 to the
Company's standby underwriters.
The Company believes that its Ni-Zn battery technology offers high energy
density, long cycle life and low material costs, resulting in a low weight, high
power battery with a substantial price advantage over other comparable
technologies. The Company's Ni-Zn battery has been used on a limited test basis
in a range of rechargeable battery applications, including scooters, bicycles,
electric vehicles and lawn mowers. The Company also believes its Ni-Zn battery
may be used in other rechargeable battery applications, including trolling
motors for boats, golfcarts, power tools, and both consumer and electronic
products.
The Company's strategic goals are to rapidly commercialize its Ni-Zn technology,
maintain and increase its technological leadership, develop new battery
businesses which build on its Ni-Zn technology and continue to develop other
advanced battery technologies. The Company intends to commercialize its Ni-Zn
technology through a combination of direct sales, licensing agreements and joint
venture relationships. The Company has licensed and granted certain marketing
rights to develop batteries for electric vehicles and hybrid electric vehicles
to a joint venture between Nan Ya Plastics Corporation of Taiwan (the "Nan Ya
License Agreement"), a Formosa Plastics Group company and Xiamen Three Circles
Co., Ltd. ("Xiamen") of Xiamen, China. The Company also has an agreement to
manufacture scooter and bicycle batteries through a joint venture formed between
the Company and Xiamen (the "Three Circle License Agreement").
The Company operated as the Battery Group between 1970 and 1999. Since
inception, FCE has exclusively focused on the development and engineering of
electricity production and storage by electrochemical means. Prior to becoming
independent, the Battery Group's product sales emphasized very high performance
cells for submarine, aerospace and military markets where application needs and
engineering excellence outweighed low cost as the greatest concern. Several
battery technologies were pursued, including silver-zinc ("Ag-Zn"), nickel
cadmium ("Ni-Cd"), and Ni-Zn. During the mid 1970's to early 1980's, the Battery
Group manufactured high energy density Ag-Zn batteries for submarines and
3
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submersibles for both main propulsion and auxiliary power. During the 1980's,
considerable development work was carried out for the U.S. Navy to develop Ni-Cd
batteries for nuclear submarines and for the U.S. Department of Energy ("DOE")
to develop Ni-Zn batteries for electric vehicles. Historically, the Company's
development activities were funded through corporate and government contracts as
well as internal research and development funds.
At present, the Company is focusing its efforts on the demonstration,
manufacturing and commercialization of its advanced Ni-Zn rechargeable battery.
The Company has developed patented technologies which permit the manufacture of
batteries with longer cycle life, which are lighter in weight and lower in cost
than comparable batteries currently available. The Company believes its
batteries can compete cost-effectively with Ni-Cd and nickel metal hydride
("NiMH") batteries and with lead acid batteries in certain applications. Use of
the Company's proprietary process in the construction of Ni-Zn batteries has the
additional advantage of having lower environmental impact than lead-acid or
Ni-Cd batteries.
The Company believes that its Ni-Zn batteries represent a potential source of
significant revenue once commercialization of these products is fully
undertaken. FCE has two license agreements which are expected to be assigned to
the Company. The Nan Ya License Agreement is for the use of the Company's
technology in batteries developed for Electric Vehicles ("EVs") and Hybrid
Electric Vehicles ("HEVs") in the People's Republic of China ("PRC"), Taiwan and
certain other countries in Southeast Asia. The Three Circles License Agreement
is for the use of the Company's technology in batteries to be used in miners'
cap lamps and two and three wheel vehicles, including bicycles, scooters and
off-road vehicles in China and Southeast Asia. In connection with the Three
Circles License Agreement, FCE formed a joint venture agreement with Xiamen
Three Circles Co., Ltd. and has received a 50.5% ownership interest in the
Xiamen Three Circles-ERC Battery Corp., Ltd. (The "Joint Venture"), for the
manufacture and sale of batteries. The benefits and obligations of the Three
Circles License Agreement and the Joint Venture Agreement have been transferred
to the Company pursuant to the terms of the License Assistance Agreement. See
"PARTNERSHIPS, JOINT VENTURES AND LICENSES".
To further commercialize its Ni-Zn technology, the Company intends to pursue a
range of battery markets, each of which has performance requirements aligned
with the benefits of Ni-Zn. To capitalize on these opportunities, the Company
plans to manufacture and sell directly to original equipment manufacturers
("OEMs"), continue to enter into joint venture agreements, and license its
technology to larger organizations with established manufacturing or
distribution capabilities in specific markets. Since the Company was originally
the Battery Group of FCE, all licenses and joint ventures entered into prior to
February, 1999 were entered into by FCE. The battery related agreements which
have not been amended to name the Company as a party are subject to the License
Assistance Agreement which provides the Company with the benefits and
obligations of those battery related agreements entered into by FCE prior to
February 1999.
NI-ZN BATTERIES
In addition to the technological advantages that the Company believes are
inherent in the Ni-Zn battery, there is also the low environmental impact of
materials contained in the Company's batteries compared to that of lead-acid or
Ni-Cd batteries. The Company's Ni-Zn battery combines a low-cost, light-weight
nickel electrode with the high-energy of environmentally benign zinc to produce
a rechargeable battery having a voltage 30% higher and an energy density per
unit weight approximately 30% greater than that of conventional Ni-Cd batteries.
In tests conducted by the Company and independent laboratories, the Company's
batteries have achieved approximately 600 deep discharge cycles with only a 20%
loss in capacity.
The rechargeable Ni-Zn battery was first patented in 1923. During the early
1980's, extensive research and development efforts were made by other
researchers to develop a Ni-Zn battery with a satisfactory cycle life which were
not successful. The Company solved many of the problems associated with the
short cycle life as evidenced by tests achieving greater than 600 cycles.
Patents have been granted in which the zinc electrode solubility has been
greatly reduced and construction features provide for a sealed maintenance-free
construction.
The Ni-Zn cell developed by the Company consists of layers of positive (nickel)
electrodes and negative (zinc) electrodes separated by both electrolyte
absorptive layers and microporous separator layers. The Company plans to
manufacture a range of cells in various energy capacities. These cells can then
be arranged in series and packaged to produce convenient voltages, such as
typical 12 volt blocks. The Company is supplying demonstration batteries to
various potential customers for evaluation and is conducting in-house testing of
its batteries for recreational boating trolling motors, electric bicycles and
scooters. Also, batteries are being supplied to Italian companies for electric
scooters and to several start-up electric bicycle and scooter companies in the
United States. The Company is also working with bicycle companies in China
through the joint venture partnership in Xiamen, China (Xiamen Three Circles-ERC
Battery Corp., Ltd.), to begin manufacture of the Company's batteries.
4
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EMPLOYEES
At present, the Company employs a staff of approximately thirty, including a
Chief Executive Officer, Chief Operating Officer, Vice-President of Sales and
Marketing, Vice-President of Far East Operations, Controller, Director of
Product Development and Director of Manufacturing. All functions are adequately
staffed to support commercialization. Currently, the small-scale manufacturing
facility employs approximately seven full-time and ten temporary employees. This
number is expected to increase with planned automation and accelerated
production. The Company considers relations with its employees to be good. The
loss of key employees could cause delays in development and commercialization
activities.
SALES AND MARKETING
The Company's sales and marketing organization is focusing on the following:
- To generate direct sales to OEMs and distributors in selected applications
and geographical territories, and to launch, for consumer sales, the
trolling motor battery through a multi-channel approach.
- To develop joint venture partnerships for manufacturing and distribution
in applications and geographical territories for which the Company
believes strategic partners can improve its chances of success.
- To license its technology and know-how to strategic partners in
applications and geographical territories for other businesses, such as
consumer electronics.
The Company is focusing its direct marketing efforts on those applications which
represent specialty niches where the Ni-Zn battery technology has significant
competitive advantages and where the channels of distribution are relatively
narrow. An example of such an application is the marine trolling motor market.
For those areas where broad distribution is required, the Company believes a
joint venture manufacturing and/or sales partnership with companies who have a
position in the distribution channels will be a more effective way to exploit
the technology in a shorter amount of time. An example of such an application
and a geographical area is the company's license and joint venture,
manufacturing and sales agreement with Xiamen Three Circles Co., Ltd. for China
and Southeast Asia. The Company intends to license its technology for those
applications which require very large capital investment in manufacturing and
very broad distribution channels, such as consumer electronics and power tools.
Upon establishment of the core joint venture manufacturing and sales agreements,
the Company expects to use the manufacturing capability of the joint ventures to
sell directly to OEMs in other geographical territories. For example, the Joint
Venture production capability for small form factor batteries (i.e. scooters,
bicycles and similar applications) is planned to satisfy the North American
and/or European markets for these products.
PARTNERSHIPS, JOINT VENTURES AND LICENSES
In January 1997, FCE entered into a license agreement with Corning, Inc. to
continue the development of the Ni-Zn battery and to manufacture and market
batteries worldwide. This license was exclusive for all applications with the
exception of EV/HEVs for which FCE, and, now, the Company, retained all rights.
After having successfully validated the performance of the Company's technology,
Corning decided for strategic business reasons to discontinue its development of
certain energy related products, including the Company's batteries, and as a
result discontinued the license agreement with FCE. This has allowed the Company
to seek business opportunities which had previously been reserved exclusively
for Corning.
In February 1998, FCE 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 the
Company's Ni-Zn batteries in EV/HEVs in China, Taiwan, Hong Kong and Macao on an
exclusive basis and for certain other Southeast Asian countries on a
non-exclusive basis. The license agreement calls for the payment of $5 million
in three stages and a royalty for the exclusive and non-exclusive territories.
The payments include $1.5 million received by FCE in 1998 which was not
transferred to the Company, a further $2 million dollars to be paid to the
Company upon completion of certain conditions which the Ni-Zn battery has
substantially achieved and the Company expects payment in the first calendar
quarter of 2000, and a final payment of $1.5 million to be paid to the Company
upon completion of duplication of the battery at its facilities in China.
5
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In July 1998, FCE also entered into the Technology Transfer and the Three
Circles License Agreements with the Joint Venture for the use of the Company's
Ni-Zn batteries in electric bicycles, scooters, three-wheel vehicles, off-road
vehicles, and miners' safety lamps in China on an exclusive basis and in
Southeast Asia on a non-exclusive basis. The license included an initial payment
to FCE of $3 million. Pursuant to the Three Circles License Agreement, the Joint
Venture must also pay FCE certain royalties based upon the net sales of Ni-Zn
batteries sold, leased or transferred in the applicable territories. In addition
the Joint Venture may sub-license the Company's technology to third parties in
China, Hong Kong, Taiwan and Macao on a non-exclusive basis. In connection with
the Three Circles License Agreement, FCE entered into a joint venture agreement
with Xiamen Three Circles Co., Ltd., using the $3 million initial payment
received as its investment in the joint venture, plus an additional $80,500
investment in return for a 50.5% share of the joint venture called Xiamen Three
Circles-ERC Battery Corp., Ltd. (the "Joint Venture"). FCE reserves exclusive
rights (assigned to the Company) for exporting batteries from the Joint Venture
to other territories outside of the exclusive and non-exclusive field
territories.
The Joint Venture is managed by a Board of Directors consisting of seven
individuals, three of whom are appointed by Xiamen-Three Circles Co., Ltd., and
four of whom are appointed by FCE. Under the Joint Venture agreement, FCE is
responsible for assisting the Joint Venture with the selection and purchase of
machinery, equipment and materials outside China; assisting the Joint Venture in
marketing, sales and distributions of batteries outside of China; assisting the
Joint Venture's working personnel in obtaining visas for entrance to the United
States for necessary training; handling matters in respect to export licenses
for technology as it relates to the Three Circles License Agreement; and
handling other matters as requested by the Board of Directors of the Joint
Venture.
The Joint Venture agreement anticipates that the Joint Venture will derive
revenue primarily from sales of batteries and sub-licenses of Ni-Zn technology,
including revenue received from the payment for the sub-licensing of the
technology and revenue received from the payment of royalties for use of the
technology. Under the terms of the Joint Venture agreement, the net income or
loss of the Joint Venture is shared by the Joint Venture partners in accordance
with their respective interests. Distributions are expected to be made either
quarterly or annually, depending upon the nature of the payment. The Joint
Venture agreement may be terminated by either party upon a material breach of
the contract or upon bankruptcy of either party to the contract.
The Joint Venture agreement is governed by the laws and pertinent rules and
regulations of the PRC. In order for FCE to transfer the Joint Venture agreement
and the Three Circles License Agreement to the Company, FCE has been advised
that it should obtain the consent of Xiamen Three Circles Co., Ltd. and the
Joint Venture, and the approval of the appropriate examination and approval
authority of the People's Republic of China. FCE has agreed to seek these
consents and approvals, however, there can be no assurance that these consents
and approvals will be obtained on a timely basis or at all. Pending receipt of
these consents and approvals, FCE and the Company have entered into a License
Assistance Agreement pursuant to which FCE has retained the Company to provide
all services and assistance necessary for the Company to effectively fulfill, on
behalf of FCE, all of FCE's obligations under the Joint Venture contract and
Three Circle License Agreement in exchange for payment to the Company by FCE of
all renumeration paid and other benefits accruing to FCE pursuant to such
agreements. The Three Circles License Agreement and the Joint Venture contract
are subject to the License Assistance Agreement.
MANUFACTURING AND RAW MATERIALS
The Company's manufacturing plan is to produce small form factor batteries (for
use in scooters, electric bicycles, EV/HEVs and similar applications) at the
Joint Venture and large form factor batteries (marine trolling motor, industrial
utility vehicles and similar products) at a facility in the United States. The
Joint Venture is expected to continue to focus on a manual production process
and employ relatively inexpensive labor in the PRC. The Joint Venture has
recently installed production equipment which the Company believes, when fully
operational, will enable production capacity of an estimated 30,000 kilo-watt
hours ("kWh") annually and plans to continue to acquire equipment during
calendar year 2000 to allow for capacity of 90,000 kWh annually by the year-end.
The Company's primary facility in Danbury, Connecticut produces prototypes and
product samples as well as housing research and development and administration.
It is the Company's intention to commence production in an automated facility in
the United States by the middle of calendar year 2000, to reduce reliance on
relatively expensive domestic labor. The Company expects the automated plant
will have the capability to produce 100,000 kWh annually per line of automation.
The Company expected to invest an estimated $7-$10 million in each line of
automation as well as require 20,000-30,000 square feet of manufacturing space.
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The chemical materials required to manufacture the Company's Ni-Zn battery are
readily available from multiple sources in North America and China. 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 the control of the Company. The Company does not currently
utilize financial instruments to mitigate risk of component prices.
