AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 2001
REGISTRATION NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
EVERCEL, INC.
(Exact Name of Registrant as Specified in Its Charter)
--------------------
DELAWARE 06-1528142
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification Number)
Organization)
2 LEE MAC AVENUE
DANBURY, CONNECTICUT 06810
(203) 825-3900
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
--------------------
ROBERT L. KANODE, PRESIDENT AND CHIEF EXECUTIVE OFFICER
EVERCEL, INC.
2 LEE MAC AVENUE
DANBURY, CONNECTICUT 06810
(203) 825-3900
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
<PAGE>
COPIES TO:
RICHARD A. KRANTZ, ESQ. ALAN P. BADEN, ESQ.
ROBINSON & COLE LLP VINSON & ELKINS L.L.P.
FINANCIAL CENTRE 666 FIFTH AVENUE
695 EAST MAIN STREET NEW YORK, NY 10103
STAMFORD, CT 06904-2305 (917) 206-8000
(203) 462-7500
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this registration statement.
--------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
ii
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================= ====================== ======================= ====================== =====================
Title of each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered (1) Offering Price per Aggregate Offering Registration Fee
Registered Share (2) Price (2)
========================= ====================== ======================= ====================== =====================
<S> <C> <C> <C> <C>
Common Stock, 3,450,000 $9.50 $32,775,000 $8,194
par value $0.01 per shares
share
========================= ====================== ======================= ====================== =====================
</TABLE>
(1) Includes 450,000 shares of common stock which the underwriters have the
option to purchase from Evercel, Inc. solely to cover over-allotments,
if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, as amended, on the basis of the average high and low sale prices
of the registrant's common stock on January 3, 2001, as reported by
Nasdaq National Market System.
--------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the SEC, acting pursuant to said Section 8(a), may
determine.
--------------------
iii
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 8, 2001
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and we are not soliciting offers to buy these securities, in
any state where the offer or sale is not permitted.
PROSPECTUS
, 2001
EVERCEL, INC. LOGO
3,000,000 SHARES OF COMMON STOCK
--------------------
EVERCEL, INC.: THE OFFERING:
o We have developed and are o We are offering 3,000,000 shares of
manufacturing rechargeable our common stock.
nickel-zinc batteries. We believe
that our batteries have superior o We have granted the underwriters an
characteristics when compared with option to purchase an additional
conventional lead-acid batteries. 450,000 shares of common stock to
Our initial target markets for our cover over-allotments.
batteries are the electric trolling
motor market and the scooter o We plan to use the net proceeds
market. from this offering to equip our
Virginia production facility with a
o Evercel, Inc. second automated line, for research
2 Lee Mac Avenue and development and for working
Danbury, Connecticut 06810 capital and general corporate
(203) 825-3900 purposes.
o Closing: _______, 2001.
SYMBOL AND MARKET:
o EVRC/Nasdaq National Market
PER SHARE TOTAL
-------------- ------------
Public offering price........................... $ $
Underwriting fees ..............................
Proceeds to Evercel(1) .........................
----------------------------------------
(1) Excludes offering expenses estimated to be $__________.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9.
--------------------
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
--------------------
MORGAN KEEGAN & COMPANY, INC. BURNHAM SECURITIES INC.
1
<PAGE>
[INSIDE FRONT COVER PAGE]
2
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................................... 4
Risk Factors................................................................ 9
Forward-looking Statements.................................................. 18
Use of Proceeds............................................................. 19
Dividend Policy............................................................. 19
Price Range of Common Stock................................................. 20
Capitalization.............................................................. 21
Selected Financial Data..................................................... 22
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 24
Business.................................................................... 28
Management.................................................................. 40
Related Party Transactions.................................................. 42
Principal Stockholders...................................................... 44
Description of Capital Stock................................................ 47
Shares Eligible for Future Sale............................................. 50
Underwriting................................................................ 51
Legal Matters............................................................... 53
Experts..................................................................... 53
Where You Can Find More Information......................................... 54
Incorporation of Certain Documents by Reference............................. 54
Index to Financial Statements............................................... F-1
Independent Auditors' Report................................................ F-2
--------------------
You should rely only on the information contained in this prospectus.
We have not, and the underwriters have not, authorized any other person to
provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operation and prospects may have changed since that date.
The name Evercel and our logo are names and trademarks that belong to
us. This prospectus also contains the names of other entities which are the
property of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO HISTORICAL
INFORMATION, THE FOLLOWING SUMMARY AND OTHER PARTS OF THIS PROSPECTUS CONTAIN
FORWARD-LOOKING STATEMENTS THAT REFLECT OUR PLANS, ESTIMATES, INTENTIONS,
EXPECTATIONS AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH
IN THE "RISK FACTORS" SECTION AND CONTAINED ELSEWHERE IN THIS PROSPECTUS.
OUR BUSINESS AND TECHNOLOGY
We have developed and are manufacturing rechargeable nickel-zinc
batteries. We believe that our rechargeable nickel-zinc batteries have superior
characteristics when compared with conventional lead-acid batteries. Our
patented technology and manufacturing process allow us to produce rechargeable
batteries with a unique combination of characteristics, including:
o extended run time;
o light weight;
o maintenance free construction;
o favorable environmental profile; and
o lower lifetime cost.
For a comparison of the battery performance characteristics of our
nickel-zinc batteries with other types of batteries, see "Business - Competitive
Battery Technologies" beginning on page 33.
We are initially manufacturing and selling our batteries in two
markets. At our manufacturing facility in Newport News, Virginia, we are
producing Evertroll(TM) brand batteries for electric trolling motors used in
sportfishing boats. While the retail price of the Evertroll battery will be
significantly higher than that of a lead-acid battery, we believe that the
durability and extended life of the Evertroll battery will result in a cost per
hour of operation that will be less than one-half that of a lead-acid battery.
The estimated size of the electric trolling motor market in the United States is
three million lead-acid batteries annually. Our manufacturing facility in
Virginia currently has the capacity to produce approximately 100,000 Evertroll
batteries annually. We intend to use the proceeds of this offering to equip a
second automated line that will increase the annual capacity of the facility to
200,000 Evertroll batteries. In January and March 2001, our rechargeable
nickel-zinc batteries will be featured in major sporting catalogues with a
combined distribution of 6.2 million copies.
We own a majority interest in a joint venture in the People's Republic
of China (PRC) that manufactures rechargeable nickel-zinc batteries for scooter
markets in Europe and Asia. We believe that our batteries can provide a 60-100
kilometer operating range for electric scooters with acceleration and
performance characteristics comparable to gasoline-powered scooters. Our initial
target markets for electric scooters are in Europe and Taiwan. We have recently
received an order for 3,250 batteries to be delivered over the next year from
Oxygen S.p.A., our affiliate that was recently formed to manufacture and
distribute scooters and other electric vehicles in Europe. The worldwide market
for electric and gasoline powered scooters is approximately six million units
annually. The estimated combined market for electric and gasoline-powered
scooters in Europe and Taiwan is approximately three million units annually. The
current manufacturing capacity of this joint venture is approximately 80,000
12-volt battery packs annually. Our joint venture in the PRC plans to expand
4
<PAGE>
manufacturing capacity to 240,000 12-volt battery packs annually by the end of
2001. Electric scooters require four 12-volt battery packs to power a medium
size electric scooter and up to ten 12-volt battery packs to power a large
electric scooter.
OUR STRATEGY
We have recently introduced our battery technology to the motive power
market. We now seek to:
o establish Evercel and Evertroll(TM) as premium brand names;
o create a manufacturing and distribution network with global reach;
o sell trolling motor batteries to consumers and boat manufacturers;
o sell scooter batteries directly to original equipment
manufacturers;
o pursue strategic alliances to access additional markets for our
batteries; and
o maintain our technical leadership through continued research and
development.
In addition to our current target markets, we believe our battery
technology has future applications in other markets, including:
o neighborhood electric vehicles, such as golf carts;
o wheelchairs;
o electric bicycles;
o uninterruptible power supplies, such as back-up power supplies for
computers;
o yard tools, including lawn mowers and trimmers; and
o 42-volt battery systems for automobiles and trucks.
Our proprietary rechargeable nickel-zinc battery is the result of over
30 years of research and development in advanced battery technologies. Between
1970 and 1999, we operated as the battery business group of FuelCell Energy,
Inc., formerly known as Energy Research Corporation. On February 22, 1999, we
were spun-off from FuelCell as an independent company.
Our principal executive offices are located at 2 Lee Mac Avenue,
Danbury, Connecticut 06810, and our telephone number is (203) 825-3900.
We maintain websites on the Internet at WWW.EVERCEL.COM and
WWW.EVERTROLL.COM. Information contained in or connected to our Internet
websites does not constitute a part of this prospectus.
5
<PAGE>
THE OFFERING
Common stock offered ............................. 3,000,000 shares
Shares of common stock to be outstanding after
this offering .................................... ________ shares
Use of proceeds .................................. We estimate that our net
proceeds from this
offering will be
approximately $___
million. We intend to use
these proceeds:
o to equip our Virginia
manufacturing facility
with a second automated
line;
o for additional research
and development in
battery technology; and
o for working capital and
general corporate
purposes. See "Use of
Proceeds."
Risk Factors...................................... See "Risk Factors" and
other information included
in this prospectus for a
discussion of factors you
should carefully consider
before deciding to invest
in our common stock.
Nasdaq National Market symbol..................... EVRC
Except as otherwise noted, all information in this prospectus assumes
no exercise of the underwriters' over-allotment option. In addition, we have
adjusted all of the information in this prospectus, except as otherwise noted,
to reflect a 2-for-1 stock split, accomplished by means of a 100% stock dividend
paid to stockholders on March 22, 2000.
The number of shares to be outstanding immediately after this offering
does not include:
o 676,499 shares of our common stock issuable upon stock options
outstanding at December 31, 2000, at a weighted average exercise
price of $9.32 share;
o 555,200 shares of our common stock issuable upon warrants
outstanding at December 31, 2000, at a weighted average exercise
price of $8.70 per share; and
o 714,523 shares of our common stock issuable upon conversion of our
Series A convertible preferred stock outstanding as of December
31, 2000.
6
<PAGE>
SUMMARY FINANCIAL DATA
The following table summarizes statements of operations data for our
business. You should read this information together with our financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" presented elsewhere in this
prospectus. The as adjusted balance sheet data as of September 30, 2000 reflects
the sale of the 3,000,000 shares of common stock in this offering, assuming an
offering price of $_____ per share and after underwriting discounts and
commissions and our estimated offering expenses.
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS NINE MONTHS ENDED
--------------------------------------------- ENDED -----------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999(C) 1999 2000
----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED)
(Dollars in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues ................... $ 436 $ 438 $ 196 $ 13 $ -- $ 94
Total operating costs and
expenses ................. 1,303 3,769 5,568 1,361 3,763 8,428
Interest income, net, equity
in net loss of affiliates,
license fee income and
other expense ............ -- -- 51 28 79 912
Income tax benefit ......... (295) (1,006) (360) -- (111) 88
----------- ----------- ----------- ----------- ----------- -----------
Net loss ................... $ (572) $ (2,325) $ (4,961) $ (1,320) $ (3,573) $ (7,510)
----------- ----------- ----------- ----------- ----------- -----------
Preferred stock dividends .. -- -- -- (22) -- (396)
----------- ----------- ----------- ----------- ----------- -----------
Net loss - common
stockholders ............. $ (572) $ (2,325) $ (4,961) $ (1,342) $ (3,573) $ (7,906)
----------- ----------- ----------- ----------- ----------- -----------
Basic and diluted loss per
share .................... $ (0.21)(a) $ (0.84)(a) $ (1.11)(b) $ (0.23)(b) $ (0.80)(b) $ (1.22)(b)
=========== =========== =========== =========== =========== ===========
Basic and diluted shares
outstanding .............. 2,778,000(a) 2,778,000(a) 4,456,538(b) 5,722,000(b) 4,466,000(b) 6,455,000(b)
=========== =========== =========== =========== =========== ===========
</TABLE>
(a) Represents the pro forma loss per share and shares assumed to be
outstanding based on the number of shares outstanding immediately after our
spin-off from FuelCell.
(b) Due to losses we have incurred, dilutive instruments, consisting of
outstanding shares of Series A preferred stock, options and warrants, have been
excluded from diluted shares. At December 31, 1999 and September 30, 2000, there
were outstanding 264,000 shares of Series A preferred stock convertible into
960,000 shares of common stock and related warrants exercisable for 595,268
shares of common stock. At September 30, 1999 and October 31, 1999 there were
outstanding options exercisable for 605,098 and 625,098 shares of common stock,
respectively. At December 31, 1999 and September 30, 2000, there were
outstanding options exercisable for 627,098 and 674,499 shares of common stock,
respectively.