ENVIRONMENTAL, SAFETY AND REGULATORY
Ni-Zn batteries are more environmentally acceptable than other commonly
available rechargeable battery systems. Ni-Zn batteries contain no cadmium or
mercury, which are difficult to dispose of under current environmental
regulation. The Ni-Zn battery does contain a limited amount of lead in the
negative electrode, but has passed EPA testing for disposal in public landfills.
The Company anticipates little waste generation due to the simple manufacturing
technology utilized. There are no effluents in waste water. Electrode materials
in dough form can be reprocessed and reutilized in the process, thereby
producing low levels of waste. The solvent used in the electrode production
process can be reclaimed, purified and reintroduced into the manufacturing
process with low levels of waste.
PATENTS AND TRADEMARKS
The Company has nine U.S. patents with an average of 10 years left before
expiration. The Company's patents expire through 2017. The Company does not
believe that the expiration of any of its earlier patents will have a material
adverse effect on the Company's business. The Company has NiVolt and Illuma as
registered trademarks at this time and has applied to use "Evercel" as a
trademark.
RECENT DEVELOPMENTS
- - November 1, 1999: Appointed Robert Gable, former chairman of the board and
chief executive officer of Unitrode Corporation, to fill an open seat on the
Company's board.
- - December 16, 1999: Completed raising $6.6 million in capital through the
private placement of equity securities and a commitment from these investors
for an additional $3.3 million, 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 (Series A
Shares) at an issue price of $25 per share, with a dividend of 8 percent
payable in cash or additional Preferred Shares, which are convertible to
Common shares at a conversion price of $13.75. 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 one share of common stock at $16.50 per share. The warrants
are callable by the Company 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 Series B Convertible Preferred Shares in an amount equal
to 50 percent of his investment in Series A Shares. The call by the Company
expires August 31, 2000.
- - December 20, 1999: Announced the receipt of an order for 6,000 of its premium
Model 40/12 volt Ni-Zn batteries by the Joint Venture from the Taiwan EVT
Technology Co. Ltd., of Taiwan ("EVT"). Beginning in the second quarter of
2000, the batteries will be installed in 1,500 high performance 48-volt
electric scooters produced by EVT. The total amount of the order, which is
subject to final testing and acceptance of the scooters by EVT, is
approximately (US)$1.3 million to fulfill EVT's anticipated second quarter
2000 requirements. Additional orders are expected for the balance of 2000.
The Joint Venture expects to produce the batteries in its new factory in
Xiamen, China.
- - January 5, 2000: JBI Corporation ("JBI") of Genoa, Ohio, a leading
independent battery testing laboratory, successfully duplicated the Company's
previously announced results of exceeding 500 charge/discharge cycles in
Evercel's 12 Volt, 30Ah battery. A cycle is when a battery is used and then
recharged.
- - January 21, 2000: John H. Gutfreund, former chairman and chief executive
officer of Salomon Brothers, Inc., and former vice chairman of the New York
Stock Exchange, joined Evercel's Board of Directors.
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BUSINESS
BATTERY TECHNOLOGY
A battery is an electrochemical apparatus used to store energy and release it in
the form of electricity. There are two types of batteries, primary and
rechargeable batteries, also known as secondary batteries. A primary, or
disposable, battery is used until discharged and then discarded. A rechargeable,
or secondary, battery can, after discharge, be recharged and used again. The
Company's Ni-Zn batteries are designed to be rechargeable.
Rechargeable batteries can often be used in battery applications where primary
batteries are most commonly employed. The Company is conducting research and
development of an advanced, rechargeable zinc-manganese dioxide battery designed
to compete with the most common consumer batteries. Primary batteries are, in
most cases, too costly for widespread use in applications currently utilizing
rechargeable batteries.
No one battery system is ideal for all rechargeable applications. There are
numerous performance variables which vary in importance by application. Each
commercially available battery system has strengths and weaknesses. Important
variables include: voltage, energy capacity per unit weight (energy density),
energy capacity per unit of volume (volumetric energy density), power or
discharge rate capability (how rapidly energy can be drawn from the battery or
"Specific Power"), cycle life and how this varies with discharge rate and depth
of discharge, response to ambient temperatures, rate of self-discharge, shelf
life in charged and discharged states, size, shape and design flexibility, time
and other constraints on recharging, safety, environmental and disposal
considerations, and various application-specific considerations. The needs of
various battery applications place a different priority on these
characteristics, and, thus, require different solutions. In addition, for each
anode/cathode combination there are many alternative ways to design a battery,
involving choices of electrolyte and electrode materials and how components are
shaped and manufactured. Design choices involve trade-offs, and as a result
improvement in one element of a battery's performance often comes at a sacrifice
of another characteristic. A battery optimized for just one characteristic may
not be competitive if its performance in other areas is inferior.
The Company selected Ni-Zn for development because of its potential to compete
well in several large rechargeable battery markets. The following chart compares
Ni-Zn to certain other competitive battery technologies:
BATTERY PERFORMANCE CHARACTERISTICS
<TABLE>
<CAPTION>
NI-ZN LEAD-ACID(1) NICKEL-CADMIUM(1) NICKEL-MH(1) LITHIUM-ION(1)
------ ------------ ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Energy Density (Wh/kg) .... 60-80 35-40 45-55 60-80 100-150
Specific Power (W/kg) ..... 500 >200 500 100-185 100
Cycle Life (deep
discharge) .............. 600 200-300 700-1200 700-1200 400-1200
Cost ($/Wh) ............... 0.15-0.50(2) 0.10-0.30 0.5-1.50 1.00-3.00 1.50-5.00
- --------------------------
</TABLE>
(1) Handbook of Batteries, Edited by D. Linden (Second Edition) McGraw-Hill
Publisher (1995).
(2) The cost estimate assumes the high volume production levels anticipated to
be achieved in a large-scale manufacturing facility. There can be no
assurance that the Company will achieve these cost estimates.
MARKETS
The world battery industry totals approximately $33 billion of manufacturers'
shipments, growing at 6-8% per year. This total includes primary batteries ($9.8
billion), motive power batteries ($2.1 billion), high performance rechargeable
batteries ($6.1 billion) and starting, lighting and ignition batteries ($15
billion). These four major types of batteries are sold into a wide array of
different markets, some of which the Company does not intend to enter. These
different markets frequently require different battery systems and have
different competitors. The market statistics referenced in the following
sections were obtained from "The 1997 Review and Analysis of Battery Industry
Developments," except if otherwise noted.
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Motive power applications are significant potential markets for the Company's
Ni-Zn battery. This segment includes electric scooters, bicycles, neighborhood
electric vehicles (NEVs) and industrial applications such as electric material
handling and transport carts. The EV/HEV potential is also projected by industry
experts to be significant in the future and Ni-Zn batteries are well suited to
these applications. Currently, because of the market risk associated with this
segment the Company is not basing its business plan on those projections but
expects to be able to meet market demand should it develop. The Company believes
that markets for the Ni-Zn battery include the existing markets for Ni-MH and
Ni-Cd, such as power tools, high-end portable lighting, and consumer home and
electronic products. In addition, the Ni-Zn battery has the potential to compete
in the upper cost segment of the lead acid battery markets where it would enjoy
a substantial weight advantage as well as increased life and reliability.
EV AND MOTIVE
Successful battery development has been a barrier to the emergence of a large EV
market. Lead-acid batteries, while cost effective, are too heavy to give
adequate vehicle range. Other higher energy density battery systems including
Ni-MH, Ni-Cd, and lithium-ion ("Li-ion") as well as Ni-Zn are being tested in
vehicles. The Company believes that its Ni-Zn battery has adequate energy
density to permit acceptable vehicle range and has the potential to be produced
at lower cost than the most other likely contenders for the EV market. Recently,
HEVs have also received more interest and development efforts. An HEV combines a
battery/electric motor drive, which is typically used for acceleration to a
predetermined speed, with an alternative drive system, such as a small internal
combustion engine, which takes over when the power requirements are lower at
steady highway speed. Toyota Motor Corporation has reported mileages of greater
than 60 miles per gallon for its Prius HEV. HEVs are likely to use similar
battery systems to EVs, albeit in smaller capacity battery packs designed for
higher power output.
The market for electric vehicles is now in the early stages of development and
many of the vehicles on the road are prototypes. The market for EV/HEVs is
predicted to grow rapidly after the year 2000, and projections for annual growth
rates for EV/HEVs are expected to accelerate from 7% annually from 1997-2002 to
approximately 22% annually, reaching $8 billion of sales in 2007. The
acceleration of growth is based on industry estimates of the rate of acceptance
of EV/HEVs in the marketplace. The market for motive power batteries was
estimated to be $2.1 billion in 1997. The Company estimates that the addressable
market for EVs/HEVs and other motive power that could use the Company's
batteries was $700 million in 1997. Based on these estimates and growth
projections, the Company estimates this market to exceed $800 million in 2000.
The Company has focused significant effort into specific segments of the motive
power market which the Company's technology addresses well. The motive power
applications for rechargeable batteries include scooters and bicycles,
industrial trucks, neighborhood vehicles, golf carts, electric wheelchairs and
marine batteries. These markets are primarily supplied by lead-acid (and some
Ni-Cd and Ni-MH) batteries today. These markets have been grouped with EVs
rather than automotive batteries because of their need for the deeper discharge
(deep cycle) capability versus high impulse power needed for starting. The
Company believes that the deep cycle capability of its Ni-Zn technology meets
the requirements of this segment.
The Company believes its Ni-Zn technology is particularly well suited to motive
power applications due to its combination of low weight, deep cycle capability,
high specific power and competitive cost. Initial target markets for the
Company's battery include the electric scooters and bicycles, particularly in
China and Europe, and the marine market. The scooter and bicycle market require
the light weight and long total range available from the Company's Ni-Zn
battery. The Company believes consumers in the the deep-cycle marine market will
be attracted to Ni-Zn's light weight, multi-year life and zero maintenance. The
industrial lift truck market, in contrast, sees little benefit to weight savings
since lead-acid batteries are often used as counterweights, but may find the
deep cycle capability and rapid charging ability to be attractive.
HIGH PERFORMANCE AND OTHER RECHARGEABLE BATTERIES
The market for portable rechargeable batteries consists of three major
technologies and is measured on a per unit basis as follows: 1) Ni-Cd, presently
approximately 62% of the market, 2) Ni-MH, approximately 31% of the market and
3) lithium-ion, approximately 7% of the market. Approximately 75% of all cells
are assembled into battery packs for use in a variety of portable devices.
Increasingly, these packs contain sophisticated electronics for power management
and safety.
Ni-Cd is the oldest commercialized rechargeable system in the market. Ni-Cd
cells can be employed in battery packs without high-cost electronics and safety
devices and enjoy a substantial price advantage over Ni-MH and Li-ion cells. In
the last decade, Ni-Cd has increasingly been the subject of tightening
environmental and workplace regulations and related pressures for recycling and
mandatory collection due to the toxicity of cadmium as a principal component.
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However, pressures to enforce mandatory collection schemes or even to ban Ni-Cd
have partially abated due to industry-wide recycling efforts. Although Ni-Cd
will remain attractive in certain applications that require very high power,
they do not experience a significant performance benefit from other technologies
and are not sensitive to their higher cost. Industry analysts believe growth in
this segment will remain relatively flat.
Ni-MH technology, which typically offers a 25% to 40% advantage in energy
density relative to Ni-Cd, was commercialized in the early 1990's. Because it
employs a metal hydride electrode rather than a cadmium electrode, Ni-MH is
considered an environmentally preferred technology and has increased its market
penetration in several applications and geographic regions as a result of this
attribute. However, Ni-MH cells and batteries typically carry a substantial cost
premium relative to Ni-Cd.
Li-ion battery technology was also commercialized in the early 1990's.
Production of Li-ion cells has increased from 15 million cells in 1994 to an
estimated 200 million cells in 1997. Li-ion technology offers the highest energy
density of all commercial rechargeable technologies available today. On a weight
basis, the technology offers 2 to 3 times the energy content of Ni-Cd and offers
higher voltage (3.6 volts per cells) than Ni-MH or Ni-Cd (1.2 volt)
technologies. Lithium-based technologies are expected to experience high growth
rates. Li-ion cells and batteries are expected to continue to be more expensive
than the Company's Ni-Zn cells.
Ni-Zn technology is in the early stages of commercialization by the Company.
Ni-Zn cells can be employed in battery packs without high-cost electronics and
safety devices. Ni-Zn cells have demonstrated characteristics that would
classify them among the safest and most environmentally benign of the
rechargeable technologies available today. The Company expects Ni-Zn to enjoy a
substantial price advantage over Ni-MH and Li-ion battery systems, assuming high
volume production levels. Ni-Zn cells offer a 30% volts per cell advantage over
Ni-MH and Ni-Cd.
Ni-Zn also offers a weight advantage over current starting, lighting and
ignition batteries, due to its higher specific energy, as well as other
performance advantages which the Company believes may be of only minor benefit
to automotive OEMs. The Company's Ni-Zn batteries have been tested for a
European automotive OEM for use in higher voltage electrical systems for
vehicles. These benefits may offset the higher cost of Ni-Zn compared to lead
acid. The success of the Company in capturing a market share in the starting,
lighting and ignition market will depend on, among other factors, the Company's
ability to lower the minimum operating temperature range of the system to meet
automotive specification and the timing and degree to which automotive
manufacturers adopt these higher voltage electrical systems.
The disadvantages of Ni-Zn are its current volumetric energy density and
operating temperature. The volumetric energy density of Ni-Zn is less than Ni-MH
and equal to that of Ni-Cd and Lead Acid. The minimum operating temperature has
been tested at -10 degrees Celsius while many EV/HEV applications require -30
degrees. The Company believes product design improvements will allow the Ni-Zn
battery to meet or exceed these requirements.
The worldwide market for rechargeable batteries, excluding automotive, motive
power and specialty battery systems is approximately $6.1 billion, growing at 7%
to 8% per year. The following table details the market size and growth of this
market, and are estimated from a variety of industry sources. The growth rate of
individual application markets varies widely, with the small cell, portable
rechargeable markets generally representing the faster-growing sectors,
resulting primarily from the continued development and proliferation of new
portable electronic products. There can be no assurance that these projected
growth rates will be continue to occur.
ESTIMATED
GROWTH RATE
1997 SALES THROUGH 2000
($ BILLION) (% PER YEAR)
----------- ------------
Power Tools .................... 2.0 8
Emergency Power & Light ........ 1.5 7
Telephones & Communications..... 0.8 10
Military/Aerospace ............. 0.5 4
Computers & Electronics ........ 0.4 12
Medical ........................ 0.3 15
Toys ........................... 0.3 6
Power Condition ................ 0.15 5
Signaling ...................... 0.15 5
-----
TOTAL .......................... 6.1 8
=====
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COMPETITION
Competition in the battery industry is, and is expected to remain, intense.
Competitors range from development stage companies to major domestic and
international companies, most of which have financial, technical, manufacturing,
marketing, sales and other resources significantly greater than those of the
Company. There are at least two, and possibly more, other battery manufacturers
in the world who have demonstrated interest in developing and marketing Ni-Zn
rechargeable batteries. The Company does not perceive these competitors, who are
significant battery producers, to be its prime competition as their technology
development is believed to be less advanced than that of the Company. The
Company expects to be competing against suppliers of lead-acid, Ni-Cd, and Ni-MH
rechargeables, as well as other rechargeables and potentially primary battery
technologies. The Company is competing on the basis of battery performance, the
price and economics of its batteries, as well as usage considerations
(stability, safety, environmental).
Lead-acid rechargeable batteries are mass produced at low cost for the
automotive starting, lighting and ignition market. Ni-Zn batteries are likely to
remain more costly than lead-acid batteries but offer advantages in performance.
The Company only intends to compete against lead-acid batteries in the more
specialized markets willing to pay a price premium for superior performance.
Major suppliers of such batteries include Johnson Controls, Inc. and Exide
Corporation. Several other battery manufacturers are attempting to develop and
market higher performance versions of lead-acid batteries. The Company believes
it is unlikely that those developments will match the performance of Ni-Zn.
Most of the world's major automotive companies are engaged in electric vehicle
development, however, production has been limited. Vehicles vary from prototypes
to commercial offerings. Many automotive companies, as well as major battery
manufacturers, are sponsoring the development of higher performance batteries
for EVs. For example, General Motors, Ford and Chrysler are members of the U.S.
Advanced Battery Consortium. Numerous battery chemistries are being pursued so
that there is uncertainty over the long term system of choice. Ni-MH appears to
currently be the most popular choice among technologies which can broadly match
Ni-Zn's performance. Because of higher material costs, the Company believes
Ni-MH batteries will be more costly to produce than Ni-Zn.
Ni-Cd and Ni-MH rechargeable batteries are mass produced. The Company believes
that its Ni-Zn batteries can be made at lower cost than both in volume
production while offering comparable to superior performance. Ni-Cd and Ni-MH
batteries are currently supplied to consumer products and consumer electronics
OEMs by battery manufacturers who are frequently affiliated with the OEMs. These
relationships and the substantial lead times OEMs require to incorporate new
battery designs into their products could hinder the Company's attempt to
substitute for Ni-Cd and Ni-MH batteries.
Lithium-based battery systems offer significant performance advantages over many
other rechargeable battery technologies. Li-ion batteries are currently more
costly than Ni-Cd and Ni-MH cells but have found applications willing to pay the
price premium for enhanced performance.
ENVIRONMENTAL AND SAFETY ISSUES
Safety is an issue in most battery systems. Both nickel and zinc, while not
entirely harmless, are relatively benign compared to other high-performance,
rechargeable electrode materials. Lead is toxic, however, there are currently
systems in place in the developed world to recycle lead. There is pressure in
Europe to ban or require recycling of Ni-Cd batteries due to the poisonous
nature of cadmium. It would be desirable to recycle metal hydrides, given their
high cost, but the technology that exists does not make it practical. Recharging
batteries produces heat and, in some systems, hydrogen which must be managed and
exhausted safely. Li-ion batteries have had several safety incidents and have
occasionally caught fire in consumer products. The Company's Ni-Zn design
appears to have no intrinsic safety problems. The prospect of stricter
environmental legislation relating to the manufacture, disposal and recycling of
batteries containing lead or cadmium, both of which are hazardous and toxic, if
enacted, could enhance the attractiveness of the Company's Ni-Zn battery.
RESEARCH AND DEVELOPMENT
DEVELOPMENT OF NI-ZN
The Company expects to continue working on improving the characteristics of its
Ni-Zn batteries to provide a longer cycle life and higher energy density,
including the following research objectives:
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o New applications for Ni-Zn offer the opportunity to optimize the cell
design to better meet the customer's desired specifications.
Troubleshooting and general technical service for existing licensees will
be conducted by the research and development group.
o The performance of all batteries varies with temperature; with specific
power declining as temperature declines. The Company plans to conduct
research to improve the low temperature performance of its Ni-Zn battery.
Other technical goals include increasing cycle life from over 600 to 1000
and further improving energy density. The work will center on improved
electrode materials and separator systems.
OTHER ZINC BATTERIES
The research and development of other rechargeable zinc battery technologies is
the main non-Ni-Zn battery research being pursued. The Company is developing a
rechargeable zinc battery which if successful has the potential to compete for
the primary cell market at a price close to that of common primary cells, using
the Company's zinc electrode technology. This opportunity is being pursued in a
cooperative technology joint venture which includes the Company, Xiamen Three
Circles Co., Ltd. and assistance from Xiamen University. The overall near-term
goals for the program are to achieve greater than 100 cycles with only a 20%
decay in capacity and achieve a potential production cost that is not
significantly higher than that of commonly available alkaline cells. If this
product is successfully developed, it has the potential to open up a different,
large consumer market for the Company.
RISK FACTORS
The following factors have been identified as risks to the sustained operations
of the Company:
UNCERTAINTY OF FUTURE PROFITABILITY
In the past, the Company has had limited revenues. The Company is not
profitable, and no assurance can be given that the Company will become
profitable in the foreseeable future, if ever. For the fiscal years ended
October 31, 1999 and 1998, the Company had losses of $4,961,000 and $2,325,000,
respectively. Future operating results of the Company will depend upon many
factors, including its ability to raise capital, demand for the Company's
products, the efforts and success of the Company and its licensees and joint
venture partners in developing and marketing products incorporating the
Company's technology, the development of battery markets, the level of
competition faced by the Company, and the ability of the Company to develop,
market and license new products and effectively manage operating expenses.
DEPENDENCE ON NI-ZN PRODUCT LINE AND UNCERTAINTY OF MARKET ACCEPTANCE OF
ADVANCED RECHARGEABLE BATTERIES
In the fiscal years ended October 31, 1999 and 1998, contract revenues and
licensing fees related to the Company's Ni-Zn battery and sales of raw materials
represented substantially all of the Company's revenues. To date, the only
revenues received from its Ni-Zn battery has been for samples shipped. The
Company believes that its dependence on revenues related to its Ni-Zn product
line is likely to continue for at least the next several years, unless and until
the Company successfully develops and commercializes other new products.
Since the Company intends to focus its manufacturing, research and development
and marketing efforts on its Ni-Zn batteries, it will be dependent upon the
market acceptance of its Ni-Zn batteries. The Company's Ni-Zn batteries have not
yet achieved market acceptance, and there can be no assurance that market
acceptance of its Ni-Zn batteries will ever be achieved. The introduction of new
products is subject to the inherent risks of unforeseen delays and the time
necessary to achieve market success for any individual product is uncertain.
Volume production of the Company's advanced rechargeable batteries could be
delayed for any reason. The Company's competitors may introduce new technologies
or refine existing technologies which could have a material adverse effect on
the Company's business, financial condition and results of operations.
RISKS RELATING TO INFRINGEMENT AGAINST AND ENFORCING PATENTS
There can be no assurance that the issued patents or the licensing rights of the
Company will fully, or even partially, protect the Company's technology from
competitors' approaches, or that new patent applications will be allowed. There
can be no assurance that the Company would be successful if any challenges are
made by the Company to the patents of other parties or that other parties will
not be successful in asserting infringement claims against the Company. Further,
because of the intense competition in battery technology and the large number of
patents filed, or being filed, no assurance can be given that the Company will
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not need another company's patent under a license agreement, if such an
agreement could be reached or what the terms of that agreement might be. Any
determination that the Company's products or manufacturing processes have
infringed on the product or process rights held by others could have a material
adverse effect on the Company's business and results of operation. Additionally,
adverse determinations could result in the Company's loss of proprietary rights,
subject the Company to liability to third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
negative effect on the Company's business and hinder the Company's
commercialization initiatives.
The Company has not filed for patent protection in certain potential major
markets such as India and Southeast Asia. Agreements reached with partners in
these areas would have to be based on trade secrets and know-how. In the future,
the Company may seek patent protection in those areas. The Company also relies
on know-how and trade secrets to establish its battery technologies for
commercial applications and there is no assurance it can adequately protect this
information in its dealings with other entities. There can be no assurance that
other organizations will not develop similar or better information through their
own efforts.
RISKS RELATING TO TRANSFER OF JOINT VENTURE AND RELATED LICENSE AGREEMENT
FCE has entered into a Joint Venture with Xiamen Three Circles Co., Ltd., a
Chinese entity, to develop and manufacture the Company's batteries to be used to
power electric bicycles, scooters, off-road vehicles and miners' cap lamps to be
marketed and sold in China and Southeast Asia. The Joint Venture and FCE have
entered into the Three Circles License Agreement pursuant to which FCE has
licensed certain of its Ni-Zn battery technology to the Joint Venture. See
"BUSINESS--Partnerships, Joint Ventures and Licenses." In order for FCE to
transfer its interest in the Joint Venture and the Three Circles License
Agreement to the Company, FCE has sought the consent of Xiamen Three Circles
Co., Ltd. and the Joint Venture and the approval of the appropriate examination
and approval authority of the PRC. However, there can be no assurance that these
consents and approvals will be obtained on a timely basis or at all. Pending
receipt of these consents and approvals, FCE and the Company have entered into a
License Assistance Agreement pursuant to which FCE has retained the Company to
provide all services and assistance necessary for the Company to effectively
fulfill, on behalf of FCE, all of FCE's obligations under the Joint Venture
contract and Three Circles License Agreement in exchange for the Company
assuming all of the benefits and obligations accruing to FCE pursuant to such
agreements. A failure to obtain or a delay in obtaining these consents and
approvals could have a material adverse effect on the Company because the
Company will be able to enforce its rights under these agreements only through
FCE. In addition, FCE's Chinese partner could take exception to the License
Assistance Agreement and claim that FCE is in default under these agreements.
Any such event or resulting termination of these agreements could have a
material adverse effect on the Company. See "RISK FACTORS-Risks of Relying on
FCE."
RISKS PERTAINING TO CHINA
Currently, the Company's two major license agreements, the Nan Ya License
Agreement and the Three Circles License Agreement (the "China Licenses") are
with entities located in the PRC. The Company has established the Joint Venture
in the PRC to build a manufacturing plant that it intends to use as its primary
production facility. FCE also plans to transfer its interest in the Joint
Venture to the Company. See "RISK FACTORS-Risks Relating to Transfer of Joint
Venture and Related License Agreement." The following risk factors relating to
conducting business in the PRC could result in a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL ADVERSE EFFECTS OF INTERNAL POLITICAL CHANGES
The Company's business operations in China, its interest in the Joint Venture
and its rights under the China Licenses may be adversely affected by the
political environment in China. The PRC is a socialist state which, since 1949
has been, and is expected to continue to be, controlled by the Communist Party
of China. Changes in the political leadership of the PRC may have a significant
adverse effect on policies related to China's current economic reform program,
other policies affecting business and the general political, economic and social
environment in the PRC. Any such changes in the political leadership or current
economic reform policies or the imposition of additional restrictions on foreign
owned enterprises could have a material adverse effect on the business of the
Joint Venture, the Company's interest in the Joint Venture and the Company's
rights and revenues under the China Licenses.
PROPRIETARY RIGHTS
The Company protects its intellectual property rights in the PRC through a
combination of patent applications, contractual arrangements and trade secrets.
Patent and intellectual property right protection in the PRC affords
substantially less protection than is available in the United States. There can
be no assurance that the Company will be able to effectively protect its
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proprietary rights in China. The unauthorized use by others in the PRC of the
Company's technology could have a material adverse effect on the Company's
business, financial condition and results of operations.
RESTRICTIONS ON REPATRIATION OF FOREIGN CURRENCY EXCHANGE, OTHER FOREIGN
CURRENCY EXCHANGE RESTRICTIONS AND VOLATILITY OF EXCHANGE RATES
The PRC regulates the expatriation of foreign currencies as payments to
foreigners, including investors and licensors, and the conversion of Renminbi
(the currency of the PRC) into foreign currencies, such as the U.S. Dollar. In
addition, there has been significant volatility in the exchange rate of Renminbi
to U.S. Dollars. The Company expects that the Joint Venture and the Company's
other licensee in the PRC will receive a substantial portion of their revenues
in Renminbi. A portion of such revenues will have to be converted to other
currencies to meet foreign currency obligations (such as payment obligations to
suppliers) or for purposes of remittance to the Company as return of capital,
dividends or license payments. The Joint Venture and the Company's other
licensee in China may be unable to convert sufficient Renminbi into foreign
currency to enable them to comply with any foreign currency payment obligations
they have, including distributions to the Company. In the event of a depressed
market in Renminbi, the cost of foreign currency could be sufficiently high to
reclude joint ventures from meeting any foreign financial obligations incurred
in the future or from paying distributions and license fees to the Company.
Moreover, fluctuations in the exchange rate of the Renminbi into U.S. Dollars
could have an adverse effect on the license fees to be paid to the Company. Even
if the Joint Venture or any other licensee of the Company is able to convert
their Renminbi into foreign currencies there can be no assurance that the PRC
will not impose restrictions on the ability of these entities to remit out of
the PRC amounts due to the Company in U.S. Dollars or otherwise.
PRC LAWS; UNCERTAINTY ARISING FROM EVOLVING REGULATIONS AND POLICIES
The PRC does not have a well-developed, consolidated body of laws governing
foreign investment-enterprises. As a result, the administration of laws and
regulations by government agencies may be subject to considerable discretion and
variation. As the legal system in the PRC develops with respect to these new
types of enterprises, foreign investors may be adversely affected by new laws,
changes to existing laws (or interpretations thereof) and preemption of
provincial or local laws by national laws. In circumstances where adequate laws
exist, it may not be possible to obtain timely and equitable enforcement
thereof.
UNCERTAINTY OF MOST FAVORED NATION TRADING STATUS
A significant portion of the economic activity in China is export-driven and,
therefore, is affected by developments in the economies of the PRC's principal
trading partners. The United States Congress considers annually the renewal of
"Most Favored Nation" trading status for the PRC, and may attach conditions to
such renewal. There can be no assurance that Congress will renew such status or
that future renewal will not be linked to human rights issues or other
requirements which the PRC may decline or be unable to meet. Revocation or
conditional extension by the United States of the PRC's "Most Favored Nation"
trading status could have a material adverse effect upon the Company.