(c) In 1999, we changed our fiscal year end from October 31 to December
31.
7
<PAGE>
AS OF
SEPTEMBER 30, 2000
--------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
(Unaudited)
BALANCE SHEET DATA: (in thousands)
Cash and cash equivalents................... $ 9,596 $
Total assets................................ 19,173
Total current liabilities................... 2,467 2,467
Total stockholders' equity.................. 16,591
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON
STOCK. THE FACTORS DISCUSSED BELOW, AS WELL AS OTHER FACTORS NOT CURRENTLY KNOWN
TO US OR THAT WE CURRENTLY DEEM IMMATERIAL, MAY HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND COULD RESULT IN A COMPLETE LOSS OF YOUR
INVESTMENT.
RISKS RELATED TO EVERCEL
WE WERE A PART OF FUELCELL UNTIL FEBRUARY 1999 AND FACE SIGNIFICANT RISKS
TYPICAL OF NEW COMPANIES, WHICH COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Until February 1999, we operated as the battery business group of
FuelCell and currently are in the early stage of a large-scale commercial
release of our initial products. Accordingly, we only have a limited operating
history from which you can evaluate our business and prospects. Our limited
operating history makes predicting the future results of our operations or the
risks we will face difficult. Our business model has not been tested and,
accordingly, we cannot be certain that our business strategy will be successful.
WE HAVE INCURRED SUBSTANTIAL LOSSES SINCE OUR FORMATION AND MAY NOT BECOME
PROFITABLE IN THE FUTURE. IF WE CONTINUE TO INCUR LOSSES, THE VALUE OF OUR
COMMON STOCK COULD DECLINE.
We are not profitable and have had limited revenues. We cannot assure
you that we will become profitable in the foreseeable future, if ever. For the
nine months ended September 30, 2000, the two months ended December 31, 1999,
and the twelve months ended October 31, 1999, we had losses available to common
stockholders of $7.9 million, $1.3 million and $5.0 million, respectively. We
expect that we will continue to incur losses through 2001. Even if we do achieve
profitability, we may be unable to sustain or increase our profitability in the
future.
WE ARE DEPENDENT ON OUR NICKEL-ZINC BATTERY PRODUCT LINE AND ARE UNCERTAIN
WHETHER OUR BATTERIES WILL BE WIDELY ACCEPTED IN THE MARKETPLACE.
We believe that we will depend on sales of our nickel-zinc batteries
for substantially all of our revenues for the foreseeable future. Our success
will depend upon the market acceptance of our nickel-zinc battery technology.
Our nickel-zinc batteries have not achieved, and may never achieve, market
acceptance. Our introduction of new products may be delayed or unsuccessful. Our
batteries will be a more expensive initial purchase than competing batteries and
other technologies. We cannot assure you that we will be successful in
convincing customers of the value of our batteries over their life cycles and
their other performance advantages. Our success will depend, in large part, on
our ability to meet customer requirements by developing and introducing, on a
timely basis, new products and enhanced and modified versions of our current
products. We cannot assure you that we will be able to do so. Our competitors
may introduce new technologies or refine existing technologies that will be more
appealing to customers than our products.
OUR INABILITY TO ENFORCE OUR PATENTS, PROTECT OUR INTELLECTUAL PROPERTY OR
OBTAIN THE RIGHT TO USE CERTAIN INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT OUR
ABILITY TO COMPETE.
Patents, trade secrets and other proprietary rights are important to
our success and competitive position. Our efforts to protect our proprietary
rights, including our patents, may be inadequate and may not prevent others from
claiming violations by us of their property rights. In addition, because of the
intense competition in battery technology and the large number of patents filed,
or being filed, we may need to use other companies' patents under license
agreements. We are uncertain if we could reach an agreement to use those patents
and whether the terms of such an agreement would be acceptable to us. If any
court or competent authority concludes that our products or manufacturing
processes have infringed upon the product or process rights held by others, our
business, financial condition and results of operations could be harmed.
Additionally, a determination that we have infringed upon the product or process
9
<PAGE>
rights held by others could result in the loss of our proprietary rights,
subject us to liability to third parties or prevent us from manufacturing or
selling our products, any of which could have a material negative effect on our
business and hinder our intentions to sell our nickel-zinc battery technology.
We cannot assure you that patents will be issued from any pending applications,
that the claims allowed under any patents will be sufficiently broad to protect
our technology, that any patents issued to us will not be challenged,
invalidated or circumvented, or as to the degree or adequacy of protection any
patents or patent applications may afford. We could incur substantial costs in
prosecuting and defending patent and other proprietary rights suits.
Our policy is to also protect our proprietary rights in our products
and operations through contractual obligations including nondisclosure
agreements with certain employees, customers, consultants, licensees and
strategic partners. We also cannot assure you as to the degree of protection
these contractual measures may afford.
We have not filed for patent protection in certain potential major
markets such as southeast Asia. Any agreements that we reach with partners in
these areas would have to be based on trade secrets and know-how. In the future,
we may seek patent protection in those areas. In addition, some foreign
countries in which we may do business provide significantly less patent and
proprietary rights protection than the United States.
We also rely on know-how and trade secrets to establish our battery
technologies for commercial applications and we cannot assure you that we can
adequately protect this information in our dealings with other companies. If
other competitors or organizations develop similar or better battery
technologies through their own efforts, these developments could have an adverse
effect on our business.
EVEN IF OUR PRODUCTS ARE A SUCCESS, WE MAY BE UNABLE TO MEET DEMAND. OUR FAILURE
TO MEET DEMAND COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS AND FINANCIAL
RESULTS.
Rapid growth of our advanced rechargeable nickel-zinc battery business
may significantly strain our management, operations and technical resources. If
we are successful in obtaining rapid market penetration of our rechargeable
nickel-zinc batteries, we will wish to either satisfy customer orders with
quality products on a timely basis at a reasonable cost to those customers or
license our technology to others who can manufacture and distribute our
products. We also have no experience with the capabilities of our shipping
contractors and cannot assure you that our shipping contractors will be able to
ship our products in a timely manner. Additionally, we currently have limited
manufacturing capability and no experience in large-scale manufacturing of our
rechargeable nickel-zinc batteries or in automated assembly and packaging
technology.
We currently operate our Virginia facility with one automated line, and
we intend to add a second automated line with the proceeds of this offering. Our
joint venture in the PRC also intends to expand its manufacturing capability. We
cannot assure you that our business will achieve rapid growth or that our
efforts (or the efforts of those companies which are granted licenses to our
technology) to expand manufacturing or the number of employees will be
successful. In addition, we cannot assure you that we will not have difficulties
meeting necessary quality control standards as we expand our manufacturing
capabilities. Our business, financial condition and results of operations may be
harmed if we encounter difficulties in effectively managing the budgeting,
forecasting, quality control and other process control issues presented by rapid
growth. Additionally, we cannot assure you that we or our licensees will be able
to satisfy commercial-scale production requirements on a timely and
cost-effective basis.
10
<PAGE>
RISKS RELATED TO OUR INVESTMENT IN THE PEOPLE'S REPUBLIC OF CHINA
We conduct business in the People's Republic of China (the PRC)
through:
o our 50.5% ownership interest in a joint venture with Xiamen Three
Circles Co., Ltd. that manufactures rechargeable nickel-zinc
batteries for the scooter markets in Italy and Taiwan from a plant
in Xiamen; and
o the licensing of our technology to that joint venture pursuant to
the Three Circles License Agreement.
The following risk factors relate to our business in the PRC.
CHANGES IN THE POLITICAL ENVIRONMENT IN THE PRC MAY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The value of our interest in our joint venture in the PRC and the
profitability of that joint venture may be adversely affected by changes in the
political environment in the PRC. 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 in the PRC could lead to
changes in legal and business regulation and the general political, economic and
social environment in that country. Those changes could adversely affect our
business, financial condition and results of operations if they prohibit or
restrict foreign investment in the PRC or result in increased costs for our
joint venture.
One of the target markets for nickel-zinc batteries manufactured from
the Xiamen plant is Taiwan. The relationship between the PRC and Taiwan has been
marked with political and economic tension. Our joint venture in the PRC could
be adversely affected if bans or restrictions were imposed on trade between
those two countries.
In addition, we have relationships with individuals in the PRC whose
status and political influence could be adversely affected as a result of
political changes in that country. Any such changes in the political leadership
or current economic reform policies or the imposition of additional restrictions
of foreign-owned enterprises could have a material adverse effect on the
business of our joint venture in the PRC and, as a result, our interest in that
joint venture. Any such changes could also adversely affect our rights and
revenues under the Three Circles License Agreement.
WE MAY HAVE DIFFICULTY PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS IN THE PRC
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
We have licensed our technology for use by our joint venture in the PRC
pursuant to the Technology Transfer and the Three Circles License Agreement.
This agreement provides for the use of our nickel-zinc batteries for miners'
lamps, two- and three-wheel vehicles, industrial traction equipment, off-road
golf carts, boats and all terrain vehicles in the PRC on an exclusive basis and
in southeast Asia on a non-exclusive basis. We protect our technology in the PRC
through a combination of patent applications, contractual arrangements and trade
secrets. Patent and other intellectual property rights receive substantially
less protection in the PRC than is available in the United States. We cannot
assure you that we will be able to protect our proprietary rights in the PRC or
elsewhere. The unauthorized use of our technology by others, particularly in the
PRC where labor costs are low, could have a material adverse effect on our
business, financial condition and results of operation.
11
<PAGE>
RESTRICTIONS ON REPATRIATION OF FOREIGN CURRENCY OR FOREIGN CURRENCY EXCHANGE
AND VOLATILITY OF EXCHANGE RATES COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN
DISTRIBUTIONS, LICENSE PAYMENTS OR ROYALTIES SOURCED FROM THE PRC.
The PRC regulates the repatriation of foreign currencies as payments to
foreigners, including investors and licensors, and the conversion of renminbi
(the official currency of the PRC) into foreign currencies, such as the U.S.
dollar. As a result, we may be restricted or prevented from receiving
distributions, license payments or royalties from our joint venture in the PRC
even if they are needed to meet obligations of our business or would be better
employed in our business outside of the PRC. In addition, distributions from our
joint venture in the PRC, license payments and royalties may be subject to
taxation by the PRC as well as tax authorities in the United States.
In addition, there has been significant volatility in the exchange rate
of renminbi to U.S. dollars. We expect that our joint venture in the PRC will
receive a substantial portion of its revenues in renminbi. A portion of those
revenues will have to be converted to other currencies to meet contractual
obligations (such as payment obligations to suppliers) or for purposes of
remitting these funds to us as return of capital, dividends or license payments.
Under our joint venture, we are entitled to receive distributions and royalties
based on sales using our technology and other distributions from our joint
venture. Our joint venture may be unable to convert sufficient renminbi into
foreign currency to enable it to comply with its foreign currency payment
obligations, including royalty payments distributions to us. In the event of a
depressed market in renminbi, the cost of foreign currency could prevent our
joint venture in the PRC from paying distributions and license fees to us. In
addition, fluctuations in the exchange rate of the renminbi into U.S. dollars
could have an adverse effect on the license fees owed to us.
LAWS, REGULATIONS AND POLICIES IN THE PRC MAY NEGATIVELY AFFECT OUR INVESTMENT
IN THAT COUNTRY DUE TO INCONSISTENT APPLICATION OR ADVERSE INTERPRETATION,
ENFORCEMENT OR EVOLUTION.
The PRC does not have a well-developed, consolidated body of laws
governing foreign investment enterprises. As a result, the administration of
laws and regulations by government agencies may be subject to considerable
discretion and variation. As the legal system in the PRC develops, our
investment in our joint venture 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, we may
not be able to obtain timely and equitable enforcement of those laws.
EXPROPRIATION OF JOINT VENTURE PROPERTY BY THE PRC GOVERNMENT WOULD ADVERSELY
AFFECT US.
Following the formation of the PRC in 1949, the PRC government
renounced various debt obligations incurred by predecessor governments, which
obligations remain in default, and expropriated assets without compensation. We
cannot assure you that, in the future, expropriation or nationalization of the
assets of our joint venture in the PRC or any of our other assets in the PRC
will not occur. Such an expropriation or nationalization could result in a total
loss of our investment in our joint venture in the PRC.
ADDITIONAL RISKS RELATED TO OUR BUSINESS
OUR SUCCESS DEPENDS UPON THE SUCCESS OF THE MANUFACTURERS WHO MAY USE OUR
PRODUCTS OR LICENSE OUR TECHNOLOGY.