EXPROPRIATION OF PROPERTY
Following the formation of the PRC in 1949, the PRC government renounced various
debt obligations incurred by predecessor governments, which obligations remain
in default, and expropriated assets without compensation. There can be no
assurance that the PRC government will not in the future expropriate or
nationalize the assets of the Joint Venture or any assets of the Company in
China. Such an expropriation would result in a total loss of the Company's
investment in China.
AGREEMENTS WITH FCE; LACK OF ARM'S-LENGTH NEGOTIATIONS
The Company has entered into certain agreements with FCE, including the
Distribution Agreement, the Tax Sharing Agreement, the Services Agreement and
the License Assistance Agreement for the purpose of defining its ongoing
relationship with FCE and to provide certain services during the transition. The
Distribution Agreement provided for the transfer to the Company of the business
and principal assets of the Battery Group, the assumption by the Company of
certain liabilities and obligations relating to that business, the distribution
by FCE of all outstanding shares of the Company Common Stock to FCE stockholders
and certain other agreements governing the relationship between FCE and the
Company.
The Tax Sharing Agreement defines the rights and obligations of FCE and the
Company with respect to filing of returns, payments, deficiencies and refunds of
federal, state and other income, franchise or certain other taxes relating to
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the Company's operations after the spin-off. The Tax Sharing Agreement is
intended to allocate the tax liability of FCE between FCE and the Company as if
they were separate taxable entities.
The Services Agreement sets forth the terms under which FCE provides to the
Company certain management and administrative services, as well as the use of
certain office, research and development, and manufacturing and support
facilities and services. Services under this agreement amounted to $378,000 in
the fiscal year ended October 31, 1999.
The License Assistance Agreement is intended to transfer to the Company FCE's
benefits and obligations under the Joint Venture contract and the Three Circles
License Agreement while the Company and FCE seek formal approval for that
transfer. The License Assistance Agreement provides that the Company will
provide the services and assistance necessary for the Company to effectively
fulfill, on behalf of FCE, all of FCE's obligations under the Joint Venture
contract and the Three Circles License Agreement in exchange for the Company
assuming all of the obligations and benefits pursuant to such agreements. FCE
has also agreed to act in accordance with the instructions of the Company in
connection with matters of Joint Venture governance and agreed not to permit the
amendment of the related documents without the consent of the Company. See "RISK
FACTORS--Risks of Relying on FCE" and "RISK FACTORS-Risks Relating to Transfer
of Joint Venture and Related License Agreement."
In addition to the foregoing relationships, the Company issued options to
purchase up to 100,000 shares of Common Stock to officers and directors of FCE
in connection with the Distribution. The agreements between the Company and FCE,
and the Company and officers and directors of FCE, 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. In addition, questions regarding the
resolution of any issues arising under these arrangements will be resolved by
the Company and FCE.
RISKS OF RELYING ON FCE
The Company will be relying upon FCE to realize the benefits of the Joint
Venture and the Three Circles License Agreement until all consents and approvals
to the transfer and assignment of these agreements are obtained. Conflicts of
interest between FCE and the Company could arise in connection with these
agreements. A bankruptcy or insolvency of FCE could prevent the Company's
receipt of funds due to it under the agreements, even if the funds were paid to
FCE. The Chinese parties to the agreements could take exception to the License
Assistance Agreement and claim that FCE is in default under one or more of the
agreements, resulting in a termination of such agreements. Any of these events,
a delay in obtaining or the failure to obtain the consents and approvals to the
transfer and assignment of these agreements could have a material adverse effect
on the Company to the extent that the Company is unable to fully realize the
benefits of these agreements.
CONSUMER MARKETS
A substantial portion of the Company's business will depend upon the success of
products sold by OEMs that use the Company's batteries. For example, one factor
determining the quantity of purchase orders the Company may receive from a
bicycle manufacturer in the future is the success of that company's electric
bicycle. Therefore, the Company's success in being able to sell or license its
products is substantially dependent upon the acceptance and marketability of the
OEMs' products in the marketplace. The Company is subject to many risks beyond
its control that influence the success or failure of a particular product
manufactured by an OEM, including among others, competition faced by the OEM in
its particular industry; market acceptance of the OEMs product; the engineering,
sales and marketing and management capabilities of the OEM; technical challenges
unrelated to the Company's technology or problems faced by the OEM in developing
its products; and the financial and other resources of the OEM.
ELECTRIC VEHICLE MARKET AND ACCEPTANCE OF THE BATTERY SYSTEM IS UNCERTAIN
Because vehicles powered by internal combustion engines cause pollution, public
pressure has begun to result in legislative and other mandates in Europe, and
enacted or pending legislation in the United States, to promote or mandate the
use of vehicles with no tailpipe emissions ("zero emission vehicles") or reduced
tailpipe emissions ("low emission vehicles"). The Company believes that in order
to create a significant commercial market for electric vehicles in Europe it
will be necessary for such public pressure to continue. In addition, the Company
believes that in the United States government initiatives are important factors
in creating an electric vehicle market. There can be no assurance that such
public pressure will continue or that further legislation or other governmental
initiatives will be enacted, or that current legislation will not be repealed,
amended or have its implementation delayed, as has recently been the case in
California, or that a different form of zero emission or low emission vehicle,
or other solutions to the problem of containing emissions created by internal
combustion engines, will not be invented, developed and produced, and achieve
greater market acceptance than electric vehicles. The lack of significant market
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for electric vehicles could have a material adverse effect on the ability of the
Company to commercialize its technology. Even if a significant market for
electric vehicles develops, there can be no assurance that the Company's
technology will be commercially competitive within such a market.
COMPETITION; TECHNOLOGICAL OBSOLESCENCE
The primary and rechargeable battery industry is characterized by intense
competition with a large number of companies offering or seeking to develop
technology and products similar to those of the Company. The Company is subject
to competition from manufacturers of traditional rechargeable batteries, such as
Ni-Cd batteries, from manufacturers of rechargeable batteries with advanced
technologies, such as Ni-MH, Li-ion liquid electrolyte and lithium-metal
solid-polymer batteries, as well as from companies engaged in the development of
batteries incorporating new technologies. The Company also competes with large
and small manufacturers of alkaline, lithium, carbon-zinc, sea water, high rate
and primary batteries. There can be no assurance that the Company will be
successful in competing with these manufacturers, many of which have
substantially greater financial, technical, manufacturing, distribution,
marketing, sales and other resources. A number of companies with substantially
greater resources than the Company are pursuing the development of a wide
variety of battery technologies, including both liquid electrolyte lithium and
solid electrolyte lithium batteries, which are expected to compete with the
Company's technology.
Other companies undertaking research and development activities of solid-polymer
batteries have already developed prototypes and are constructing commercial
scale production facilities. If other companies successfully market their
batteries prior to the introduction of the Company's products, there may be a
material adverse effect on the Company's business, financial condition and
results of operations. The market for the Company's products, as well as the
products that utilize the Company's batteries and technology, is characterized
by changing technology and evolving industry standards, often resulting in
product obsolescence or short product lifecycles. Although the Company believes
that its batteries are comprised of state-of-the-art technology, there can be no
assurance that competitors will not develop technologies or products that would
render the Company's technology and products obsolete or less marketable.
RISKS RELATING TO GROWTH AND EXPANSION
Rapid growth of the Company's advanced rechargeable battery business or other
segments of its business may significantly strain the Company's management,
operations and technical resources. If the Company is successful in obtaining
rapid market penetration of its advanced rechargeable batteries, it will be
desirable for the Company to either deliver large volumes of quality products to
its customers on a timely basis at a reasonable cost to those customers or
license its technology to others who can manufacture and distribute the
Company's products. The Company currently has limited manufacturing capability
and no experience in large scale manufacturing of its advanced rechargeable
batteries and has no experience in automated assembly and packaging technology.
There can be no assurance that the Company's business will achieve rapid growth
or that its efforts to expand its manufacturing and quality control activities
(or the efforts of those companies which are granted licenses to the Company's
technology) will be successful or that it or its licensees will be able to
satisfy commercial scale production requirements on a timely and cost-effective
basis.
RISKS RELATING TO LICENSE AGREEMENTS
The Company's growth and success will be dependent to a substantial extent on
its reputation, and because the Company anticipates licensing its technology to
others its reputation may be affected by the performance of those companies to
which the Company licenses its technology. License agreements with foreign
companies may be subject to additional risks, such as exchange rate
fluctuations, political instability or weaknesses in the local economy. Certain
provisions of the license agreements for the benefit of the Company may be
subject to restrictions in foreign laws that limit the Company's ability to
enforce such contractual provisions. In addition, it may be more difficult to
register and protect the Company's proprietary rights in certain foreign
countries. Failure by the Company to obtain suitable licensees of its technology
or the failure of the Company's licensees to achieve the Company's manufacturing
or quality control standards or otherwise meet the Company's expectations could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RELIANCE ON JOINT VENTURE PARTNERS
The Company intends to enter into other joint venture arrangements in the future
to further commercialize its battery technology. The Company's existing joint
venture is with a foreign partner and the Company anticipates that future joint
ventures may be with foreign partners or entities and as a result such ventures
may be subject to the political climate and economies of the foreign countries
where such partners reside. There can be no assurance that the Company's joint
16
<PAGE>
venture partners will provide the Company with the support anticipated by the
Company, or that any of the joint ventures will be successful in developing
batteries for use with their intended products, or that any of the joint
ventures will be successful in manufacturing and marketing their batteries for
such products once developed. Any international operations of the Company will
also be subject to certain external business risks such as exchange rate
fluctuations, political instability and a significant weakening of a local
economy in which a foreign joint venture operates or is located. Certain
provisions of the joint venture agreements for the benefit of the Company may be
subject to restrictions in foreign laws that limit the Company's ability to
enforce such contractual provisions. Failure of these joint ventures to be
successful could have a material adverse effect on the Company's business and
prospects.
DEPENDENCE ON KEY PERSONNEL
Because of the specialized, technical nature of the Company's business, the
Company is highly dependent on certain members of its management, marketing,
engineering and technical staff, including Robert L. Kanode, President and Chief
Executive Officer and Allen Charkey, the Executive Vice President and Chief
Operating Officer of the Company, the loss of whose services could have a
material adverse effect on the Company's business, financial condition and
results of operations. The ability of the Company to pursue effectively its
business strategy will depend upon, among other factors, the successful
retention of additional highly skilled and experienced managerial, marketing,
engineering and technical personnel. There can be no assurance that the Company
will be able to retain or recruit such personnel.
DEMANDS OF ENVIRONMENTAL AND OTHER REGULATORY COMPLIANCE
National, state and local regulations impose various environmental controls on
the manufacture, storage, use and disposal of batteries and/or of certain
chemicals used in the manufacture of batteries. Although the Company believes
that its operations are in substantial compliance with current environmental
regulations and that there are no environmental conditions that will require
material expenditures for clean-up at its present or former facilities or at
facilities to which it has sent waste for disposal, there can be no assurance
that conditions relating to the Company's historical operations which require
expenditures for clean-up will not be discovered in the future or that changes
in environmental laws and regulations will not impose costly compliance
requirements on the Company or otherwise subject it to future liabilities. There
can be no assurance that additional or modified regulations relating to the
manufacture, transportation, storage, use and disposal of materials used to
manufacture the Company's batteries or restricting disposal of batteries will
not be imposed or as to the effect such regulations may have on the Company or
its customers.
DEPENDENCE ON PROPRIETARY TECHNOLOGIES
The Company believes that its success will be dependent both on the legal
protection that its patents and other proprietary rights may or will afford and
on the knowledge, ability, experience and technological expertise of its
employees. The Company claims proprietary rights in various unpatented
technologies, know how, trade secrets and trademarks relating to its products
and manufacturing processes. There can be no assurance as to the degree of
protection these various claims may or will afford, or that the Company's
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to the Company's technology. It is the
policy of the Company to protect its proprietary rights in its products and
operations through contractual obligations, including nondisclosure agreements
with certain employees, customers, consultants, licensees and strategic
partners. There can be no assurance as to the degree of protection these
contractual measures may or will afford. There can be no assurance (i) that
patents will be issued from any pending applications, or that the claims allowed
under any patents will be sufficiently broad to protect the Company's
technology, (ii) that any patents issued to the Company will not be challenged,
invalidated or circumvented, or (iii) as to the degree or adequacy of protection
any patents or patent applications may or will afford. If the Company is found
to be infringing third party patents, there can be no assurance that it will be
able to obtain licenses with respect to such patents on acceptable terms, if at
all. Failure of the Company to obtain necessary licenses could result in delays
in product shipment or the introduction of new products, and costly attempts to
design around such patents could foreclose the development, manufacture or sale
of the Company's products.
RAW MATERIALS
The Company's principal raw materials for the production of its battery products
are nickel and zinc. Prices for both nickel and zinc are subject to market
forces beyond the control of the Company. The Company's future profitability may
be materially adversely affected by increased nickel and/or zinc prices to the
extent it is unable to pass on higher raw material costs to its customers.
However, to offset such costs, the Company may engage in forward purchases and
hedging transactions to effectively manage raw material costs and inventory
relative to anticipated production requirements for the next six to twelve
months.
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<PAGE>
FUTURE CASH REQUIREMENTS
The Company's cash requirements will vary depending upon a number of factors,
many of which may be beyond the control of the Company, including demand for the
Company's products, the efforts and success of the Company and its joint venture
partners in developing and marketing products incorporating the Company's
technology, the development of battery markets, the level of competition faced
by the Company and the ability of the Company to develop, market and license new
products and effectively manage operating expenses. If and when the Company is
required to raise additional funds, there can be no assurance that the Company
will be able to do so on favorable terms, if at all. Failure of the Company to
raise funds required to support its operations would have a material adverse
effect on the Company's business, financial condition and results of operations
and could result in a loss to their investors.
DIVIDEND POLICY
The Company has not and does not expect to pay any cash dividends in the near
future. The Company's dividend policy will be reviewed by the Board of Directors
of the Company (the "Board") from time to time based on the results of
operations and financial condition of the Company and such other business
considerations as the Board considers relevant. Subject to the foregoing, the
Company may declare and pay dividends, although there can be no assurance that
any dividends will be paid in the future.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Robert L. Kanode 49 President and Chief Executive Officer
Allen Charkey 58 Executive Vice President and Chief Operating Officer
Joseph G. Mahler 47 Acting Chief Financial Officer, Treasurer and
Corporate Secretary
Robert L. Kanode has been President and Chief Executive Officer of Evercel, Inc.
since April 1999. Prior to joining Evercel Mr. Kanode served as President of
Varta Batteries North America. Mr. Kanode also held numerous positions with IBM
and the IBM ThinkPad team and other permanent and consulting positions focused
on electronic manufacturing and operations.