A substantial portion of our business will depend upon the success of
products sold by manufacturers that may use our batteries or license our
technology. For example, one factor determining the quantity of purchase orders
we may receive from scooter manufacturers in the future is the success of that
12
<PAGE>
company's scooter. We are subject to many risks beyond our control that
influence the success or failure of manufacturers' particular products
including, among others factors:
o competition faced by those manufacturers in their particular
industry;
o market acceptance of the manufacturers' products;
o engineering, sales and marketing and management capabilities of
those manufacturers;
o technical challenges unrelated to our technology or problems faced
by any of those manufacturers in developing their products; and
o financial and other resources of those other manufacturers.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IF WE FAIL TO KEEP PACE WITH RAPIDLY
CHANGING TECHNOLOGIES.
The battery industry has experienced, and is expected to continue to
experience, rapid technological change. Our growth and future success will
depend, in part, on our ability to enhance and modify existing products and to
introduce new products in new markets. Our product development efforts require
and are expected to continue to require, substantial investments by us for
research, refinement and testing. We cannot assure you that we will have the
resources to do this.
INTENSE COMPETITION AND THE EMERGENCE OF COMPETING TECHNOLOGIES COULD ADVERSELY
AFFECT THE SALE OF OUR PRODUCTS.
The rechargeable battery industry is characterized by intense
competition with a large number of companies offering or seeking to develop
technology and products similar to ours. We are subject to competition from
manufacturers of traditional rechargeable batteries, from manufacturers of
rechargeable batteries with advanced technologies, as well as from companies
engaged in the development of batteries incorporating new technologies. We
cannot assure you that we will be successful in competing with these
manufacturers, many of which have substantially greater financial, technical,
manufacturing, distribution, marketing, sales and other resources. A number of
companies with substantially greater resources than ours are pursuing the
development of a wide variety of battery technologies which are expected to
compete with our technology.
Other companies undertaking research and development activities of
solid-polymer batteries have already developed prototypes and are constructing
commercial scale production facilities. If other companies successfully market
their batteries prior to the introduction of our products, there may be a
material adverse effect on our business, financial condition and results of
operations. The market for our products, as well as the products that use our
batteries and technology, is characterized by changing technology and evolving
industry standards, often resulting in product obsolescence or short product
life cycles. We cannot assure you that competitors will not develop technologies
or products that would render our technology and products obsolete or less
marketable.
OUR ABILITY TO ADEQUATELY LICENSE OUR TECHNOLOGY MAY AFFECT OUR SUCCESS.
Our growth and success will be dependent to a substantial extent on our
reputation. Since we anticipate licensing our technology to others, our
reputation may be affected by the performance of the companies to which we
license our technology. Our licenses may grant exclusivity with respect to
certain uses or geographic areas. As a result, we will be wholly dependent on
13
<PAGE>
the success of the licensee for success with respect to any exclusive use or
geographical area. We cannot assure you that we will be successful in granting
our licenses to those who are likely to succeed. In addition, 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 that benefit us may be subject to
restrictions in foreign laws that limit our ability to enforce those contractual
provisions. In addition, it may be more difficult to register and protect our
proprietary rights in certain foreign countries. Our failure to obtain suitable
licensees of our technology or the failure of our licensees to achieve our
manufacturing or quality control standards or otherwise meet our expectations
could have a material adverse effect on our business, financial condition and
results of operations.
OUR ABILITY TO ENTER INTO JOINT VENTURES OR OTHER STRATEGIC ARRANGEMENTS MAY
AFFECT OUR SUCCESS.
We intend to enter into additional joint venture arrangements in the
future to sell or license our battery technology. Our joint venture in the PRC
is with a foreign partner and we anticipate that future joint ventures may be
with foreign partners or entities. As a result, such future joint ventures may
be subject to the political climate and economies of the foreign countries where
such partners reside. In addition, we have contracted with Oxygen, S.p.A. to
promote our rechargeable nickel-zinc batteries in light electric vehicles in
Europe. We cannot assure you that our joint venture partners or other partners
will provide us with the support we anticipate, or that any of the joint
ventures or other relationships will be successful in developing batteries for
use with their intended products, or that any of the joint ventures or other
relationships will be successful in manufacturing and marketing their batteries
for such products once developed. Any of our international operations will also
be subject to certain external business risks such as exchange rate
fluctuations, political instability and a significant weakening of a local
economy in which a foreign joint venture operates or is located. Certain
provisions of the joint venture agreements that are for our benefit may be
subject to restrictions in foreign laws that limit our ability to enforce those
contractual provisions. Failure of these joint ventures to be successful could
have a material adverse effect on our business and prospects.
OUR SUCCESS DEPENDS ON THE RETENTION AND HIRING OF CERTAIN KEY PERSONNEL.
Because of the specialized, technical nature of our business, we are
highly dependent on certain members of our management, marketing, engineering
and technical staff including Robert L. Kanode, President and Chief Executive
Officer, and Allen Charkey, Executive Vice President and Chief Technology
Officer, the loss of whose services could have a material adverse effect on our
business, financial condition and results of operations. Based on our
commercialization and expansion plans, we will require a significant increase in
the number of our employees and the employees of our joint venture in the PRC.
Our success will depend upon, among other factors, attracting and retaining
additional highly skilled and experienced managerial, sales, marketing,
engineering and technical personnel. We cannot assure you that we will be able
to recruit or retain such personnel.
THE ADDITION OR MODIFICATION OF ENVIRONMENTAL LAWS MAY ADVERSELY AFFECT BOTH OUR
FUTURE AND PAST OPERATIONS.
Foreign, federal, state and local regulations impose various
environmental controls on the manufacture, transportation, storage, use and
disposal of batteries and certain chemicals used in the manufacture of
batteries. We cannot assure you that conditions relating to our historical
operations which require expenditures for clean-up will not be discovered in the
future or that changes in environmental laws and regulations will not impose
costly compliance requirements on us or otherwise subject us to future
liabilities. Our batteries contain a limited amount of lead in the negative
electrodes. We cannot assure you that the United States Environmental Protection
Agency or other governmental agencies in the U.S. or abroad will not determine
that the lead content or the nickel in our batteries makes them unsuitable for
14
<PAGE>
landfill disposal. Although we believe we are presently in compliance with all
foreign, federal, state and local governmental regulations, we cannot assure you
that additional or modified regulations relating to the manufacture,
transportation, storage, use and disposal of materials used to manufacture our
batteries or restricting disposal of batteries will not be imposed or as to the
effect such regulations may have on us or our customers.
WE MAY BE ADVERSELY AFFECTED BY OUR DEPENDENCE UPON CERTAIN RAW MATERIALS USED
IN THE PRODUCTION OF OUR BATTERIES.
The principal raw materials used in the production of our battery
products are nickel and zinc. Prices for both nickel and zinc are subject to
market forces beyond our control. Our future profitability may be materially
adversely affected by increased nickel or zinc prices to the extent we are
unable to pass on higher raw material costs to our customers. To attempt to
reduce such risks, we may engage in forward purchases and hedging transactions
to manage raw material costs and inventory relative to anticipated production
requirements. We cannot assure you that such activities will be successful or
will not result in increased losses.
ONE OF THE MATERIALS WE USE IN OUR BATTERIES IS ONLY AVAILABLE FROM ONE
SUPPLIER.
Certain separator materials used in the production of our batteries are
only available from one supplier. We cannot assure you that alternate materials
would be available to us at an acceptable price, or quickly enough so as not to
disrupt production.
WE OFFER AN EXTENDED WARRANTY ON SOME OF OUR PRODUCTS, AND WE HAVE NO HISTORICAL
EXPERIENCE AS TO OUR POTENTIAL LIABILITY.
We offer an extended warranty for our trolling motor batteries. Our
warranty is substantially greater than the existing warranties of most of our
competitors. We have no historical experience in evaluating the potential
liability that could be created by claims under that warranty. If the claims
made under that extended warranty exceed expected levels against which we have
reserved, our results of operations and financial condition could be adversely
affected.
PRODUCT LIABILITY CLAIMS COULD RESULT IN COSTS TO US OR IMPEDE DEMAND FOR OUR
PRODUCTS.
The sale of our products may expose us to product liability claims from
consumers. Certain materials we use in our batteries could, if used improperly,
cause injuries to others. In addition, because our batteries are new products,
any accident involving them or other battery products could impede demand for
our products.
RISKS RELATED TO OUR COMMON STOCK
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
We cannot be certain that additional financing will be available to us
on favorable terms when required, or at all. If we raise additional funds
through the issuance of equity, equity-related or debt securities, those
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. In the past, we have experienced negative cash flow from operations.
We currently anticipate that the net proceeds of this offering, together with
our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least 2001. We may need to
raise additional funds prior to the expiration of this period if, for example,
we pursue business acquisitions or experience operational losses that exceed our
15
<PAGE>
current expectations. We also cannot assure you that we will be able to put in
place any future credit facilities that will address our future capital needs,
in whole or in part.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL STOCKHOLDERS.
We expect that our quarterly operating results will fluctuate
significantly. As a result, the market price for our common stock is likely to
be highly volatile and subject to wide fluctuations. Factors, many of which are
beyond our control, that may affect our quarterly results include:
o announcements of technological innovations or new products or
services or pricing changes by us or our competitors;
o conditions or trends in the battery or electric vehicle
industries;
o changes in the economic performance and/or market valuations of
other battery or electric power companies;
o announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o additions or departures of key personnel;
o currency fluctuations;
o release of lock-up or other transfer restrictions on our
outstanding shares of common stock or sales of additional shares
of common stock; or
o potential litigation.
Many companies that have experienced volatility in the market price of
their stocks have been the subject of securities class action litigation. We may
be involved in a securities class action lawsuit in the future. Litigation often
results in substantial costs and the diversion of management's attention and
resources and could harm our business, financial condition and results of
operations.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO FALL.
If our stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options and warrants or
the conversion of our Series A preferred stock, in the public market following
this offering, the market price of our common stock could fall. These sales
might also make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. Upon
completion of this offering, we will have outstanding _____________ shares of
common stock, assuming no exercise of the underwriters' over-allotment option,
no conversion of our Series A preferred stock and no exercise of our outstanding
options or warrants. Of these shares, __________________ shares are freely
tradable. Of the remaining shares, ____________________ will be eligible for
sale in the public market beginning 180 days after the date of this prospectus,
subject to volume and other restrictions pursuant to Rule 144 under the
Securities Act. However, Morgan Keegan & Company, Inc. may, in its sole
discretion and at any time or from time to time, without notice, release all or
any portion of the securities subject to lock-up agreements. An additional
______________________ shares of common stock may be issued upon conversion of
the Series A preferred stock and exercise of outstanding options and warrants.
16
<PAGE>
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The public offering price per share will be substantially higher than
the net tangible book value per share immediately after the offering. If you
purchase common stock in this offering, you will incur immediate and substantial
dilution in the net tangible book value per share of the common stock from the
price you paid. We have a large number of Series A preferred shares which are
convertible into our common stock at prices significantly below the public
offering price of our common stock. We also have a large number of outstanding
stock options and warrants to purchase our common stock with exercise prices
significantly below the public offering price of our common stock. To the extent
that the holders of these options or warrants convert or exercise them, you will
experience further dilution.
WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS.
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain our future earnings, if any, to finance the
expansion of our business and do not expect to pay any cash dividends on our
common stock in the foreseeable future.
PROVISIONS OF DELAWARE AND CONNECTICUT LAW AND OF OUR CERTIFICATE OF
INCORPORATION AND BY-LAWS MAY MAKE A TAKEOVER MORE DIFFICULT.
Provisions in our certificate of incorporation and by-laws and in the
Delaware and Connecticut corporate law may make it difficult and expensive for a
third party to pursue a tender offer, change in control or takeover attempt that
is opposed by our management and board of directors. Public stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. These anti-takeover provisions could substantially impede the ability of
public stockholders to benefit from a change in control or change our management
and board of directors. See "Description of Capital Stock."
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains and incorporates by reference forward-looking
statements that are subject to a number of risks and uncertainties. All
statements, other than statements of historical facts, are forward-looking
statements. Forward-looking statements may include words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe" and other words or
terms of similar meaning and are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. These forward-looking statements include statements relating
to:
o our strategy, future operations and financial plans;
o competition;
o the development of our battery technology;
o acquisition and expansion strategy;
o development of products;
o use of proceeds;
o projected capital expenditures;
o liquidity;
o our intention to reinvest earnings from our joint venture in the
PRC back into the joint venture;
o development of additional revenue sources;
o doing business in the PRC;
o development and maintenance of strategic alliances;
o market acceptance of our battery technology;
o ability to develop brand identification; and
o global expansion.
Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
inaccurate assumptions we might make or known or unknown risks and
uncertainties, including all the risks discussed in "Risk Factors" and elsewhere
in this prospectus. We caution you not to place undue reliance on these
forward-looking statements.
18
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from our sale of 3,000,000
shares of our common stock in this offering will be approximately $ ____________
million, assuming a public offering price of $ ____________ per share and after
deducting the underwriting discounts and commissions and our estimated offering
expenses. We expect to receive approximately $ ____________ million in
additional net proceeds if the underwriters' over-allotment option is exercised
in full.
We currently intend to use the net proceeds as follows:
o approximately $8.0 million to build a second automated
manufacturing line in our Virginia production facility for the
manufacture of rechargeable nickel-zinc batteries;
o approximately $1.0 million for additional research and development
in battery technology; and
o the balance for general corporate purposes and working capital,
which may include marketing and promotion expenses, sponsorships,
acquiring additional businesses, products and technologies or
establishing joint ventures. We have no specific agreements or
commitments to enter into any acquisitions or additional joint
ventures.
We will retain broad discretion in the allocation of the net proceeds
of this offering. Pending the uses described above, we intend to invest the net
proceeds of the offering in short-term and intermediate-term interest-bearing
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock
and we do not intend to pay any cash dividends in the near future on our common
stock. At this time, we intend to retain our future earnings to fund the
expansion of our business. Our dividend policy may be reviewed by our board of
directors from time to time, based on our performance and our financial
condition.
19
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low sales prices
of our common stock for the quarters indicated, as reported by the Nasdaq
National Market and the Nasdaq Small Cap Market for the applicable periods.
Our common stock has been traded on the Nasdaq National Market since
May 4, 2000, and previously on the Nasdaq Small Cap Market from April 5, 1999.
CALENDAR 2001 HIGH LOW
------------- ---- ---
First Quarter (through $ $
January , 2001
CALENDAR 2000
-------------
First Quarter $ 30.75 $ 12.00
Second Quarter 24.00 12.38
Third Quarter 22.56 11.00
Fourth Quarter 21.94 5.78
CALENDAR 1999
-------------
Second Quarter $ 6.13 $ 2.41
Third Quarter 7.41 4.25
Fourth Quarter 12.88 5.19
On ____________, 2001, the last reported sale price for the common
stock on the Nasdaq National Market was $________ per share. As of ____________,
2001, there were approximately ________ holders of record of our common stock.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2000:
o on an actual basis; and
o as adjusted to give effect to the sale of 3,000,000 shares of
common stock by us in this offering, after deducting the
underwriting discounts and offering expenses payable by us,
assuming an offering price of $________ per share.
You should read the information in conjunction with our financial
statements and the related notes appearing elsewhere in this prospectus.
SEPTEMBER 30, 2000
-------------------- ------
ACTUAL AS ADJUSTED
------ -----------
(in thousands)
Stockholders' equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized,
264,000 shares of Series A preferred
stock issued and outstanding with
cumulative dividends at 8% .............. $ 3 $ 3
Common stock, $.01 par value; 30,000,000
shares authorized; 7,137,504 shares
issued and outstanding, actual; shares
issued and outstanding, as adjusted ..... 71
Note receivable from stockholder .......... (300) (300)
Additional paid-in capital ................ 30,103
Accumulated deficit ....................... (13,286) (13,286)
-------- --------
Total stockholders' equity ............ 16,591
-------- --------
TOTAL CAPITALIZATION ................ $ 16,591 $
======== ========
The above table excludes:
o 960,000 shares of our common stock issuable upon the conversion of
our Series A preferred stock outstanding as of September 30, 2000;
o 603,200 shares of our common stock issuable upon exercise of
warrants outstanding as of September 30, 2000, at a weighted
exercise price of $8.66 per share; and
o 674,499 shares of our common stock issuable upon exercise of stock
options outstanding as of September 30, 2000, at a weighted
average exercise price of $9.28 per share.
The table also assumes no exercise of the underwriters' over-allotment
option.
21
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below is for the years ended
October 31, 1995, 1996, 1997, 1998 and 1999, the two months ended December 31,
1999 and the nine months ended September 30, 1999 and 2000. You should read this
information together with our financial statements and the notes to those
statements beginning on page F-7 of this prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The statement of income data for the years ended
October 31, 1997, 1998 and 1999 and the two months ended December 31, 1999 and
the balance sheet data at October 31, 1998 and 1999 and December 31, 1999 are
derived from our financial statements which have been audited by KPMG LLP,
independent accountants, and are included elsewhere in this prospectus. The
statement of income data for the nine months ended September 30, 1999 and 2000,
and the balance sheet data as at September 30, 1999 and 2000 are derived from
our unaudited condensed financial statements included elsewhere in this
prospectus. Historical results are not necessarily indicative of the results to
be expected in the future, and results of interim periods are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------------------------------------------------------
STATEMENT OF INCOME DATA: 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 164 $ 355 $ 436 $ 438 $ 196
Costs and expenses
Cost of revenues 101 246 98 87 694
Administrative and selling 149 199 268 1,805 2,244
Depreciation and
amortization 31 34 40 45 181
Research and development 516 644 897 1,832 2,449
----------- ----------- ----------- ----------- -----------
Total operating costs and
expenses 797 1,123 1,303 3,769 5,568
Loss from operations (633) (768) (867) (3,331) (5,372)
Interest income, net -- -- -- -- 90
License fee income -- -- -- -- --
Equity in net loss of affiliate -- -- -- -- (36)
Other expenses -- -- -- -- (3)
----------- ----------- ----------- ----------- -----------
Loss before income tax
benefit (633) (768) (867) (3,331) (5,321)
Income tax benefit (215) (261) (295) (1,006) (360)
----------- ----------- ----------- ----------- -----------
Net loss (418) (507) (572) (2,325) (4,961)
=========== =========== =========== =========== ===========
Preferred stock dividends -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss - common
shareholders (418) (507) (572) (2,325) (4,961)
=========== =========== =========== =========== ===========
Basic and diluted loss
per share (0.15)(a) (0.18)(a) (0.21)(a) (0.84)(a) (1.11)(b)
=========== =========== =========== =========== ===========
Basic and diluted shares
outstanding 2,778,000(a) 2,778,000(a) 2,778,000(a) 2,778,000(a) 4,456,538(b)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
TWO MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------------
1999(c) 1999 2000
---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenues $ 13 $ -- $ 94
Costs and expenses
Cost of revenues 220 -- 286
Administrative and selling 636 1,805 4,992
Depreciation and
amortization 54 141 286
Research and development 451 1,817 2,864
----------- ----------- -----------
Total operating costs and
expenses 1,361 3,763 8,428
Loss from operations (1,348) (3,763) (8,334)
Interest income, net 28 80 454
License fee income -- -- 572
Equity in net loss of affiliate -- -- (114)
Other expenses -- (1) --
----------- ----------- -----------
Loss before income tax
benefit (1,320) (3,684) (7,422)
Income tax benefit -- (111) 88
----------- ----------- -----------
Net loss (1,320) (3,573) (7,510)
=========== =========== ===========
Preferred stock dividends (22) -- (396)
----------- ----------- -----------
Net loss - common
shareholders (1,342) (3,573) (7,906)
=========== =========== ===========
Basic and diluted loss
per share (0.23)(b) (0.80)(b) (1.22)(b)
=========== =========== ===========
Basic and diluted shares
outstanding 5,722,000(b) 4,466,000(b) 6,455,000(b)
=========== =========== ===========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------------------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited)
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ -- $ -- $ -- $ 1 $ 1,820
Total assets 166 163 289 1,176 4,290
Total current liabilities 33 52 78 753 1,011
Total shareholders' equity 133 111 211 423 3,279
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------------------
1999 1999 2000
---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $ 6,117 $ 2,518 $ 9,596
Total assets 8,810 4,861 19,173
Total current liabilities 742 552 2,467
Total shareholders' equity 8,068 4,309 16,591
</TABLE>
(a) Represents the pro forma loss per share and shares assumed to be
outstanding based upon the number of shares outstanding immediately after our
spinoff from FuelCell.
(b) Due to losses we have incurred, dilutive instruments, consisting of
outstanding shares of Series A preferred stock, options and warrants, have been
excluded from diluted shares. At December 31, 1999 and September 30, 2000 there
were 264,000 shares of Series A preferred stock convertible into 960,000 shares
of common stock and related warrants exercisable for 595,268 shares of common
stock. At September 30, 1999 and October 31, 1999 there were outstanding options
exercisable for 605,098 and 625,098 shares of common stock, respectively. At
December 31, 1999 and September 30, 2000, there were outstanding options
exercisable for 627,098 and 674,499 shares of common stock, respectively.
(c) In 1999, we changed our fiscal year end from October 31 to December
31.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION DOES NOT CONTAIN ALL THE INFORMATION THAT MAY
BE IMPORTANT TO YOU. YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE
MORE DETAILED INFORMATION CONTAINED IN OUR FINANCIAL STATEMENTS, THE NOTES TO
THOSE STATEMENTS AND THE OTHER INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS, ESPECIALLY "RISK FACTORS" BEGINNING ON PAGE 9.
OVERVIEW
We develop, design and have begun to manufacture high-performance
rechargeable nickel-zinc batteries. Much of the following discussion relates to
our operations prior to manufacturing when we were primarily engaged in research
and development activities. We recognize revenue on the date our products are
shipped. To date, revenues have primarily resulted from shipment of products to
our joint venture in the PRC and sample products to potential customers.
We licensed the rights to manufacture nickel-zinc batteries for miners'
lamps, two- and three-wheel vehicles, industrial traction equipment, off-road
golf carts, boats and all terrain vehicles to our joint venture in the PRC, of
which we own a 50.5% interest. We account for our involvement in that joint
venture using the equity method of accounting, in which we record our share of
earnings or losses from that joint venture in our income statement.
On February 16, 1999, FuelCell transferred to us the principal assets,
intellectual property and liabilities related to its battery business group. On
February 22, 1999, FuelCell distributed to its stockholders shares of our common
stock in a tax-free distribution. In April 1999, we received $7.8 million from
the sale of shares of our common stock at $3.00 per share pursuant to a rights
offering. Results shown before the period of the spin-off reflect our activity
as the battery business group of FuelCell.
We changed our fiscal year from October 31 to December 31 effective
December 31, 1999.
24
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
We had revenues of $94,000 for the nine months ended September 30, 2000
compared to no revenues for the nine months ended September 30, 1999. The
revenues in the 2000 period were due to consumer samples sold in our efforts to
commercialize our nickel-zinc batteries. Cost of revenues of $286,000 for the
nine months ended September 30, 2000 represents the costs to produce the sample
batteries, which approximate revenues and freight charges, as well as a charge
to adjust inventory to net realizable value. There were no cost of revenues for
the same period in 1999.
Administrative and selling expenses increased 180% to $5,079,000 for
the nine months ended September 30, 2000 from $1,817,000 for the nine months
ended September 30, 1999. The increase is the result of additional staffing of
administrative, financial and sales and marketing functions, relocation,
severance and other employee costs, legal and financial costs of being an
independent publicly traded company, and selling, marketing and administrative
activities to prepare us for commercialization of our nickel-zinc battery
technology.
Research and development expenses increased 57% to $3,063,000 for the
nine months ended September 30, 2000 from $1,946,000 for the nine months ended
September 30, 1999 due to additional staffing and product development activity
relating to the commercialization of our battery technology.
Net interest income of $454,000 for the nine months ended September 30,
2000 increased from $80,000 for the nine months ended September 30, 1999 due to
interest income on funds received from the May 2000 public offering of our
common stock and interest paid to FuelCell in 1999 on short-term borrowings.
License fee income of $572,000 was received in the nine months ended September
30, 2000 related to a license agreement. Our share of losses from our joint
venture in the PRC in the nine months ended September 30, 2000 was $114,000. We
recognized a tax expense of $88,000 on the license fee payment in the nine
months ended September 30, 1999 due to our inclusion in the consolidated tax
return of FuelCell from January 1, 1999 through February 21, 1999. We have not
recorded the tax benefit of operating losses in the nine months ended September
30, 2000 or the period from February 22, 1999 through September 30, 1999
pursuant to Financial Accounting Standard No. 109, "Accounting for Income
Taxes."
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
We had $196,000 in revenues for the year ended October 31, 1999, as
compared to $438,000 for the same period in 1998. Lower revenues resulting from
the termination of a license fee arrangement with Corning, Inc. in May 1998 were
partially offset by sales of materials of $195,000 to our joint venture in the
PRC during the year ended October 31, 1999. We had cost of revenues of $694,000
for the year ended October 31, 1999 as compared to $87,000 for the prior year.
The higher cost of revenues was due to the cost of the materials shipped and the
revaluation of inventory items at December 31, 1999 to adjust their costs to
market value. The revaluation reserve reflects the value of materials and their
components to reflect what we believe will be their market value when we are in
high volume production and are able to negotiate more favorable pricing.
Administrative and selling expenses increased 24% to $2.2 million for the year
ended October 31, 1999 from $1.8 million for the same period in 1998. The
increase was the result of increased staffing to support the commercialization,
production and distribution of sample batteries and costs associated with our
joint venture in the PRC and Three Circles License Agreement. Depreciation
increased to $181,000 in the year ended October 31, 1999 from $45,000 from the
25
<PAGE>
year ended October 31, 1998 reflecting increased capital purchases to outfit our
Danbury, Connecticut manufacturing facility.
Research and development expense increased 34% to $2.4 million for the
year ended October 31, 1999 from $1.8 million in the prior year. The increase
reflects product development activity relating to the commercialization of our
battery technology.
Net interest income of $90,000 for the year ended October 31, 1999
reflects interest of $108,000 earned on funds raised from our 1999 offerings
offset by $18,000 of interest expense due to borrowings from banks and FuelCell
to finance operations prior to our rights offering. Our share of losses from our
joint venture in the PRC amounted to $36,000 for the year ended October 31,
1999. We recognized a tax benefit of $360,000 in the quarter ended January 31,
1999 due to our inclusion in the consolidated tax return of FuelCell. We have
recorded no benefit for the losses incurred in the second, third and fourth
quarters of the year ended October 31, 1999, pursuant to Financial Accounting
Standard No. 109, "Accounting for Income Taxes."
MARKET RISK
We held no derivative instruments as of September 30, 2000. We are
exposed to market fluctuations in foreign currency exchange and repatriation,
interest rates and commodity pricing. The nature of each is as follows:
FOREIGN CURRENCY EXCHANGE AND REPATRIATION
We currently have international operations in the PRC through our joint
venture. The currency of exchange is U.S. dollars for all current international
transactions. Although the PRC controls the rate of exchange for the renminbi, a
devaluation or free market valuation could impair our joint venture's ability to
make payments for products sold or services rendered. In the PRC, we expect to
continue to reinvest all monies earned as net income of the joint venture for
the foreseeable future. The PRC may restrict the payments under our joint
venture. As a result, we might not be able to receive distributions from our
joint venture in the future even if they are needed to meet obligations of our
business or would be better employed in uses of our business outside of the PRC.
INTEREST RATES
We have invested and expect to invest excess funds in money market
accounts in U.S. financial institutions. Currently, our only indebtedness is
$1.0 million borrowed from the Virginia Small Business Financing Authority at an
interest rate of 8.75% for 5 years and $250,000 borrowed from the Newport News
Redevelopment and Housing Authority at an interest rate of 4.5% for 6 1/2 years.
The loans are secured by substantially all of our assets.
COMMODITY PRICING
We do not hedge against price fluctuation in the commodities used in
the manufacturing of our product. We will reevaluate this policy as needed
commensurate with the risk inherent in the business.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 2000 was $8.2 million compared to $2.3
million at September 30, 1999 with cash of $9.6 million, compared to $2.5
million at September 30, 1999.
26
<PAGE>
Prior to having been spun off from FuelCell, we obtained all of our
funding from FuelCell. On February 5, 1999, we entered into a loan agreement
pursuant to which we borrowed $1.6 million from a bank and $300,000 from
FuelCell for working capital and proposed capital expenditures secured by all of
our tangible and intangible personal property. Repayment of the bank loan was
guaranteed by FuelCell. In April 1999, we received $7.8 million of net proceeds
from a rights offering, including funds received from the sale of unsubscribed
shares pursuant to an agreement with standby underwriters. We used a portion of
these net proceeds to repay in full the bank loan and the line of credit from
FuelCell, and those agreements were terminated.
To continue to meet our operating and capital requirements, we
completed a private placement of our equity in December 1999, raising $6.1
million, net of expenses. We also completed a public offering of our common
stock in May 2000. The public offering raised net proceeds of $15.9 million
through the sale of 1,391,080 shares of our common stock at $12.50 per share. We
believe the net proceeds from these sales and the proceeds to be received from
this offering will be sufficient to support our planned operations through at
least 2001.
In December 2000, we borrowed approximately $1.3 million from the State
of Virginia and the City of Newport News, Virginia. We are currently negotiating
with private financial institutions in order to secure up to approximately $9.0
million in borrowings in order to provide adequate financing and capital for
opportunities or contingencies.
We have equipped our facility in Virginia with one automated line of
production at a cost of approximately $8.0 million. We intend to use a portion
of the proceeds of the offering to equip a second automated production line in
2001 at a cost of $8.0 million.
Our cash requirements will vary depending upon a number of factors,
many of which are beyond our control. These factors include the demand for our
products, the efforts and success of our licensees and joint venture partners in
developing and marketing products incorporating our battery technology, the
development of battery markets, the level of competition that we face, our
ability to develop, market and license new products and our ability to
effectively manage operating expenses. Over time, we expect to continue to enter
into license agreements and to participate in joint manufacturing ventures.
We have entered into a services agreement with FuelCell to provide us
with certain management and administrative services and office, research and
development and manufacturing support facilities and services. The net fees
which we paid to FuelCell pursuant to our services agreement were $139,000 and
$309,000 for the nine months ended September 30, 2000 and 1999, respectively,
$67,000 for the two months ended December 31 and $378,000 for the year ended
October 31, 1999. These amounts exclude certain services billed on the basis of
usage, such as purchasing, analytical lab, microscope analysis, machine shop and
drafting. These amounts reflect FuelCell's additional costs related to providing
these services. These services were provided by FuelCell through December 31,
2000 and are now provided by our employees.
27
<PAGE>
BUSINESS
OVERVIEW
We have developed and are manufacturing rechargeable nickel-zinc
batteries. We believe that our batteries have superior characteristics when
compared to conventional lead-acid batteries. We are introducing this product
into the domestic and international markets. We believe that our patented,
independently tested and proven technology is superior to the competing battery
technologies in our target markets. For a comparison of the battery performance
characteristics of our nickel-zinc batteries with other types of batteries, see
"Business - Competitive Battery Technologies" beginning on page 33. During 2001,
we intend to manufacture and sell our rechargeable nickel-zinc batteries
principally in two markets:
o the electric trolling motor market, primarily focused on
sportfishing boats, which we estimate to have 1999 sales of
approximately 3,000,000 lead acid batteries; and
o the scooter market, which we estimate to have 1999 worldwide sales
of approximately 6,000,000 new gas and electric powered scooters.
We are producing batteries (comparable in size to average car
batteries) in the United States for use with electric trolling motors. We are
also producing smaller batteries for the scooter market through our joint
venture in Xiamen, PRC. We have received a commercial order from Oxygen, S.p.A.,
an affiliated manufacturer and distributor of electric vehicles, for our
rechargeable nickel-zinc batteries for scooters in Italy. Our joint venture in
the PRC expects to begin shipping these batteries during the first quarter of
2001.
We are focusing our marketing efforts on specialty applications of our
rechargeable nickel-zinc batteries where our technology has significant
competitive advantages and where the channels of distribution are relatively
narrow, such as the electric trolling motor and scooter markets.
We believe our rechargeable nickel-zinc batteries have a variety of
other applications. We have developed and are prepared to market our
rechargeable nickel-zinc batteries for lawn equipment. We are currently
developing batteries for neighborhood electric vehicles, electric bicycles and
42-volt battery systems for automobiles and trucks. In addition, we intend to
develop batteries for additional applications, such as uninterruptible power
supplies and wheelchairs.
OUR PRODUCT
Our proprietary nickel-zinc rechargeable battery is the result of over
30 years of research and a substantial investment in the development of advanced
battery technologies. We believe that our technology resulting from this
investment has created significant barriers for competition to enter the market.
Our manufacturing process and patented technology allow us to produce batteries
with the following unique combination of characteristics:
o high specific energy (energy capacity per unit weight) relative to
the weight of the battery and specific power content (how rapidly
energy can be drawn from the battery relative to its weight);
o sustained performance at high depths of discharge over the life of
the battery;
28
<PAGE>
o low material costs;
o maintenance free, sealed unit construction; and
o easy recyclability.
These characteristics combine to result in a high-power, low-weight,
low-maintenance battery with a lower lifetime cost when compared to other
technologies in our target markets.
VERIFICATION OF OUR TECHNOLOGY
From June 1999 to February 2000, JBI Corporation, an internationally
recognized independent testing laboratory, conducted a cycle test on two of our
rechargeable nickel-zinc batteries under controlled conditions. JBI repeatedly
discharged 80% of the full energy of our batteries. At the conclusion of the
test in February 2000, our batteries had run for over 500 cycles and the
capacity of each of the batteries remained at over 80% of its original strength.
Each cycle is one discharge and one charge. We believe that this independent
test result is evidence of our success in developing the first commercially
viable nickel-zinc battery.
During 1999, the Nan Ya Plastics Division of Formosa Plastics
Corporation conducted an internal test program for our nickel-zinc battery. The
objective of its testing was to confirm our claims of performance and cycle
life. The testing was considered successful by Nan Ya in December 1999 with over
600 cycles completed at an 80% depth of discharge.
In late 1999, the Nan Ya Plastics Division submitted one of our
batteries to the Taiwan Government Laboratory for testing in accordance with the
Government of Taiwan Incentive Standard for Electric Scooters. This test
simulates a severe driving environment for a scooter. The results of this test,
which was completed in December 1999, showed that our battery in simulation
exceeded 14,000 kilometers while the closest competitor traveled only 4,000
kilometers. As a result, scooter manufacturers installing our battery will
receive the highest subsidy allowed under Taiwan Government regulations for the
year 2001.
MARKET OPPORTUNITY
In most deep discharge applications where the battery functions as the
primary power source, we believe our rechargeable nickel-zinc batteries will
offer superior performance and lower lifetime costs than any other battery
chemistries currently available on a commercial basis.
THE ELECTRIC TROLLING MOTOR MARKET
The electric trolling motor market exists almost exclusively in the
United States sportfishing industry. We estimate that approximately 3,000,000
lead-acid batteries are sold in this market annually, priced at $100 to $300
(retail) per battery.
Our electric trolling motor batteries are priced at $600 (retail) per
battery, including a built-in charger. In addition, we offer a warranty which is
longer than existing warranties for trolling motor batteries. While the retail
price of the Evertroll battery is significantly higher than that of a lead-acid
battery, we believe that the durability and extended life of the Evertroll
battery will result in a cost per hour of operation over the life of the battery
that will be less than one-half that of a lead-acid battery.
29
<PAGE>
Direct consumer sales make up 99% of the total trolling motor market.
Therefore, we expect that our initial sales of electric trolling motor batteries
will be to sportfishermen. In January and March 2001, our rechargeable
nickel-zinc batteries will be featured in major sporting catalogues that have a
combined distribution of 6.2 million copies. In addition, we are working on
building relationships with boat manufacturers and expect that our market will
expand to include wholesale revenues.
We believe, due to the popularity and technical equipment requirements
of sport fishing, consumers are willing to spend over $600 for a premium
trolling motor battery that will facilitate longer fishing and lower maintenance
costs. Our technology provides a deep discharge cycle life that extends the
total hours of trolling. Other advanced technologies such as lithium-ion and
nickel-metal hydride are not practical in this market due to their cost. Our
maintenance-free design and fast-charge capability also increase the value of
our battery.
THE SCOOTER MARKET
We estimate that in 2000 approximately 6,000,000 new gas and
electric-powered scooters were sold worldwide. The scooter market primarily
exists in Taiwan, India, southeast Asia, Japan and Europe. Of these sales of new
scooters, we estimate that at least 1% of these scooters were electric powered.
The scooters that will initially use our technology will require a battery,
which will be priced at approximately $750 (retail). Within the scooter market,
we expect that the majority of our sales will be direct sales to scooter
manufacturers, with a small aftermarket for battery sales directly to consumers.
The scooter market is a good fit for our technology because of the
particular characteristics of our batteries. Electric scooters require a power
source capable of providing adequate acceleration and load carrying through high
energy content at a low weight. Our technology enables scooter manufacturers to
incorporate in their scooters a high energy power source relative to the weight
of the battery. The deep cycle capability of our technology provides
significantly longer total range than lower cost technologies. We believe the
cost of ownership of our battery over its entire life is less than other
available technologies.