Allen Charkey has been a director of Evercel, Inc. since its formation in June,
1998 and Executive Vice President and Chief Operating Officer since January,
1999. He joined FCE in 1970 and has held various positions of increasing
responsibility at the Company. Prior to joining the FCE, Mr. Charkey was
employed by Yardney Electric Corporation from 1963 to 1970 as a battery
scientist.
Joseph G. Mahler joined FCE in October 1998 as Chief Financial Officer,
Corporate Secretary and Treasurer. Since the spin-off of the Company, he has
performed the same duties as Acting Chief Financial Officer of Evercel. Prior to
joining FCE, Mr. Mahler was Vice President-Chief Financial Officer at Earthgro,
Inc. from 1993 to 1998 and prior to that, he was a partner at Ernst & Young.
ITEM 2. PROPERTIES
The Company is leasing approximately 28,500 square feet of space in Danbury,
Connecticut, to be used as a small-scale manufacturing plant for Ni-Zn battery
production, distribution and for office space. The annual lease cost in Danbury,
Connecticut is approximately $171,000. The Company believes that its facilities
are adequate for its current operations. The Company will expand the current
facility or acquire additional manufacturing space in order to support the
production of the large form factor battery.
A large form factor manufacturing plant will be designed to be flexible enough
to produce batteries for the different markets which will be pursued, but
primarily will be focused on the Model 100 battery large form factor. This
18
<PAGE>
battery will primarily be marketed to the marine trolling motor market in the
United States. The Company estimates it will cost $7 to $10 million to procure
and automate this facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock (Common Stock), par value $.01, has been publicly
traded since April 6, 1999 on the Nasdaq Small Cap ("NASDSC") under the symbol
"EVRC" and the Boston Stock Exchange ("BSE") under the symbol "EVL". On January
28, 2000 there were approximately 181 common stockholders of record.
The following table sets forth the range of high and low prices of the Common
Stock on the NASDAQ Small Cap for the fiscal quarters indicated, as reported by
NASDAQ.
YEAR ENDED 10/31/99 HIGH LOW
- ------------------- ---- ---
Second Quarter $ 6.125 $ 5.125
Third Quarter $ 13.500 $ 4.813
Fourth Quarter $ 15.000 $ 10.125
The Company has never paid any dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently anticipates retaining all of its earnings to finance future growth.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is engaged in the design and manufacture of innovative, patented
Ni-Zn rechargeable batteries. The Company believes that its Ni-Zn battery
technology offers high energy density, long cycle life and low material costs,
resulting in a low weight, high power battery with a substantial price advantage
over other comparable technologies. The Company's Ni-Zn battery has been used on
a limited test basis in a range of rechargeable battery applications, including
scooters, bicycles, electric vehicles and lawn mowers. The Company also believes
its Ni-Zn battery may be used in other rechargeable battery applications,
including trolling motors for boats, golfcarts, power tools, and both consumer
and electronic products.
The Company's strategic goals are to rapidly commercialize its Ni-Zn technology,
maintain and increase its technological leadership, develop new battery
businesses which build on its Ni-Zn technology and continue to develop other
advanced battery technologies. The Company intends to commercialize its Ni-Zn
technology through a combination of direct sales, licensing agreements and joint
venture relationships. The Company has licensed and granted certain marketing
rights to develop batteries for electric vehicles and hybrid electric vehicles
to a joint venture between Nan Ya Plastics Corporation of Taiwan, a Formosa
Plastics Group company and Xiamen of Xiamen, China. The Company also has an
agreement to manufacture scooter and bicycle batteries through the Three Circle
License Agreement.
RESULTS OF OPERATIONS
The Company had $196,000 in revenues for the year ended October 31, 1999 as
compared to $438,000 for the same period in 1998. Lower revenue resulted from
the termination of the Company's license fee arrangement with Corning in May
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<PAGE>
1998 partially offset by sales of raw materials of $195,000 to the Chinese joint
venture in fiscal 1999. The Company had cost of revenues of $694,000 in fiscal
1999 as compared to $87,000 for the prior fiscal year. Higher costs were driven
by low volume manufacturing operations which started in 1999. Administrative and
selling expense increased 24% to $2.2 million in fiscal 1999 from $1.8 million
in 1998. The increase is the result of staffing to support the commercialization
effort, production and distribution of samples, and costs associated with the
Joint Venture and License Agreement. Depreciation increased to $181,000 from
$45,000 in the last fiscal year reflecting increased capital purchases to outfit
the Danbury facility. Research and development expense increased 34% to $2.4
million in fiscal 1999 from $1.8 million in the last fiscal year. The increase
reflects product development activity relating to the commercialization of the
Company's battery technology.
Net interest income of $90,000 in 1999 was earned on funding from the Rights
Offering placed in an interest bearing account, $108,000, partially offset by
$18,000 of interest expense due to borrowings from banks and FCE to maintain
operations prior to the Rights Offering. The Company's share of the Joint
Venture's losses amounted to $36,000 for the year. The Company recognized a tax
benefit of $360,000 in the first quarter of fiscal 1999 due to its inclusion in
the consolidated tax return of FCE and has recorded no benefit for the losses
incurred in the second, third and fourth quarters of fiscal 1999, pursuant to
the requirement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes".
LIQUIDITY AND CAPITAL RESOURCES
Working capital at October 31, 1999 was $1,272,000 including $1,820,000 of cash
as compared to a negative working capital of $735,000 at October 31, 1998 and
$1,000 cash. To continue to meet the operating and capital requirements of
growing the Company, a Private Placement offering was completed on December 1999
raising $6.6 million. With this offering, the Company also has the right to
require the investors to purchase additional securities for $3.3 million. The
Company believes that the net proceeds received from the Private Placement, the
$2 million license payments anticipated to be received under the Nan Ya License
Agreement in the first quarter of calendar 2000 and potentially collateralizing
the Company's capital investments and working capital for financing, will be
sufficient to support its planned operations for at least the next twelve
months. The Company's cash requirements will vary depending upon a number of
factors, many of which are beyond the control of the Company, including the
demand for the Company's products, the efforts and success of the Company's
licensees and joint venture partners in developing and marketing products
incorporating the Company's technology, the development of battery markets, the
level of competition faced by the Company, the ability of the Company to
develop, market and license new products and its ability to effectively manage
operating expenses. The Company expects to continue to enter into license
agreements, to participate in joint manufacturing ventures and to expand its
battery manufacturing facilities. The Company believes that it will require
additional capital in order to continue these activities. If and when the
Company is required to raise additional funds, there can be no assurance that
the Company will be able to do so on favorable terms if at all. Failure of the
Company to raise funds required to support its operations would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Prior to having received the proceeds from the Rights Offering, the Company
obtained all of its funding from FCE. FCE provided funding for all battery
research activities under its research and development expense budget. On
February 5, 1999, the Company entered into a Loan Agreement and Line of Credit
Note (the "Line of Credit") to borrow up to $3,450,000 (including certain
borrowings from a Bank) from FCE for working capital and proposed capital
expenditures to be secured by all of the Company's tangible and intangible
personal property. The Company has entered into a Services Agreement with FCE to
provide certain management and administrative services and office, research and
development and manufacturing support facilities and services to the Company. In
the second fiscal quarter of 1999, the Company received $7,873,000 of net
proceeds from the Rights Offering (after deducting underwriting discounts and
fees), including funds received from the sale of unsubscribed share. pursuant to
a Standby Underwriting Agreement. Pursuant to its loan agreements, the Company
used a portion of the proceeds to pay in full the outstanding principal and
interest on certain notes held by a Bank and the Line of Credit from FCE. The
principal amounts paid were $1,647,000 and $300,000, respectively.
The net fees paid to FCE by the Company pursuant to the Services Agreement for
services performed were $378,000 for fiscal 1999, excluding certain services
billed on the basis of usage, such as purchasing, analytical lab, microscope
analysis, machine shop and drafting, which amount takes into account FCE's
additional costs related to providing such services, and will decline as the
services performed decrease. The Company presently expects that these services
will be provided by FCE until the third quarter of 2000.
20
<PAGE>
OVERVIEW
ITEM 7. FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
Independent Auditors' Report F-2
Balance Sheets - October 31, 1999 and 1998 F-3
Statements of Income (Loss) for Years ended
October 31, 1999 and 1998 F-4
Statements of Changes in Common Shareholders' Equity
for the Years ended October 31, 1999 and 1998 F-5
Statements of Cash Flows for the Years ended
October 31, 1999 and 1998 F-6
Notes to Financial Statements F-7
F-1
21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evercel, Inc.:
We have audited the accompanying balance sheets of Evercel, Inc. as of October
31, 1999 and 1998, and the related statements of income (loss), changes in
common shareholders' equity and cash flows for each of the years in the two-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 October 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the years in the two-year period ended October 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
---------------
KPMG LLP
January 28, 2000
Stamford, CT
F-2
22
<PAGE>
EVERCEL, INC.
Balance Sheets
October 31, 1999 and 1998
(Dollars in thousands except per share amounts)
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 1,820 $ 1
Accounts receivable 214 17
Inventories 192 --
Other current assets 56 --
------- -------
Total current assets 2,282 18
Property, plant and equipment, net 1,991 825
Other assets, net 17 333
------- -------
Total assets $ 4,290 $ 1,176
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 603
Accounts payable 538 53
Accrued liabilities 473 97
------- -------
Total current liabilities 1,011 753
Shareholders' equity:
Common stock, ($.01 par value);
10,000,000 shares authorized: 2,861,045
issued and outstanding in 1999 29 --
Additional paid-in capital 8,006 --
Note receivable from shareholder (300) --
Accumulated deficit (4,456) --
Net assets of Battery Group -- 423
------- -------
Total shareholders' equity 3,279 423
------- -------
Total liabilities and shareholders' equity $ 4,290 $ 1,176
======= =======
The accompanying notes are an integral part of the
financial statements.
F-3
23
<PAGE>
EVERCEL, INC.
Statements of Income (Loss)
Years ended October 31, 1999 and 1998
(Dollars in thousands except per share amounts)
1999 1998
---- ----
Revenues $ 196 $ 438
Costs and expenses:
Cost of revenues 694 87
Administrative and selling 2,244 1,805
Depreciation and amortization 181 45
Research and development 2,449 1,832
------- -------
Total costs and expenses 5,568 3,769
------- -------
Loss from operations (5,372) (3,331)
Interest income, net 90 --
Loss of nonconsolidated affiliate (36) --
Other expense (3) --
------- -------
Loss before income tax benefit (5,321) (3,331)
Income tax benefit (360) (1,006)
------- -------
Net loss $(4,961) $(2,325)
======= =======
Basic and diluted loss per share $ (2.23) $ (1.67)
======= =======
Basic and diluted shares outstanding 2,228,269 1,389,000(a)
========= =========
(a) Represents the pro forma shares assumed to be outstanding as of October 31,
1998.
The accompanying notes are an integral part of
the financial statements.
F-4
24
<PAGE>
<TABLE>
<CAPTION>
EVERCEL, INC.
Statements of Changes in Common Shareholders' Equity
Years ended October 31, 1999 and 1998
(Dollars in thousands)
Shares Common Note Net Total
of stock Additional receivable assets of common
common at paid-in Accumulated from Battery shareholders'
stock par capital deficit shareholder Group equity
----- --- ------- ------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
October 31, 1997 -- $ -- $ -- $ -- $ -- $ 211 $ 211
Net loss -- -- -- -- -- (2,325) (2,325)
Contribution from FCE -- -- -- -- -- 2,537 2,537
--------- --------- --------- --------- --------- --------- ---------
Balance at
October 31, 1998 -- -- -- -- -- 423 423
Net intercompany
activity -- -- -- -- -- 96 96
Common stock issued 1,388,856 14 -- -- -- (14) --
Stock issued under
rights offering 1,388,856 14 7,507 -- -- -- 7,521
Stock options exercised 83,333 1 499 -- (300) -- 200
Net loss post spin-off -- -- -- (4,456) -- -- (4,456)
Net loss pre-spin -- -- -- -- -- (505) (505)
--------- --------- --------- --------- --------- --------- ---------
Balance at
October 31, 1999 2,861,045 $ 29 $ 8,006 $ (4,456) $ (300) $ - $ 3,279
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
F-5
25
<PAGE>
EVERCEL, INC.
Statements of Cash Flows
Years ended October 31, 1999 and 1998
(Dollars in thousands)
1999 1998
---- ----
Cash flows from operating activities:
Net loss $(4,961) $(2,325)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 181 45
(Increase) decrease in operating assets:
Accounts receivable (197) 16
Inventories (192) --
Other current assets (56) 42
Increase (decrease) in operating liabilities:
Accounts payable 485 36
Accrued liabilities 376 32
Other 290 (332)
------- -------
Net cash used in operating activities (4,074) (2,486)
------- -------
Cash flows from investing activities:
Capital expenditures (1,321) (652)
------- -------
Net cash used in investing activities (1,321) (652)
------- -------
Cash flows from financing activities:
Borrowings from FCE -- 603
Repayment to FCE (603) --
Proceeds from common stock issued 7,721 --
Contributions from Fuel Cell Energy 96 2,536
------- -------
Net cash provided by financing activities 7,214 3,139
------- -------
Net increase in cash and cash equivalents 1,819 1
Cash and cash equivalents-beginning of year 1 --
------- -------
Cash and cash equivalents-end of year $ 1,820 $ 1
======= =======
Cash paid during the period for:
Interest $ 18 --
Income taxes -- --
The accompanying notes are an integral part of
the financial statements.
F-6
26
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(dollars in thousands except per share amounts)
(1) BASIS OF PRESENTATION
The accompanying financial statements represent the financial position and
results of operations of FCE's Battery Group as of and for the twelve months
ended October 31, 1998. The financial statements as of and for the year ended
October 31, 1999 reflect the financial position of Evercel, Inc. at October 31,
1999 and include the results of operations of FCE's Battery Group for the period
from November 1, 1998 through February 21, 1999 and the results of operations of
Evercel, Inc. from February 22, 1999 through October 31, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Evercel, Inc. (the "Company") is engaged in the design and manufacture of
innovative, patented Ni-Zn rechargeable batteries, as well as the research and
design of other advanced battery technologies. The Company believes the Ni-Zn
battery has commercial applications in markets requiring long cycle life, light
weight and relative cost efficiency.