We believe that the electric scooter market is expanding due to global
pollution concerns, increasing gasoline prices and restrictions on noise
pollution. For example, the Government of Taiwan has mandated that a minimum of
2% of all new scooters produced be electric. Additionally, the Italian
government has provided for subsidies at the local and national level and has
initiated inner city travel restrictions for gas powered vehicles.
FUTURE MARKETS
Our technology lends itself to many other applications. We believe the
electric bicycle market, the majority of which is in the PRC and Japan, will
also benefit from our technology. The same strengths that make the scooter
market accessible to our batteries also apply to the electric bicycle market. We
believe that over 40 million bicycles are produced annually in the PRC, and a
small percentage of those are expected to be electric. Other potential
applications include lawn equipment, low speed neighborhood vehicles and
wheelchairs, the general marine market (outside the trolling market),
uninterruptible power supplies (such as back-up power supplies for computers)
and 42-volt battery systems for automobiles and trucks. While the market for
42-volt battery systems has yet to develop, automobile manufacturers expect to
offer them in two to five years. Each of the other markets varies in size from a
few thousand units annually for low speed neighborhood electric vehicles to the
$1.5 billion market in 1997 for uninterruptible power supplies. We believe that
our technology will be able to address specialized segments of these markets as
well.
30
<PAGE>
We expect to develop our technology to expand into additional markets
as opportunities arise. Certain states, including California, Arizona and
Colorado, are strengthening environmental laws and granting consumer rebates for
purchasing electric vehicles. We expect this trend to continue. As the market
for mass produced electric vehicles grows in the United States, we believe that
we are well positioned to be a major participant in this market.
BUSINESS STRATEGY
We have recently introduced our battery technology to the motive power
market. We intend to penetrate the market segments particularly suited for our
current products and, in particular, the electric trolling motor and scooter
markets. We intend to reach this goal by leveraging our strengths to achieve the
following specific benchmarks:
o establish Evercel and Evertroll as a premium brand names;
o create a manufacturing and distribution network with global reach;
o sell trolling motor batteries to consumers and boat manufacturers;
o sell scooter batteries directly to original equipment
manufacturers;
o pursue strategic alliances to access additional markets for our
batteries; and
o maintain our technical leadership through continued research and
development.
We believe that we can achieve these benchmarks by leveraging three
core strengths of Evercel: our technology, our relationships and our management.
TECHNOLOGY
Through our focus on technical innovation in battery chemistry, we
believe we have created proprietary products that are particularly well suited
for our target markets. By modifying the preexisting technology relating to
nickel-zinc batteries, we have developed and patented unique technologies that
will permit scalable, high volume manufacture of our rechargeable batteries. We
believe our batteries have a longer cycle life, are lighter in weight and lower
in cost than comparable batteries currently available in our target markets.
Although the basic characteristics of nickel-zinc battery technology have been
known for many years, our patents and proprietary production process create a
significant barrier of entry for potential competition in our chosen market. Our
batteries also have the additional advantage of lower environmental impact
compared to lead-acid or nickel-cadmium batteries.
RELATIONSHIPS
We believe that one of our greatest strengths lies in our relationships
and strategic alliances. To successfully commercialize our rechargeable
nickel-zinc battery technology, we intend to pursue a range of battery markets
whose performance requirements match the attributes of our nickel-zinc
batteries. These markets have diverse technical and manufacturing specifications
driven by differing applications. Therefore, we will continue to rely on, and
expand, our relationships with our industry partners, as well as seek new
relationships.
In addition to our joint venture in the PRC, we have signed endorsement
contracts with ten well-known bass fishing professionals and four well-known
walleye fishing professionals in the United States who regularly appear on
31
<PAGE>
television, both in competition and in instructional sportfishing programs. We
expect that these endorsements will generate support for our products in the
trolling motor market. Finally, we intend to continue to enter into joint
venture agreements and license our technology to companies with established
manufacturing or distribution capabilities in specific markets.
MANAGEMENT
Collectively, our management has over 80 years of experience in the
battery, electrochemical and consumer electronics industries. This experience
includes decades of research and development in batteries and consumer
electronics and the successful rollout of both power source and consumer
products. Our management has a proven track record of designing and constructing
domestic and foreign manufacturing facilities capable of scalable production of
consumer and technical products and then successfully marketing those products
on a global basis.
HISTORY OF EVERCEL AND OUR TECHNOLOGY
Our products are the culmination of decades of research in rechargeable
nickel-zinc battery technology. The rechargeable nickel-zinc battery was first
patented in 1923, but until now the technology has never been commercially
viable. During the early 1980's, extensive research and development efforts by
other researchers to develop a nickel-zinc battery were not successful due to
unacceptably short battery cycle life.
We solved the short cycle life problem with our proprietary cell
consisting of layers of positive (nickel) electrodes and negative (zinc)
electrodes separated by both electrolyte absorptive layers and microporous
separator layers. By sealing the battery cell and reducing the solubility of the
zinc electrode, we have increased the cycle life of our batteries to
commercially viable levels. This is evidenced by independent tests that have
achieved more than 500 cycles per battery under deep discharge test standards.
We believe that the average user will experience superior cycle life performance
under normal operating conditions. Our patents reflect the methods we use to
reduce the solubility, as well as the construction features of our sealed cell
technology.
Evercel operated as the battery business group of FuelCell between 1970
and 1999. FuelCell's main business was the development of carbonate fuel cells,
which were designed for stationary power systems. In February 1999, FuelCell
made a tax-free distribution of our stock to its stockholders, which resulted in
our current structure as an independent, publicly held company.
While we were part of FuelCell, we focused primarily on the development
and engineering of electricity production and storage by electrochemical means.
Prior to becoming independent, our product sales emphasized high performance
battery cells for the submarine, aerospace and military markets where
application needs and engineering excellence outweighed the concerns of cost. We
pursued several battery technologies, including silver-zinc, nickel-cadmium, and
nickel-zinc. During the mid-1970's to early 1980's, we manufactured high energy
density silver-zinc batteries for submarines and submersibles for both main
propulsion and auxiliary power. During the 1980's, we were contracted by the
United States Navy to develop nickel-cadmium batteries for nuclear submarines as
well as the U.S. Department of Energy to develop nickel-zinc batteries for
electric vehicles. Historically, we relied on corporate and government contracts
for our revenue and as the source of internal research and development funds.
We expect to continue working on improving the characteristics of our
nickel-zinc batteries and are pursuing research and development of other
rechargeable zinc battery technologies beyond our current nickel-zinc battery
technology.
32
<PAGE>
COMPETITIVE BATTERY TECHNOLOGIES
There are two types of batteries, disposable and rechargeable
batteries. Our nickel-zinc batteries are rechargeable. Rechargeable batteries
can often be used in battery applications where disposable batteries are most
commonly employed. Disposable batteries are, in most cases, too costly for
widespread use in applications currently utilizing rechargeable batteries.
No one rechargeable battery system is ideal for all applications. There
are numerous performance variables that vary in importance by application.
Important variables in our markets include:
o specific energy (energy capacity per unit weight);
o specific power (how rapidly energy can be drawn from the battery
relative to its weight);
o cycle life (which varies with discharge rate and depth of
discharge, response to ambient temperatures, rate of
self-discharge, charged and discharged shelf life, size, shape and
design);
o energy density (energy capacity per unit volume); and
o cost of materials per kilowatt hour.
We believe nickel-zinc technology is suitable for our target markets
because of its potential to compete well in several rechargeable battery
applications. The following chart illustrates the primary performance
characteristics by which batteries are judged in our target markets and compares
nickel-zinc to certain other competitive battery technologies:
33
<PAGE>
<TABLE>
<CAPTION>
BATTERY PERFORMANCE CHARACTERISTICS
NICKEL-
NICKEL- LEAD- NICKEL- METAL LITHIUM-
ZINC ACID CADMIUM HYDRIDE ION
---- ---- ------- ------- ---
<S> <C> <C> <C> <C> <C>
SPECIFIC ENERGY (Wh/kg) 35-65(1) 20-30(1) 20-40(1) 40-65(1) 90(1)
53(2)
SPECIFIC POWER (W/kg) 280(2) 200(4) 260(3) 190(3) Low(3)
CYCLE LIFE (NUMBER OF DEEP
DISCHARGE CYCLES) 600(2) 250(1)- 300-2,000(1) 300-600(1) 60-300(3)
1,000(3)
ENERGY DENSITY (Wh/l) 65-130(1) 40-80(1) 40-100(1) 105-185(1) 200(1)
85(2)
COST OF MATERIALS ($/kWh)(4) <= 250 <= 50 <= 300 <= 500 <= 800
</TABLE>
--------------------
(1) HANDBOOK OF BATTERIES, Edited by D. Linden (Second Edition) McGraw-Hill
Publisher (1995).
(2) Nan Ya Test Report, dated December 1999, for 12-volt module (7-cell
battery).
(3) Battery Report on Power Sources (DSMA Battery Committee) (1997).
(4) Evercel estimates.
Our technology is well suited to our target markets due to the
combination of the characteristics listed in the table above. Specific energy
provides extra range or run-time given a realistic weight limit in a scooter or
boat. Specific power provides the necessary acceleration for the vehicle to meet
the expectations of the user or, in a marine application that does not require
acceleration, the ability of the trolling motor to pull reliably in heavy wind
or current. Energy density provides extra range or run time given a realistic
size and configuration in a scooter or boat.
In the trolling and scooter markets, the costs must be seen to be
justified by cycle life. Cycle life directly affects the economics of paying
more for a premium battery. Longer cycle life correlates to more total hours of
trolling or more miles in total range for a scooter over the life of the
battery. We expect that our battery will perform for at least five years when
usage is measured by average fishermen. We believe that, on average, lead-acid
trolling batteries require replacement annually. In the scooter market, the
Taiwan government has tested our battery against lead-acid batteries. The
results of these tests reflected that a scooter powered by our batteries
traveled 3.5 times longer than scooters powered by lead-acid batteries.
In addition to our nickel-zinc technology, the market for rechargeable
batteries consists of lead-acid, nickel-cadmium, nickel-metal hydride and
lithium-ion batteries.
34
<PAGE>
o LEAD-ACID batteries are the most common rechargeable batteries and
are primarily used in automobile starting, uninterruptible power
supplies and motive power applications such as golf carts and fork
lifts. Although lead-acid is the lowest cost rechargeable
technology currently available, these batteries are characterized
by low cycle life and low energy density. In addition, these
batteries must be recycled and are harmful to the environment.
o NICKEL-CADMIUM is the oldest commercialized rechargeable system in
the market, primarily used in power tools and uninterruptible
power supplies. Nickel-cadmium is considered the most powerful and
robust technology in the rechargeable battery marketplace. In the
last decade, nickel-cadmium has increasingly been the subject of
tightening environmental and workplace regulations and related
pressures for recycling and mandatory collection due to the
toxicity of cadmium as a principal component.
o NICKEL-METAL HYDRIDE technology, primarily used in portable
electronics, including mobile phones and computers, offers high
energy density relative to nickel-cadmium. Although the metal
hydride electrode is considered environmentally preferable to
cadmium, nickel-metal hydride cells and batteries typically carry
a cost premium that detracts from the appeal of this technology.
o LITHIUM-ION batteries, primarily used in portable electronics,
offer the highest energy density of all commercial rechargeable
technologies available today. On a weight basis, the technology
offers two to three times the energy content of nickel-cadmium and
offers higher voltage than nickel-metal hydride or nickel-cadmium
technologies. However, lithium-ion cells and batteries are
expected to continue to be more expensive than our nickel-zinc
technology.
COMPETITION
Competition in our markets continues to be, and is expected to remain,
intense. Competitors range from development stage companies to major domestic
and international companies, many of which have resources significantly greater
than ours. Several of these companies are attempting to develop commercial
nickel-zinc batteries; however, we believe that their technology is less mature
than ours.
In our target trolling and scooter motor markets, we expect to compete
against suppliers of rechargeable lead-acid and, to a lesser extent,
nickel-cadmium and nickel-metal hydride batteries. We are competing on the basis
of battery performance and economics, as well as stability, safety and
environmental impact considerations.
The trolling motor battery market is supplied mainly by Delco Battery
and Johnson Controls, Inc., who are producing and distributing lead-acid
batteries. The major drawbacks of these batteries as compared to our nickel-zinc
batteries are power retention, cycle life and ability to charge quickly relative
to cycle life.
The scooter market is dominated by gasoline powered, internal
combustion engines. However, electric battery powered scooters are becoming
popular with regulators, manufacturers and consumers alike. Our largest
competitor in the battery market for scooters is Saft S.A.
We intend to compete only in specialized markets, where we believe
consumers are willing to pay a premium for superior characteristics. Several
other battery manufacturers are attempting to develop and market higher
performance versions of lead-acid batteries. We believe it is unlikely that
those developments will match the performance of nickel-zinc batteries.
35
<PAGE>
ENVIRONMENTAL IMPACT
Nickel-zinc batteries are more environmentally acceptable than other
commonly available rechargeable battery systems. Lead-acid batteries, our
principal competitors, contain chemicals which are harmful to the environment
and must be recycled. Nickel-zinc batteries are recyclable. Nickel-zinc
batteries also contain no cadmium or mercury, which are difficult to dispose of
under current environmental regulation. In addition, we anticipate little waste
generation and no wastewater effluents due to our simple manufacturing process.
We use electrode materials in dough form that can be reprocessed and reutilized,
thereby producing low levels of waste. We also use solvent in the electrode
production process that can be reclaimed, purified and reintroduced into the
manufacturing process with low levels of waste.
SALES AND MARKETING
Our sales and marketing organization is composed at present of a
domestic, U.S. based marketing staff and an independent sales and marketing
organization in our joint venture in the PRC. We expect to hire additional staff
to support our expanding production capabilities.
We are focusing our general sales and marketing efforts in the
following areas:
o generating direct sales to equipment manufacturers and
distributors in selected applications and geographical territories
and launching the trolling battery through a multi-channel
approach directly to consumers;
o developing joint venture partnerships for manufacturing and
distribution in applications and territories where we believe
strategic partners can improve our sales revenues; and
o licensing our technology and know-how to strategic partners in
applications for businesses other than our core applications, such
as consumer electronics.
In the trolling motor market, we have engaged a team of ten bass and
four walleye fishermen to endorse and represent our products in this market. We
launched our EvertrollTM battery and generated initial orders in September 2000.
We have purchased both print and television advertising targeted specifically at
the fishing market for 2000 and 2001. We expect that this effort will create a
demand outside sportfishing in other marine related markets based on word of
mouth and cross-market benefits. Telephone sales and sales through our web site
were our primary retail sales channels in 2000. We have approached mass
distribution partners to further penetrate the manufacturing market. We will
distribute our products through third party catalogs and outdoor and fishing
stores beginning in 2001.
With regard to the scooter market we are primarily focused on marketing
directly to equipment manufacturers. We have contacted and briefed most of the
major scooter companies in Italy and Taiwan as well as several smaller
manufacturers on the advantages of our nickel-zinc batteries. We have conducted
demonstrations, tests and evaluations for several key manufacturers, some of
which are ongoing, that already have or may in the future lead to orders for our
products.
We expect to license our technology in situations where there is a
strong barrier to market entry, such as high capital cost, difficult political
environment, or unique market positioning. In these cases, we will ensure that
the licensee has sufficient incentive to aggressively pursue the implementation
and sale of our technology in their market or technical niche. We will use
quotas, compensation for results and up-front payments to motivate our licensees
to actively pursue high volume sales.
36
<PAGE>
OUR JOINT VENTURE IN THE PRC
In July 1998, we entered into a joint venture agreement with Xiamen
Three Circles Company, Ltd., a government-owned manufacturing company located in
Xiamen, PRC. The mission of our joint venture in the PRC is the manufacture and
sale of nickel-zinc batteries based on our technology and the sublicensing of
that technology to third parties. We received a 50.5% ownership interest in the
joint venture and Xiamen Three Circles received a 49.5% ownership interest. Our
joint venture in the PRC is managed by a seven member board of directors, four
of whom are elected by us and three of whom are elected by Xiamen Three Circles.
In July 1998, as part of the joint venture arrangement, FuelCell,
Xiamen Three Circles and the joint venture entered into a license agreement
pursuant to which FuelCell licensed certain intellectual property to our joint
venture for the development, manufacture and sale of nickel-zinc batteries for
two applications in the PRC and other countries in Southeast Asia. In connection
with our spin off from FuelCell, FuelCell transferred the license agreement to
us. In addition, our joint venture may sublicense our technology to third
parties in the PRC, Hong Kong, Taiwan and Macao on a non-exclusive basis. The
joint venture agreement has a term of 20 years and contains a standard
termination clause. In December 2000, the joint venture agreement was formally
assigned from FuelCell to us.
Under the Three Circles License Agreement, the joint venture made an
initial payment to FuelCell of $3.0 million, which FuelCell immediately
reinvested in the joint venture. In September 2000, we invested an additional
$2.5 million and Xiamen Three Circles invested an additional $2.4 million in the
joint venture. As a result, the current ownership interests in the joint venture
did not change. The joint venture has contracted to pay us a royalty of 2.67% of
the net sales of nickel-zinc batteries in the exclusive territory and 2.0% of
the net sales in the non-exclusive territory.
The joint venture agreement provides for the distribution of revenue
after payment of all operating expenses and costs required by law. We do not
expect any distribution of revenues in the foreseeable future, as it is intended
that all excess revenues will be reinvested in our joint venture.
Our responsibilities to our joint venture in the PRC include purchasing
machinery, equipment and materials outside the PRC, marketing, sales and
distribution of batteries outside the PRC and handling United States immigration
and export licensing matters. Xiamen Three Circles' responsibilities include
handling all legal and regulatory matters in the PRC, obtaining suitable land
and facilities in the PRC, and purchasing, marketing, sales and distribution in
the PRC.
MANUFACTURING AND RAW MATERIALS
Our manufacturing plan is to produce batteries for use in marine
electric trolling motors and similar applications at our facility in Newport
News, Virginia, and batteries for use in scooters and similar applications in
Xiamen, PRC.
We have moved into a new facility in Newport News, Virginia where we
have installed an automated production line to manufacture batteries for the
trolling motor market. With the proceeds of this offering, we plan to install a
second automated line. The lines will each have the capability to produce
approximately 100,000 trolling motor batteries annually. By June 2001 we expect
to be able to reach an annual production capacity of 100,000 batteries to be
used in trolling motors.
In the PRC, we are establishing a manual production process due to the
availability of relatively inexpensive labor. Our joint venture in the PRC has
recently installed production equipment in a 32,000 square foot facility in
37
<PAGE>
Xiamen, PRC which will enable annual battery production capacity of an estimated
30,000 kilowatt hours (kWh), or the equivalent of 20,000 scooter batteries. Our
joint venture in the PRC also plans to continue to acquire additional
manufacturing space and equipment in 2001 to allow for capacity of 90,000 kWh
annually by December 2001.
Our joint venture in the PRC also expects to reach an annual production
capacity of 60,000 scooter batteries in the PRC by the middle of 2001. While we
expect to achieve and fully utilize our manufacturing capacity, no assurance can
be given that we will be able to do so. Even if we are able to fully utilize our
capacity, we cannot assure you that there will be adequate demand for our
products.
Our facility in Danbury, Connecticut tests prototypes and product
samples and houses research and development and administrative functions.
The chemical materials required to manufacture our nickel-zinc battery
are readily available from multiple sources in North America and the PRC.
Certain separator materials are only available from one U.S. supplier. Prices
for both nickel and zinc, the primary raw materials for our batteries, are
subject to market forces beyond our control. We do not currently utilize
financial instruments to mitigate risk of component prices.
BACKLOG
Our joint venture in the PRC has received an order from Taiwan EVT
Technology Co., Ltd., an unaffiliated scooter manufacturer, to supply 1,500
scooters batteries for a total price of $1.4 million. Our joint venture expects
to begin shipping these batteries during the first quarter of 2001. The joint
venture also has an initial qualification order of 100 batteries from Flying
Electric Motor Co. of Taiwan. We also have an order from Oxygen, S.p.A. for
electric scooter batteries to be manufactured by our joint venture in the PRC.
The joint venture expects to begin shipping these batteries during the first
quarter of 2001. Orders to our joint venture are subject to cancellation and are
not necessarily indicative of our future revenues.
PATENTS AND TRADEMARKS
We have nine United States patents which, combined, have an average of
nine years remaining before expiration. Our patents expire at various times
through 2017. We do not believe that the expiration of any of our earlier
patents will have a material adverse effect on our business. We have registered
"Evercel" and have applied to register "Evertroll" as trademarks. We seek to
protect our technology through U.S. patents and trade secrets and other
agreements. Many of these patents are also filed in Hong Kong, Europe, Japan,
Taiwan, India and the PRC.
RESEARCH AND DEVELOPMENT
We continue to advance our battery technologies by conducting
additional research and development. Research and development expenses were
$897,000 in the year ended October 31, 1997, $1.8 million in the year ended
October 31, 1998, $2.4 million in the year ended October 31, 1999 and $2.9
million in the nine months ended September 30, 2000.
EMPLOYEES
We employ a staff of approximately 130 people. Approximately 29
full-time employees are located in our Danbury, Connecticut facility and 101
38
<PAGE>
employees are located at our manufacturing facility in Newport News, Virginia.
This number is expected to increase with planned automation and accelerated
production. We consider relations with our employees to be good.
Our joint venture in the PRC employs approximately 108 people, most of
whom are engaged in the manufacturing process.
FACILITIES
We lease approximately 28,500 square feet of space in Danbury,
Connecticut, that is used as our corporate headquarters. The lease term has four
years remaining with an option for us to extend the term for an additional four
years. The annual rent is $171,000 for the next two years and increases to
$178,000 and $185,000 in the next two subsequent years.
We also lease approximately 100,000 square feet of space in Newport
News, Virginia that we use for our U.S. manufacturing facility. The lease term
is 20 years with four five-year options. The annual rent is $717,000 for the
first year with an escalation of 1.5% per year.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
39
<PAGE>
MANAGEMENT
The following table sets forth information with respect to our
executive officers, directors and other key employees:
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION
---- --- --------
Robert L. Kanode 50 President, Chief Executive Officer and Director
Allen Charkey 58 Executive Vice President, Chief Technology
Officer and Director
Daniel J. Samela 52 Chief Financial Officer, Treasurer and Secretary
Jerry D. Leitman 57 Chairman
Warren D. Bagatelle 61 Director
Robert Gable 69 Director
James D. Gerson 57 Director
John H. Gutfreund 71 Director
Thomas L. Kempner 73 Director
William A. Lawson 65 Director
ROBERT L. KANODE has been our President, Chief Executive Officer and a director
since April 1999. Prior to joining us, Mr. Kanode served as President of Varta
Batteries North America, a battery manufacturer, from 1995 to 1999. Mr. Kanode
also held numerous positions with IBM, including the IBM ThinkPad team and other
permanent and consulting positions focused on electronic manufacturing and
operations.
ALLEN CHARKEY has been a director since our formation and Executive Vice
President and Chief Technology Officer since October 1998. He joined FuelCell in
1970 and held various positions at FuelCell and was Vice President of the
FuelCell Battery Group from January 1997 until October 1998. Prior to joining
FuelCell, Mr. Charkey was employed by Yardney Electric Corporation, a battery
manufacturer, from 1963 to 1970 as a battery scientist.
DANIEL J. SAMELA has been our Chief Financial Officer, Treasurer and Secretary
since August 2000. Mr. Samela, a certified public accountant, was previously
Controller of Trigen Energy Corporation since 1995. Prior to joining Trigen, Mr.
Samela was Controller and Chief Financial Officer of the dealer division of
Savin Corporation from 1990 to 1995.
JERRY D. LEITMAN has been our Chairman since our formation. He has been
President, Chief Executive Officer and a Director of FuelCell since August 1997.
Mr. Leitman was previously President of ABB Asea Brown Boveri's global air
pollution control businesses from 1992 to 1995. Prior to joining ABB, Mr.
Leitman was Group Executive Vice President of FLAKT AB, a Swedish multinational,
responsible for FLAKT's worldwide industrial businesses from 1989 to 1992. Mr.
Leitman is also a director and a member of the Audit Committee of Esterline
Technologies Inc., a manufacturer serving the aerospace and defense markets.
WARREN D. BAGATELLE has been a director since September 1998. He has been a
Managing Director of Loeb Partners Corporation, a financial services company,
40
<PAGE>
and a general partner of Loeb Investors Co. LXXV, an affiliate of Loeb Partners
Corporation, an investment company, since 1988. Mr. Bagatelle is a director of
FuelCell.
ROBERT GABLE has been a director of Evercel since November 1999. He was chairman
of the board and chief executive officer of Unitrode Corporation, a manufacturer
of power source and battery control technology, between 1990 and 1998.
JAMES D. GERSON has been a director of Evercel since September 1998. He has been
a Vice President of Fahnestock & Co., Inc., a financial services company, since
March 1993. Mr. Gerson also serves as a director of FuelCell, Ag Services of
America, Inc., a company financing farm inputs, and American Power Conversion
Corp., a company producing uninterruptible power supplies.