SPIN-OFF FROM FUELCELL ENERGY
On February 16, 1999, FCE transferred the principal assets, intellectual
property and liabilities related to its Battery Group to form Evercel, Inc. FCE
distributed to its stockholders in a tax-free distribution one share of Evercel
Common Stock for every three shares of Common Stock of FCE held on the record
date of February 22, 1999. On April 5, 1999, the Company completed a rights
offering of its shares at $6.00 per share and began trading on the NASDAQ Small
Cap market and Boston Stock Exchanges. As part of the spin-off of the Company,
FCE 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.
In conjunction with the spin-off, the Company and FCE agreed that 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 FCE shall not be
liable for their payment. The Company will account for its involvement in the
Joint Venture under the License Assistance Agreement in a manner similar to the
equity method of accounting. On February 22, 1999, the effective date of the
spin-off, FCE deconsolidated the financial statements of the Company and the
Joint Venture from its consolidated financial statements.
YEAR-END CHANGE
On October 6, 1999, the Board voted that the Company change its fiscal year-end
from October 31 to December 31.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and a
subsidiary of FCE: Xiamen Three Circles - ERC Battery Corp., a 50.5% owned joint
venture formed between FCE and Xiamen Three Circle Co., Ltd. As part of the
Distribution Agreement, the Company has been assigned all of FCE's rights and
obligations related to the Joint venture and accounts for the earnings or losses
in a manner similar to the equity method of accounting.
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-7
27
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(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.
INTELLECTUAL PROPERTY
Intellectual property including patents and know-how is carried at no value
STOCK OPTION PLAN
The Company follows Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," which permits 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 employee stock option grants
made in fiscal years beginning after December 15, 1994 as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the recognition provisions of APB Opinion No.
25 and provide 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 3,093,261 and
1,389,000 at October 31, 1999 and 1998, respectively and fully diluted EPS would
have been $2.12 and $1.67, respectively.
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
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.
F-8
28
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(dollars in thousands except per share amounts)
Prior to the Distribution, the Battery Group was included in the consolidated
tax filings of FCE. The provision for income taxes of the Company represents an
allocation of a portion of the FCE consolidated U.S. federal income tax
provision to the battery group for the period during which the Company was a
part of FCE. The allocated tax provision is determined based upon the income or
loss of each group as if a separate tax return was filed. If FCE 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 FCE 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
Financial Accounting Standards Board ("FASB") Statement No. 130 - Effective
November 1, 1998, 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).
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.
(3) JOINT VENTURES AND LICENSE AGREEMENTS
In February 1998, FCE entered into a license agreement (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 Ni-Zn batteries in EV/HEVs in China, Taiwan,
Hong Kong and Macao on an exclusive basis and for certain other Southeast Asian
countries on a non-exclusive basis. The license agreement calls for the payment
of $5 million in three stages and a royalty for the exclusive and non-exclusive
territories. The payments include $1.5 million received by FCE in 1998, of which
$1.3 million and $0.2 million, respectively were recorded on FCE's financial
statements in 1999 and 1998. A further $2 million is to be paid to the Company
based on completion of cycle life testing that was substantially achieved in
October, 1999 and a final payment of $1.5 million 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, FCE also entered into a Technology Transfer and License Contract
(the "Three Circles License Agreement") with Xiamen Three Circles-FCE Battery
Corp., Ltd. for the use of the Company's Ni-Zn batteries in electric bicycles,
scooters, three-wheel vehicles, off-road vehicles, and miner's safety lamps in
China on an exclusive basis and Southeast Asia on a non-exclusive basis. The
license included an initial payment to FCE of $3 million. Pursuant to the Three
Circles License Agreement, the Joint Venture must also pay the Company certain
royalties based upon the net sales of Ni-Zn
F-9
29
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(dollars in thousands except per share amounts)
batteries sold, leased or transferred in the applicable territories. In addition
the Joint Venture may sub-license the Company's technology to third parties in
China, Hong-Kong, Taiwan and Macao on a non-exclusive basis. In connection with
the Three Circles License Agreement, FCE entered into a joint venture agreement
with Xiamen Three Circles Co., Ltd., used this $3 million as its initial
investment in the joint venture and subsequently contributed an additional
$80,500 to receive a 50.5% share of the joint venture called Xiamen Three
Circles-FCE Battery Corp. (the "Joint Venture"). Through October 31, 1999, the
results of operations of the Joint Venture are immaterial.
(4) ACCOUNTS RECEIVABLE
Accounts receivable at October 31, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Chinese joint venture $ 195 $ --
U.S. Government 19 12
Commercial customers (samples) 5 5
Allowance for uncollectible amounts (5) --
----- -----
Net Total $ 214 $ 17
===== =====
(5) INVENTORY
Net inventories as of October 31, 1999 and 1998 were $192 and $0, respectively.
The gross inventory balance as of October 31, 1999 of $689 was reduced by $402
to reserve for costs involved with low volume production in order to maintain an
appropriate market value and $95 for obsolescence. Inventories at October 31,
1999 consisted of the following:
1999
----
Raw materials $ 382
Work in progress 301
Finished goods 6
-----
Gross inventories 689
Reserve for obsolescence (95)
Reserve for market valuation (402)
-----
Net inventory balance $ 192
=====
F-10
30
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(dollars in thousands except per share amounts)
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1999 and 1998 consisted of the
following:
Estimated
1999 1998 Useful Life
---- ---- -----------
Machinery and equipment $ 1,944 $ 1,068 3-8 years
Furniture and fixtures 204 9 10 years
Leasehold improvements 148 -- 5 years
Construction-in-progress 705 603
------- -------
3,001 1,680
Less, accumulated
depreciation and amortization (1,010) (855)
------- -------
$ 1,991 $ 825
======= =======
(7) OTHER ASSETS
Other assets at October 31, 1999 and 1998 consisted of the following:
1999 1998
---- ----
Rights offering costs $ - $ 307
Security deposits 17 14
Organizational costs -- 12
----- ------
Total $ 17 $ 333
===== ======
(8) 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
$171,000 for the first three years (1999, 2000 and 2001) and increases to
$178,000 in year four (2002) and $185,000 in year five (2003).
(9) STOCK OPTION PLAN
The Board has adopted the 1998 Stock Option Plan. Under the terms of the Plan,
options to purchase up to 325,000 (83,333 shares have been exercised) shares of
common stock may be granted to officers, key employees and directors of the
Company. 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.
F-11
31
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(dollars in thousands except per share amounts)
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.
In connection with the hiring of the Company's Chairman of the Board and Chief
Executive Officer, options were granted to purchase 83,333 and 100,000 shares of
the Company's common stock, respectively, at the purchase price of $6.00 per
share (the market value at the date of the grant). In addition, the Company and
FCE agreed to issue the Chairman of the Board one share of the Company's Common
Stock for every 4.5 shares of FCE Common Stock which he purchases pursuant to
his exercise of FCE Options. Under this agreement, an option has been granted to
acquire a total of 83,333 shares of Common Stock at an exercise price based
proportionally upon the relative fair market value of FCE Common Stock and the
Company's Common Stock.
Risk free
Dividend Interest Rate Expected Volatility
Year rate range life factor
---- ---- ----- ---- ------
1999 0% 4.31-6.35% 10 years .5495-.6225
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.
1999
----
Net loss: As reported $ (4,961)
Pro forma (5,480)
Loss per share: As reported - Basic $ (2.23)
Pro forma - Basic (2.46)
Pro forma net income reflects only options granted in 1999. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No.123 is
not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period, generally 4
years.
The following table summarizes the plan activity for the years ended October 31,
1999:
Number Weighted average
of options option price
---------- ------------
Outstanding at October 31, 1998 -- --
Granted 325,882 $ 6.94
Exercised (83,333) 6.00
Cancelled (10,333) 11.44
-------- ------
Outstanding at October 31, 1999 232,216 $ 7.08
======== ======
There were 87,499 options exercisable at February 8, 2000.
F-12
32
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(dollars in thousands except per share amounts)
(10) EMPLOYEE BENEFITS
Subsequent to October 31, 1999, the Company started a defined contribution
401(K) plan ("The Safe Harbor Plan"). The plan provisions provides for the
Company to contribute to The Safe Harbor Plan the amount the employee
contributes up to a maximum 3% of gross W-2 earnings. In fiscal 1999, the
company participated in the FCE Capital Accumulation Plan. The Company charged
$2 and $28 to this plan in 1999 and 1998, respectively. The Company also
participated in the FCE Pension Plan in 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, 1999 and 1998:
1999 1998
---- ----
Current:
Federal $ (315) $(1,006)
State (45) --
------- -------
(360) (1,006)
------- -------
Deferred:
Federal -- --
State -- --
------- -------
Total income tax benefit $ (360) $(1,006)
======= =======
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 was as follows:
1999 1998
---- ----
Statutory Federal
income tax rate (34.0%) (34.0%)
Nondeductible expenditures (0.4%) 3.8%
State tax, net of federal benefit (0.9%) --
Valuation Allowance 28.5% --
------ ------
Effective income tax rate (6.8%) (30.2%)
====== ======
F-13
33
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1999 and 1998
(dollars in thousands except per share amounts)
The Company's deferred tax assets and liabilities consisted of the following at
October 31, 1999 and 1998:
1999 1998
---- ----
Deferred tax assets:
Incentive bonuses $ 6 $ --
Vacation accrual 15 --
Net operating loss carryforwards 1,929 --
------- -------
Gross deferred tax assets 1,950 --
Valuation allowance (1,937) --
------- -------
Deferred tax assets after
Valuation allowance 13 --
------- -------
Deferred liability -
Accumulated depreciation (30) (17)
------- -------
Gross deferred tax liability (30) (17)
------- -------
Net deferred tax assets/(liability) $ (17) $ (17)
======= =======
The Company has a federal net operating loss carryforward of approximately $4.4
million, which will expire in 2019.
(12) SUBSEQUENT EVENTS
On December 16, 1999 the Company raised $6.6 million in capital through the
private placement of equity securities and a commitment from these investors for
an additional $3.3 million, 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 $13.75. 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 one share of Common stock at $16.50 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 Series B
Convertible Preferred Shares in an amount equal to 50 percent of their
investment in Series A. The call by the Company expires August 31, 2000.
F-14
34
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Jerry D. Leitman ...... 57 Chairman
Robert L. Kanode ...... 49 President, Chief Executive Officer and Director
Bernard S. Baker....... 63 Director
Thomas L. Kempner ..... 72 Director
William A. Lawson ..... 65 Director
Warren D. Bagatelle ... 61 Director
James D. Gerson ....... 56 Director
Robert Gable .......... 69 Director
John H. Geutfrend ..... 70 Director
Allen Charkey ......... 58 Executive Vice President, Chief Operating Officer
and Director
Joseph G. Mahler ...... 47 Acting Chief Financial Officer, Treasurer and
Secretary
Jerry D. Leitman has been the Chairman of the Company since its formation. He
has been President, Chief Executive Officer and a Director of FCE since August
1997. Mr. Leitman was previously President of ABB Asea Brown Boveri's global air
pollution control businesses from 1992 to 1995. Prior to joining ABB Mr. Leitman
was Group Executive Vice President of FLAKT AB, a Swedish multinational,
responsible for FLAKT's worldwide industrial businesses from 1989 to 1992. Mr.
Leitman is also a Director and a member of the Audit Committee of Esterline
Technologies Inc.
Robert L. Kanode has been President and Chief Executive Officer of Evercel, Inc.
since April 1999. Prior to joining Evercel Mr. Kanode served as President of
Varta Batteries North America. Mr. Kanode also held numerous positions with IBM
and the IBM ThinkPad team and other permanent and consulting positions focused
on electronic manufacturing and operations.
Bernard S. Baker has been a director of the Company since September 1998. He
joined FCE in 1970 and was President of FCE from 1973 to August 1997 when he
became Chairman of the Board of Directors and a consultant to FCE. He was Chief
Executive Officer and a Director of FCE from March 1992 to August 1997. He
received a Ph.D from the Illinois Institute of Technology in 1969, and was a
Fulbright Fellow at the Laboratory for Electrochemistry at the University of
Amsterdam subsequent to his receiving his Master of Science in Chemical
Engineering from the University of Pennsylvania in 1959.
Thomas L. Kempner has been a director of the Company since September 1998. He
has been Chairman and Chief Executive Officer of Loeb Partners Corporation since
1979 and a general partner of Loeb Investors Co. LXXV, an affiliate of Loeb
Partners Corporation and an investment partnership. Mr. Kempner is a director of
Alcide Corporation, IGENE Biotechnology, Inc., Intermagnetics General
Corporation, CCC Information Services Group, Inc., and Roper Starch Worldwide,
Inc. and director emeritus of Northwest Airlines, Inc. Mr. Kempner is a director
of FCE and was the Chairman of the Board of Directors of FCE from March 1992 to
August 1997.
William A. Lawson has been a director of the Company since September 1998. He
has been President since 1987 of W.A. Lawson Associates, an industrial and
financial consulting firm. Mr. Lawson has been Chairman of the Board of
Directors of Newcor, Inc. since March 1991, and Chairman and Chief Executive
Officer of Bernal International Inc. since March 1997 (formerly Atlantic Eagle
Inc.). Mr. Lawson is a director of FCE.
Warren D. Bagatelle has been a director of the Company since September 1998. He
has been a Managing Director of Loeb Partners Corporation since 1988. Mr.
Bagatelle is a director of FCE and of Genisys Reservation Systems, Inc.
(formerly Corporate Travel Link, Inc.) which owns and operates an internet
travel business.
James D. Gerson has been a director of the Company since September 1998. He has
been Vice President of Fahnestock & Co., Inc. since March 1993. Mr. Gerson also
serves as a director of FCE, Ag Services of America, Inc. and American Power
Conversion Corp.
35
<PAGE>
Robert Gable has been a director since November 1999. He is the former chairman
of the board and chief executive officer of Unitrode Corporation.
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.
Allen Charkey has been a director of the Company since its formation and
Executive Vice President and Chief Operating Officer since October 1998. He
joined FCE in 1970 and held various positions of increasing responsibility at
FCE and was Vice President of the Battery Group from January 1997 until October
1998. Prior to joining FCE, Mr. Charkey was employed by Yardney Electric
Corporation from 1963 to 1970 as a battery scientist.
Joseph Mahler joined the Company in October 1998 as Acting Chief Financial
Officer, Treasurer and Secretary and as Vice President, Chief Financial Officer,
Corporate Secretary and Treasurer of FCE. Prior to joining FCE, Mr. Mahler was
Vice President-Chief Financial Officer at Earthgro, Inc. from 1993 to 1998 and
prior to that, he was a Partner at Ernst & Young.
ITEM 10. EXECUTIVE COMPENSATION
FISCAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- ---- ------ ----- ------------
Robert L. Kanode (1)
President, Chief Executive Officer 1999 $129,816 $20,000 $ -
Allen Charkey
Executive Vice President,
Chief Operating Officer 1999 (2) 152,136 25,500 5,167 (3)
(1) Mr. Kanode joined Evercel as President and Chief Executive Officer on April
5, 1999.
(2) Includes Compensation as an employee of FCE prior to February 16, 1999.
(3) Represents contributions during the time the executive was employed by FCE
Defined Contribution Pension Plan of approximately 4% of total annual
compensation and employer contributions to the FCE Section 401(k) Plan of
approximately 5% of total annual compensation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP(1) OF CLASS
- ---------------------------- ------------ --------
Warren D. Bagatelle 357,186(2) 12.5%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006
James D. Gerson 306,515(3) 10.7%
c/o Fahnestock and Co.
780 3rd Avenue
New York, NY 10017
Thomas L. Kempner 264,108(2) 9.2%
c/o Loeb Partners Corp.
61 Broadway
New York, NY 10006
Loeb Partners Co. LXXV 264,108(2) 9.2%
61 Broadway
New York, NY 10006
36
<PAGE>
Jerry D. Leitman 133,000(4) *
Robert L. Kanode 26,000(5) *
William A. Lawson 25,610 *
Bernard S. Baker 11,344 *
Allen Charkey 8,333(6) *
Joseph G. Mahler 4,167(6) *
Robert Gable -- *
John H. Geutfrend -- *
------- -----
All Directors and Executive Officers
as a Group (11 persons) 872,155 29.7%
======= =====
* Less than one percent
(1) Unless otherwise noted, each person identified possesses sole voting and
investment power with respect to the shares listed.
(2) Messrs. Bagatelle and Kempner, by virtue of being general partners of Loeb
Investors Co. LXXV, may each be deemed to beneficially own the shares of
Loeb Investors Co. LXXV. Each of Mr. Kempner and Mr. Bagatelle is a member
of a group, as that term is used in Section 13(d) of the Exchange Act,
which group, in the aggregate, owns 264,108 shares of Common Stock.
(3) Mr. Gerson's shareholdings include 24,266 shares held by his wife, Barbara
Gerson as Custodian for two minor children and also includes 10,532 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 50,000
shares in a Company in which he is Chairman.
(4) Mr. Leitman's shareholdings include 50,000 shares of Common Stock which may
be acquired pursuant to the currently exercisable options issued under an
FCE option plan.
(5) Includes 25,000 stock options which vest on March 23, 2000.
(6) Stock options which vested on December 11, 1999.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company engages in transactions provided by FCE through the Services
Agreement that totaled $378,000 in the fiscal year ended October 31, 1999 (See
"RISK FACTORS-Risk of Relying on FCE" and "Spin-off from Fuel Cell Energy"). The
Company also treats the Joint Venture as a third party although it has been
assigned the rights FCE's 50.5% ownership through the License Assistance
Agreement. In the fourth fiscal quarter of 1999, the Company sold raw materials
to the Joint Venture which totaled $195,000 in revenues. There was no profit on
this sale.
37
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS TO THE 10-K
Method of
Exhibit No. Description Filing
- --------------------------------------------------------------------------------
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 Form of Restated By-Laws 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).
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).
10.10 Distribution Agreement between the Company and FCE. (incorporated
by reference to exhibit 10.1 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
10.11 Services Agreement between the Company and FCE. (incorporated by
reference to exhibit 10.2 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
10.12 License Assistance Agreement between the Company and FCE.
(incorporated by reference to exhibit 10.3 contained in the
Company's SB-2/A Amendment 2 dated February 9, 1999).
10.13 Tax Sharing Agreement between the Company and FCE. (incorporated
by reference to exhibit 10.4 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
10.2 Evercel, Inc. 1998 Equity Incentive Plan (incorporated by
reference to exhibit 10.5 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
10.30 *Employment Agreement between Evercel, Inc. and the President and
Chief Executive Officer, dated March 23, 1999 .
10.31 *Employment Agreement between Evercel, Inc. and the Executive
Vice-President and Chief Operating Officer. (incorporated by
reference to exhibit 10.91 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999)
10.40 **Technology Transfer and License Agreement between the Fuel Cell
Energy (formerly Energy Research Corporation) and the Joint
Venture owned jointly by the Xiamen Daily-Used Chemicals Co., Ltd.
of China and Nan Ya Plastics Corporation of Taiwan, dated February
21, 1998 (incorporated by reference to exhibit 10.6 contained in
the Company's SB-2/A Amendment 2 dated February 9, 1999).
10.41 **Technology Transfer and License Contract, dated May 29, 1998
Ni-Zn Battery Technology among Xiamen-ERC Battery Corp., Ltd. and
Xiamen Daily-Used Chemicals Co., Ltd. and the Company
(incorporated by reference to exhibit 10.7 contained in the
Company's SB-2/A Amendment 2 dated February 9, 1999).
10.42 **Cooperative Joint Venture Contract, dated as of July 7, 1998,
between Xiamen Three Circles Co., Ltd. and the Fuel Cell Energy
Corporation (formerly Energy Research Corporation) for the
establishment of Xiamen Three Circles-FCE Battery Corp., Ltd.,
Sino Foreign Manufacturing Joint Venture (incorporated by
reference to exhibit 10.8 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
23.1 Consent of KPMG LLP
27 Financial data schedule
* Management Contract or Compensatory Plan or Arrangement
** Confidential Treatment has been granted for portions of this document.
(b) REPORTS ON FORM 8-K.
None
38
<PAGE>
PART IV
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EVERCEL, INC.
/s/ ROBERT L. KANODE
--------------------
Robert L. Kanode, President, Chief Executive Officer
Dated: February 8, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- --------- -------- ----
/s/ JERRY D. LEITMAN
-------------------- Chairman of the Board February 8, 2000
Jerry D. Leitman
/s/ ROBERT L. KANODE
-------------------- President, Chief Executive Officer February 8, 2000
Robert L. Kanode (Principal Executive Officer)
/s/ ALLEN CHARKEY
-------------------- Executive Vice-President, Chief February 8, 2000
Allen Charkey Operating Officer
/s/ JOSEPH G. MAHLER
-------------------- Acting Chief Financial Officer February 8, 2000
Joseph G. Mahler Corporate Secretary, Treasurer
(Principal Accounting and Financial
Officer)
/s/ WARREN D. BAGATELLE
-------------------- Director February 8, 2000
Warren D. Bagatelle
/s/ ROBERT GABLE
-------------------- Director February 8, 2000
Robert Gable
39
<PAGE>
/s/ JAMES D. GERSON
-------------------- Director February 8, 2000
James D. Gerson
/s/ JOHN H. GUTFREUND
-------------------- Director February 8, 2000
John H. Gutfreund
/s/ THOMAS L. KEMPNER
-------------------- Director February 8, 2000
Thomas L. Kempner
/s/ WILLIAM A. LAWSON
-------------------- Director February 8, 2000
William A. Lawson
Director February 8, 2000
Bernard S. Baker
40
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into as of the 23 day of March, 1999
between EVERCEL, INC., a Delaware corporation (the "Company"), and ROBERT L.
KANODE, an individual with a current mailing address at 67 Lincoln Lane,
Ridgefield, Connecticut 06877, (the "the Employee"). Unless the context
otherwise requires, the term "Company", shall include the Company and each of
its subsidiaries.
W I T N E S E T H
WHEREAS, the Company desires to employ the Employee as its President
and Chief Executive Officer and the Employee desires to be employed in such
capacities in accordance with the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the covenants, conditions,
undertakings and premises contained herein, the sufficiency which is hereby
acknowledged, the Company and the Employee agree follows:
ARTICLE 1
---------
EMPLOYMENT AND DUTIES
---------------------
1.1 EMPLOYMENT; DUTIES
Subject to the terms and conditions set forth herein, commencing April 19, 1999
(the "Commencement Date") the Company agrees to employ the Employee and the
Employee agrees to be employed as President and Chief Executive Officer of the
Company. In such position, the Employee shall perform such duties as are or may
be assigned to the Employee by the Board of Directors of the Company (the "Board
of Directors") from time to time. In connection therewith, the Employee shall
report to and be subject to the supervision of the Executive Committee of the
Board of Directors.
1.2 FULL TIME
The Employee shall devote his full working time, attention, energies, skills and
best efforts exclusively to the performance of his duties hereunder. The
Employee shall not during the term of this Agreement engage in any other
business activity whether or not such activity is pursued for gain, profit or
other pecuniary advantage, except that the Employee, on his own time, (a) may
manage his own investments, and those of his immediate family, and (b) may serve
as a member of the board of directors of other corporations subject to the
restrictions set forth in Section 5.1, so long as such activity (as described in
either clause (a) or (b) above), does not, in the reasonable judgment of the
Company's Board of Directors, adversely affect the performance of his duties
hereunder.
1.3 BOARD MEMBERSHIP
The Employee, effective upon the Commencement Date, shall become a member of the
Board of Directors and its Executive Committee. Thereafter, for so long as the
Employee is serving as Chief Executive Officer of the Company, the Company will
nominate the Employee for re-election as a management nominee of the Board of
Directors and use its reasonable best efforts to cause the Employee to be so
re-elected and, if so elected, to appoint the Employee as a member of the
Executive Committee of the Board of Directors. If at any time the Employee
ceases to serve as President and Chief Executive Officer of the Company, if the
Board of Directors so requests, the Employee shall immediately tender his
resignation from the Board of Directors and shall automatically be deemed to
have so resigned whether or not such resignation is tendered.
ARTICLE 2
---------
2.1 TERM
The term of the Employee's employment by the Company hereunder shall commence on
the Commencement Date and, except as otherwise provided in this Agreement with
respect to earlier termination, shall continue until terminated by either party
pursuant to Article 7.
ARTICLE 3
---------
COMPENSATION
------------
3.1 BASE SALARY
For all service to be rendered by the Employee under this Agreement, including
services as an officer, director and member of any committee, and such other
duties as the Board of Directors or the Executive Committee may assign to him in
accordance with Section 1.1 hereof, the Company agrees to pay the Employee a
base salary of $250,000 per annum. The Employee's base salary shall be subject
to periodic review and adjustment by the Board of Directors in its sole
discretion,provided that the base salary may not be reduced below $250,000 per
41
<PAGE>
year. The base salary shall be payable at such times as is customary for
employees of the Company and in accordance with the normal payroll practices of
the Company.
3.2 INCENTIVE COMPENSATION
The Employee shall be a participant in the Company's incentive compensation plan
generally made available to executive officers as it may be in effect and
revised from time to time. Employee's target bonus under such plan will be forty
percent (40%) of his base salary (prorata for part of the fiscal year). The
Employee understands and agrees that the implementation of an incentive
compensation plan for the Employee and other executive officers will be subject
to the review and approval of the Compensation Committee of the Board of
Directors.
3.3 EXPENSES
(a) GENERAL. In addition to base salary and incentive
compensation, the Company shall reimburse the Employee for all
reasonable and necessary business expenses actually incurred
by him in the performance of his duties, including, without
limitation, expenses for travel, meals, entertainment and
other miscellaneous business expenses, in accordance with the
Company's policies and practices as may be in effect from time
to time.
(b) RELOCATION. It is understood that no relocation by Employee is
required or offered.
(c) SIGNING BONUS. To assist employee in covering expenses
relating to his employment (e.g., an automobile), the Company
will provide employee with a one-time payment of $20,000, half
payable on his first day of employment at the Company and half
30 days later.
ARTICLE 4
---------
COMPANY BENEFITS
----------------
4.1 VACATION
The Employee shall be entitled to receive four weeks of paid vacation per
calendar year (pro rated for any partial year), which shall be taken at such
time or times as will not unreasonably hinder or interfere with the Company's
business or operations.
4.2 SEVERANCE BENEFIT
If during the Employee's employment pursuant to this Agreement, the Employee
ceases to be employed by the Company as a result of the Company's termination of
the Employee without cause pursuant to Section 7.4 (which shall not include any
termination that is otherwise within Article 6) or the Employee's termination of
his employment for good reason pursuant to Section 7.1, the Company shall pay
the Employee as a severance benefit, (a) his then base salary plus (b) an amount
equal to the Employee's bonus from the Company, if any, for the immediately
preceding year. This severance benefit shall be payable by the Company through
(i) the continuation of the Employee's base salary for a period of one year and
(ii) the payment of the balance in four equal quarterly installments, with the
first such payment due three months after the termination and the final payment
due one year after the termination. The severance obligation set forth in this
Section 4.2 shall be in lieu of and not in addition to any other severance
benefits made available to other employees of the Company.
4.3 STOCK OPTIONS
Effective on the execution of this Agreement, the Company shall issue to the
Employee an option to purchase 100,000 shares of the Company's Common Stock with
an exercise price equal to $6.00, pursuant to the Company's standard form of
Option Agreement, subject to the following provisions. The option shall vest
over a four year period at 25% per year (25,000 shares) on each anniversary date
of the Commencement Date; provided however, if the Employee's employment
hereunder is terminated without cause by the Company or for good reason by the
Employee prior to the first anniversary date of the Commencement Date, the
options to purchase the first 25,000 shares of the Company's Common Stock will
automatically vest. The options will also fully vest upon a change of control of
the Company.
4.4 OTHER BENEFIT PLANS
The Employee shall further be entitled to participate in and receive benefits
under any retirement, life insurance, accident, disability, health and dental
insurance, profit sharing, or similar plans generally made available to its
employees.
4.5 INDEMNIFICATION
The Company agrees to defend and shall indemnify and hold the Employee harmless
to the fullest extent permitted by law from any and all liability, costs, and
expenses which may be assessed against the Employee by reason of the performance
of his responsibilities and duties under the terms of this Agreement, provided
such liability does not result from willful misconduct or gross negligence of
the Employee.
42
<PAGE>
ARTICLE 5
---------
RESTRICTIONS
------------
5.1 NON-COMPETITION
(a) So long as the Employee is employed by the Company, serving as a
Director or is receiving payments hereunder (whether in connection with the
Employee's employment or as a result of the termination of the Employee's
employment hereunder) and for a period of two years thereafter (the
"Noncompetition Period"), the Employee shall not, directly or indirectly,
whether as owner, partner, shareholder, director, consultant, agent, employee,
guarantor, surety or otherwise, or through any person, consult with or in any
way aid or assist any competitor of the Company or engage or attempt to engage
in any employment, consulting or other activity which directly or indirectly
competes with the Business of the Company. For purposes of this Agreement, the
term "employment" shall include the performance of services by Employee as an
employee, consultant, agent, independent contractor or otherwise and the term
"Business" shall mean the research, development, manufacture, sale or
distribution of fuel cells, batteries or related products and any other business
engaged in, planned or under development by the Company with respect to which
the Employee has had access to Company confidential information during the
Noncompetition Period. The Employee acknowledges that his participation in the
conduct of any such Business alone or with any person other than the Company
will materially impair the Business and prospects of the Company.
(b) In addition to and without limiting the foregoing, during the
Noncompetition Period, Employee shall not knowingly do, attempt to or assist any
other person in doing or attempting to do any of the following: (i) hire any
director, officer, employee, or agent of the Company (a "Company Employee") or
encourage any such person to terminate such relationship with the Company, as
the case may be (for purposes hereof, the Employee shall be deemed to have so
encouraged a Company Employee to terminate such relationship with the Company if
the Employee hires or otherwise assists any person in hiring any such Company
Employee within six months after the Company Employee terminates his or her
relationship with the Company), (ii) encourage any customer, client, supplier or
other business relationship of the Company to terminate or alter such
relationship, whether contractual or otherwise, to the disadvantage of the
Company; (iii) encourage any prospective customer or supplier not to enter into
a business relationship with the Company; (iv) impair or attempt to impair any
relationship, contractual or otherwise, written or oral, between the Company and
any customer, supplier or other business relationship of the Company; or (v)
sell or offer to sell or assist in or in connection with the sale to any
customer or prospective customer of the Company any products of the type sold or
rendered by the Company.
(c) Nothing in this Agreement shall preclude Employee from making
passive investments of not more than 2% of a class of securities of any business
enterprise registered under the Securities Exchange Act of 1934.
5.2 INTELLECTUAL PROPERTY
Upon execution of this Agreement, the Employee shall execute the Evercel, Inc.
Agreement for Assignment, Confidentiality and Nonsolicitation, which agreement
is hereby incorporated herein by reference.
5.3 INJUNCTIVE RELIEF
The Employee acknowledges that the restrictions contained in this Article are
reasonable in view of the nature of the business in which the Company is engaged
and his position with the Company which will provide him with extensive
knowledge of the business.
The Company and the Employee mutually agree that the Employee's obligations
under this Article are of a special and unique character which gives them a
peculiar value, and the Company cannot be reasonably or adequately be
compensated in damages in an action at law in the event the Employee breaches
such obligations. The Employee therefore expressly agrees that, in addition to
any other rights or remedies which the Company may possess, the Company shall be
entitled to injunctive and other equitable relief to prevent a breach of this
Article by the Employee, including a temporary restraining order or temporary
injunction from any court of competent jurisdiction restraining any threatened
or actual violation, and each party hereby consents to the entry of such order
and injunctive relief and waives the making of a bond as a condition for
obtaining such relief. Such rights shall be cumulative and in addition to any
other legal or equitable rights and remedies the Company may have.
5.4 SURVIVAL ENFORCEABILITY
It is expressly agreed by the parties hereto that the provisions of this Article
shall survive the termination of this Agreement. If any one or more of the
provisions contained in this Article shall for any reason in any jurisdiction be
held to be excessively broad as to the time, duration, geographical scope,
activity or subject, it shall be construed with respect to such jurisdiction, by
limiting or reducing it, so as to be enforceable to the extent compatible with
the applicable law of such jurisdiction as it shall then appear.
43
<PAGE>
ARTICLE 6
---------
DEATH; DISABILITY
-----------------
6.1 DEATH
If the Employee dies while employed under this Agreement, this Agreement shall
terminate immediately. The Company will pay to the Employee's estate his base
salary under Section 3.1 through the last day of the calendar month in which he
dies, plus any incentive compensation awarded to the Employee under the
Incentive Compensation Plan, but not yet paid, and such death benefits as may be
provided pursuant to Section 4.4.
6.2 DISABILITY
If the Employee fails to perform his duties under this Agreement due to
"Disability", as defined below, the Company may terminate this Agreement upon 30
days written notice to him. In that event, the Company shall pay the Employee
his base salary under Section 3.1 through the date of termination; PROVIDED,
HOWEVER, that to the extent the Employee is receiving disability benefits
pursuant to the Company's disability insurance policy, the amount of such
benefits shall be credited against the Employee's base salary during the period
prior to the date of termination. In addition, upon any termination based upon
Disability, the Company shall pay to the Employee any incentive compensation
awarded to the Employee under the Incentive Compensation Plan but not yet paid.
The term "Disability" shall mean the inability of the Employee to perform for
the Company the duties specified in Section 1.1 by reason of any medically
determinable physical or mental impairment for (i) a period of four consecutive
months, (ii) for shorter periods aggregating five months in any 12-month period
or (iii) if the Board of Directors determines that it is probable that the
Disability will continue for a length of time so as to constitute a Disability
under clauses (i) or (ii) above. The determination of whether the Employee is
Disabled shall be made by the Board of Directors on the basis of written medical
evidence reasonably satisfactory to it. Notwithstanding anything to the contrary
in the foregoing, in the event of a termination of the Employee pursuant to
clause (iii), the Company will pay the Employee a minimum of four months base
salary following such termination; PROVIDED, HOWEVER, that to the extent the
Employee is receiving disability benefits pursuant to the Company's disability
insurance policy, the amount of such benefits shall be credited against the
Employee's base salary.
ARTICLE 7
---------
TERMINATION
-----------
7.1 TERMINATION BY THE EMPLOYEE FOR GOOD REASON
The Employee may terminate this Agreement for good reason upon ninety (90) days
written notice to the Company setting forth with specificity the grounds for
termination upon the occurrence of any of the following: (a) the failure of the
Company to observe or comply with any of its material obligations under this
Agreement, if such failure has not been cured within 30 days after written
notice thereof has been given by the Employee to the Company; (b) the
dissolution of the Company; or (c) any merger in which the Company is not the
surviving corporation and in which the stockholders of the Company own less than
50% of the voting securities of the merged entity upon the effectiveness of the
merger, or any consolidation, sale of substantially all of the assets of the
Company or change of control of the Company, provided the Employee has not
approved the transaction by voting for it either as a director or shareholder.
For purposes of clause (a) a material breach by the Company shall include a
material change in the reporting responsibilities of the Employee such that the
Employee is no longer effectively serving as the President and Chief Executive
Officer of the Company, a material reduction in benefits or other perquisites of
office such that the Employee is not receiving the benefits set forth herein or
the benefits and other perquisites generally granted for executive positions
within the Company. For purposes of clause (c) above, a "change of control"
shall be presumed to have occurred if within any 12-month period a single person
or entity, or related group of persons or entities, acquires 50% or more of the
outstanding voting stock of the Company. In the event of a termination for good
reason under this Section, the Company shall pay the Employee (i) his base
salary as then in effect under Section 3.1 through the date of termination, (ii)
any incentive compensation awarded to the Employee under the Incentive
Compensation Plan, but not yet paid, and (iii) the severance benefit set forth
in Section 4.2.
7.2 TERMINATION BY THE COMPANY FOR CAUSE
The Company may terminate this Agreement for cause in the manner set forth
below. For purposes of this Section, "cause" shall mean (a) a material breach by
the Employee of the terms of this Agreement, including without limitation
failure by the Employee to perform a material portion of his duties hereunder
(not otherwise excused by the disability of the Employee) (b) criminal
misconduct or unethical conduct, whether or not in relation to the Company's
affairs or business, which reflects adversely upon Employee's honesty or
integrity in the performance of his duties as an employee of the Company, or
which otherwise is materially detrimental to the interests of the Company; (c)
if the Employee is found guilty or pleads nolo contendere to the commission of a
crime classified as a felony under any Federal, state or local law; and (d)
commission by the Employee of an act of gross incompetence in the course of his
employment hereunder. The term "cause" as used in the preceding sentence does
not include the Employee's erroneous judgment or judgments of a technical,
scientific, financial, legal and/or environmental nature which were, although
erroneous, nevertheless reasonable at the time and under the circumstances in
which they were made. In the event of termination under this Section, the
Company shall pay to the Employee his base salary under Section 3.1 through the
date of termination stated in the notice plus any incentive compensation awarded
44
<PAGE>
to the Employee under the Incentive Compensation Plan but not yet paid, and the
Employee shall, if so requested by the Board of Directors, perform his duties
under Article 1 through the date of termination stated in the notice.
7.3 TERMINATION BY THE COMPANY FOR CAUSE-PROCEDURE
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH HEREIN, THE EMPLOYEE SHALL
NOT BE DEEMED TO HAVE BEEN TERMINATED FOR CAUSE WITHOUT (I) DELIVERY TO THE
EMPLOYEE OF WRITTEN NOTICE SETTING FORTH THE REASONS FOR THE COMPANY'S INTENTION
TO TERMINATE FOR CAUSE, (II) AN OPPORTUNITY FOR THE EMPLOYEE, TOGETHER WITH HIS
COUNSEL, TO BE HEARD BEFORE THE BOARD OF DIRECTORS AND (III) DELIVERY TO THE
EMPLOYEE OF A NOTICE OF TERMINATION FROM THE BOARD OF DIRECTORS STATING THAT A
MAJORITY OF THE MEMBERS OF THE BOARD HAVE DETERMINED IN GOOD FAITH THAT THE
EMPLOYEE WAS GUILTY OF CONDUCT THAT SUPPORTS THE TERMINATION FOR CAUSE,
SPECIFYING THE CONDUCT WHICH GAVE RISE TO SUCH TERMINATION.
7.4 TERMINATION BY THE COMPANY OR THE EMPLOYEE WITHOUT CAUSE
Either the Company or the Employee may terminate this Agreement for reasons
other than as set forth above in Section 7.1 or Section 7.2 and which are not
otherwise within Article 6 upon 30 days written notice by the Company or 90 days
written notice by the Employee. Upon such termination, the Company shall pay the
Employee his base salary under Section 3.1 through the date of termination
(provided, however, that the Employee continues to be available to perform the
services required under Section 1.1 through the date of termination), plus any
incentive compensation awarded to the Employee under the Incentive Compensation
Plan, but not yet paid, and any accrued vacation. In addition, upon the
Company's termination of the Employee without cause, the Company shall be
required to pay the Employee the severance benefit set forth in Section 4.2.
Nothing herein shall prohibit the Company from relieving the Employee of any or
all of his duties hereunder pending the expiration of the 30-day notice period.
7.5 TERMINATION OF DUTIES
Notwithstanding anything to the contrary set forth herein, at any time on or
after delivery of written notice to the Employee, the Company may relieve the
Employee of all of his duties and responsibilities hereunder and may relieve the
Employee of authority to act on behalf of, or legally bind, the Company;
provided, however, that any such action by the Company shall not relieve the
Company of its obligation to pay to the Employee all compensation and benefits
otherwise provided for in this Agreement.
ARTICLE 8
---------
MISCELLANEOUS
-------------
8.1 NO CONFLICTING AGREEMENTS.
The Employee represents and warrants to the Company, that the Employee is not
under any obligation to any person or entity which is inconsistent with or in
conflict with any of the terms of this Agreement or which would prevent, limit
or impair in any way the Employee's performance of all the terms of this
Agreement and the Employee agrees not to enter into any agreement, either
written or oral, in conflict herewith.
8.2 ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement between the
Company and the Employee and cannot be amended, modified, or supplemented in any
respect except by subsequent written agreement entered into by both parties.
8.3 SUCCESSORS OF THE COMPANY
This Agreement shall inure to the benefit of and be binding upon the Company,
its successors and assigns, including, without limitation, any person, firm,
corporation or other entity which may acquire all or substantially all of the
Company's assets and business, or with or into which the Company may be
consolidated or merged, and this provision shall apply in the event of any
subsequent merger, consolidation or transfer. In every respect, this Agreement
shall inure to the benefit of and be binding upon the Employee, his heirs,
executors and personal representatives and, being personal in nature, shall not
be assignable by the Employee.
8.4 EFFECT OF WAIVER
The waiver by either party of a breach of any provision of this Agreement shall
not operate as or be construed as a waiver of any subsequent breach.
8.5 NOTICES
Any notice, request, demand or other communication in connection with this
Agreement must be in writing and shall be deemed to have been given and received
three days after a certified or registered letter containing such notice,
properly addressed, with postage prepaid, is deposited in the United States
mail; and, if given otherwise than by registered or certified mail, it shall not
be deemed to have been given until actually delivered to and received by the
party to whom it is addressed.
45
<PAGE>
Notice to the Company shall be given at its principal mailing address, which at
the time of execution of this Agreement is 3 Great Pasture Road, Danbury,
Connecticut, 06813, Attention: Chairman of the Board of Directors, or at such
other address as it may designate.
Notice to the Employee shall be given at his home address, which at the time of
execution of this Agreement is the address set forth in the heading of this
Agreement, or at such other address as he may designate.
8.6 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
8.7 SEVERABILITY
If, in any jurisdiction, any provision of this Agreement or its application to
any party or circumstances is restricted, prohibited or unenforceable, such
provision shall, as to such jurisdiction, be ineffective only to the extent of
such restriction, prohibition or unenforceability without invalidating the
remaining provisions hereof and without affecting the validity or enforceability
of such provision in any other jurisdiction or its application to other parties
or circumstances.
8.8 SURVIVAL
Each of the terms and provision of this Agreement which are expressly or
impliedly so intended shall survive the termination of this Agreement.
8.9 APPLICABLE LAW
This Agreement shall be governed by and construed according to the laws of the
State of Connecticut.
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the day and year first stated above.
EVERCEL, INC.
By: /s/ JERRY LEITMAN
---------------------
Jerry Leitman
Chairman of the Board
/s/ ROBERT L. KANODE
---------------------
Robert L. Kanode
46
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Evercel Incorporated:
We consent to incorporation by reference in the registration statement Form SB 2
(No. 333-81941) of Evercel, Incorporated of our report dated January 28, 2000
relating to the balance sheets of Evercel, Incorporated as of October 31, 1999
and 1998 and the related statements of income (loss), changes in common
shareholders' equity and cash flows for each of the years in the two-year period
ended October 31, 1999, which report appears in the October 31, 1999 annual
report on Form 10-KSB of Evercel Incorporated.
/s/ KPMG LLP
---------------
KPMG LLP
Stamford, CT
February 8, 2000
47
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