JOHN H. GUTFREUND has been a director since January 2000. He is the former
Chairman and Chief Executive Officer of Salomon Brothers Inc. and former Vice
Chairman of the New York Stock Exchange. He is President of Gutfreund & Company,
Inc., an investment banking and consulting firm. He is also a director of AMBI,
Inc., a manufacturer of nutrition products; Ascent Assurance, Inc., an insurance
holding company; Baldwin Piano & Organ Company, Inc., a musical instruments
company; Foamex International, Inc., a manufacturer of plastic foam products;
LCA-Vision, Inc., a provider of services to outpatient eye surgery facilities;
and Universal Bond Fund.
THOMAS L. KEMPNER has been a director since September 1998. He has been Chairman
and Chief Executive Officer of Loeb Partners Corporation since 1979 and a
general partner of Loeb Investors Co. LXXV, an affiliate of Loeb Partners
Corporation, an investment company. Mr. Kempner is a director of Alcide
Corporation, an agricultural products company, IGENE Biotechnology, Inc., a
microbiology products company, Intermagnetics General Corporation, CCC
Information Services Group, Inc., a claims management company, Insight
Communications Company, Inc., a cable television systems operation, and Roper
Starch Worldwide, Inc. and director emeritus of Northwest Airlines, Inc. Mr.
Kempner is a director of FuelCell and was the Chairman of the board of directors
of FuelCell from March 1992 to August 1997.
WILLIAM A. LAWSON has been a director since September 1998. He has been
President of W.A. Lawson Associates, an industrial and financial consulting
firm, since 1987. Mr. Lawson is Chairman of the board of directors of Newcor,
Inc., a manufacturer of motor vehicle parts, and Mr. Lawson was the Chairman and
Chief Executive Officer of Bernal International Inc. (formerly, Atlantic Eagle
Inc.) a manufacturer of industrial marketing and equipment, from 1997 to 1999.
Mr. Lawson is a director of FuelCell.
KEY EMPLOYEES
GLEN V. BOWLING has been our Vice President of Marketing and Sales since 1999
and our Director of Marketing and Sales since 1998. Prior to joining us, he was
Vice President of Sales for the Saft Lithium and Military Battery Division of
the Saft Group from 1997 to 1998, responsible for worldwide sales. From 1991 to
1997, he was Director of Sales and Marketing for the Lithium Battery Division in
Valdese, NC, where he was responsible for all commercial activities for the
facility.
DR. CHAO MING HUANG has been our Vice President of Far East Operations since
July 1999 and has served as a director of Xiamen Three Circles Battery
Corporation since its formation in August 1998 and General Manager since January
1999. He joined FuelCell in 1994 where he held various positions, including
Director for Advanced Materials Research.
41
<PAGE>
DR. CHRISTINE FRYSZ has been our Director of Product Engineering since September
1999. Dr. Frysz was previously Director, Engineering & Operations, Electrochem
Battery Division of Wilson Greatbatch, Limited, a leading manufacturer of
lithium batteries for specialty and medical applications.
JASON HERON has been our Director of Manufacturing Operations since May 2000 and
the General Manager of our Virginia facility since August 2000. Mr. Heron was
previously Development Engineering Manager at Thomas and Betts, Inc. a leading
manufacturer of batteries for the electronics industry.
RELATED PARTY TRANSACTIONS
Messrs. Warren Bagatelle, James Gerson, Thomas Kempner, Jerry Leitman
and William Lawson are also directors of, and have a significant investment in,
FuelCell. Accordingly, these directors may be deemed to have an indirect
interest in certain transactions with us because of their relationship with
FuelCell.
We entered into certain agreements with FuelCell, including a
distribution agreement, a tax sharing agreement, a services agreement and the
License Assistance Agreement for the purpose of defining our ongoing
relationship with FuelCell and to provide certain services during the
transition. The distribution agreement provides for the transfer of the business
and principal assets of the battery business group to us and the assumption by
us of certain liabilities and obligations relating to that business.
The tax sharing agreement defines the rights and obligations of
FuelCell and us with respect to filing of returns, payments, deficiencies and
refunds of federal, state and other income, franchise or certain other taxes
relating to our operations after the spin-off. The tax sharing agreement is
intended to allocate the tax liability of FuelCell between FuelCell and us as if
we were separate taxable companies.
The services agreement sets forth the terms under which FuelCell
provides to us certain management and administrative services, as well as the
use of certain office, research and development and manufacturing and support
facilities and services. We paid FuelCell $378,000 under this agreement in the
fiscal year ended October 31, 1999 and $139,000 for the nine months ended
September 30, 2000. We now have the ability to perform substantially all of
these services.
In February 1999, we borrowed $300,000 from FuelCell for working
capital and capital expenditures. This loan was secured by all of our assets. We
borrowed an additional $1.6 million from a bank, which was guaranteed by
FuelCell. These loans were repaid in April 1999.
In March 1999, Jerry D. Leitman, our Chairman, exercised options for
100,000 shares of our common stock at $3.00 per share by issuing to us a
nonrecourse, non-interest-bearing note in the original principal amount of
$300,000 payable in equal installments through 2001. No principal payments have
yet been made on this note. If this note is not paid by March 2001, Mr.
Leitman's shares will be forfeited.
In December 1999, James Gerson and John Gutfreund, each a director, and
a retirement plan for Robert Kanode, our Chief Executive Officer, President and
a director, bought 20,000, 2,000 and 1,200 shares of Series A preferred stock,
respectively, and accompanying warrants at $25.00 per share. For a description
of the Series A preferred stock and warrants, see "Description of Capital
Stock."
Loeb Partners Corporation, an affiliate of Thomas Kempner and Warren
Bagatelle, each a director, received $174,000 as standby underwriter in
connection with our 1999 rights offering.
42
<PAGE>
In December 2000, we entered into an agreement with Oxygen, S.p.A.
Oxygen has agreed to promote and incorporate into its manufacturing process our
rechargeable nickel-zinc batteries destined for the European market for use in
light-weight electric vehicles. These batteries will be manufactured by our
joint venture in the PRC. We have invested $154,000 in the equity of Oxygen and
we hold 3% of its issued capital. It is expected that James Gerson, one of our
directors, will be a director of Oxygen. In addition, Glen Bowling, our Vice
President of Marketing and Sales, is a director and officer of Oxygen. Oxygen
has placed an initial order with us for 3,250 rechargeable nickel-zinc batteries
to be manufactured over the next year by our joint venture in the PRC.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 31, 2000, and as adjusted to
reflect the sale of common stock offered by this prospectus by:
o each stockholder known by us to beneficially own more than 5% of
our outstanding common stock;
o each of our executive officers;
o each of our directors; and
o all directors and executive officers as a group.
A person has beneficial ownership of shares if the individual has the
power to vote or dispose of shares. This power can be exclusive or shared,
direct or indirect. In addition, a person beneficially owns shares underlying
options or warrants that are presently exercisable or will become exercisable
within 60 days of December 31, 2000, and shares to be acquired upon conversion
of our preferred stock. These shares are considered to be outstanding for the
purpose of calculating the percentage of outstanding shares of our common stock
owned by a particular stockholder but are not considered to be outstanding for
the purpose of calculating the ownership percentage of any other person.
Applicable percentage ownership in the following table is based on 7,431,952
shares of common stock outstanding as of December 31, 2000. Except as otherwise
noted, to our knowledge, the stockholders named in the table have sole voting
and investment power for all shares shown as beneficially owned by them.
44
<PAGE>
The table below assumes that the underwriters have not exercised their
over-allotment option.
PERCENTAGE OF PERCENTAGE OF
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP
PRIOR TO AFTER THE
NAME NUMBER OF SHARES OFFERING OFFERING
---- ---------------- -------- --------
Warren D. Bagatelle(1) 714,372 % %
c/o Loeb Investors Co.
LXXV
61 Broadway
New York, NY 10006
James D. Gerson(2) 748,303 % %
c/o Fahnestock and Co.
780 3rd Avenue
New York, NY 10017
Thomas L. Kempner(1) 528,216 % %
c/o Loeb Investors Co.
LXXV
61 Broadway
New York, NY 10006
Loeb Investors Co. LXXV(1) 528,216 % %
61 Broadway
New York, NY 10006
Jerry D. Leitman(3) 266,666 % %
Robert L. Kanode(4) 58,764 % *
William A. Lawson 51,220 * *
Allen Charkey(5) 49,999 * *
John H. Gutfreund(6) 11,273 * *
Robert Gable(7) 6,000 * *
Daniel J. Samela -- * *
All directors and executive 1,889,930 % %
officers as a group
(10 Persons)
----------
* Less than one percent.
45
<PAGE>
(1) 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 528,216 shares
of common stock.
(2) Mr. Gerson's shareholdings include 71,078 shares held by his wife as
custodian for two children (of which 22,545 shares are issuable upon
conversion of Series A preferred stock and exercise of related
warrants). Also includes 21,064 shares held by a private foundation, of
which Mr. Gerson is President and a Director. Mr. Gerson disclaims
beneficial ownership of the securities held by his wife and of the
private foundation. Mr. Gerson also holds 122,545 shares (of which
22,545 are issuable upon conversion of Series A preferred stock and
exercise of related warrants) in a company in which he is Chairman. Mr.
Gerson's other holdings also include 90,182 shares issuable upon
conversion of Series A preferred stock and exercise of related
warrants.
(3) Includes 100,000 shares which may be acquired upon exercise of options
within 60 days.
(4) Includes 50,000 shares which may be issued upon exercise of options and
6,764 shares which may be issued upon conversion of Series A preferred
stock and exercise of related warrants.
(5) Represents shares which may be issued upon exercise of options within
60 days.
(6) Represents 11,273 shares which may be issued upon conversion of Series
A preferred stock and related warrants.
(7) Represents shares held by his wife as to which he disclaims beneficial
interest.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 30,000,000 shares of common
stock, $.01 par value per share and 1,000,000 shares of preferred stock, $.01
par value per share.
As of ___________ , 2000, there were _____________ shares of common
stock outstanding and _______ ,000 shares of Series A preferred stock
outstanding. After giving effect to the sale of the 3,000,000 shares of our
common stock in this offering, there will be ____________________ shares of
common stock outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. The election of
directors is determined by a plurality of the votes cast and, except as
otherwise required by law, all other matters are determined by a majority of the
votes cast. Our stockholders do not have cumulative voting rights. Accordingly,
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors. Holders of common stock
are entitled to receive any dividends declared by the board of directors out of
funds legally available for that purpose, subject to any preferential dividend
rights of outstanding shares of preferred stock. Upon the liquidation,
dissolution or winding up of Evercel, the holders of common stock are entitled
to receive pro-rated shares of our net assets after we have paid all debts and
other liabilities. Holders of the common stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of common stock may be adversely affected by the rights of the holders
of shares of any class or series of preferred stock which we may designate and
issue in the future.
PREFERRED STOCK
Under our certificate of incorporation, our board of directors, without
further action by our stockholders, is authorized to issue up to an aggregate of
1,000,000 shares of preferred stock in one or more classes or series. Our board
of directors may, without shareholder approval, issue any class or series of
preferred stock with dividend rights, dividend rates, conversion rights,
redemption rights, preferences on liquidation or dissolution, voting rights and
any other preferences, which could adversely affect the voting power of the
holders of common stock. Issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions or other corporate
purposes, could make it more difficult for a third party to acquire, or could
discourage or delay a third party from acquiring, a majority of our outstanding
stock.
We have created a class of Series A preferred stock. On December 16,
1999, we sold 264,000 shares of Series A preferred stock in a private placement.
Burnham Securities Inc., one of the underwriters of this offering, acted as
placement agent for this private placement. Each share of Series A preferred
stock is convertible into 3.64 shares of common stock, representing an effective
purchase price of $6.88 per share of our common stock. Each share of Series A
preferred stock accrues dividends at the rate of $2.00 per year, payable either
in cash or in shares of Series A preferred stock at our option. Each share of
Series A preferred stock bears a liquidation preference of $25.00 per share and
is entitled to one vote for each share of common stock into which it is
convertible on all matters submitted to stockholders. We may redeem the Series A
preferred stock for $25.00 per share at any time after one year following the
issue date if certain common stock price levels are reached.
47
<PAGE>
WARRANTS
Each share of Series A preferred stock also carries a five-year
warrant, which is exercisable into two shares of common stock at $8.25 per
share. Burnham Securities Inc., one of the underwriters for this offering, acted
as placement agent for the sale of the Series A preferred stock and received
67,200 warrants to purchase our common stock at $10.50 per share. We may redeem
the warrants at any time after one year following the issue date if certain
common stock price levels are reached. We have also issued 6,000 five-year
warrants to a consultant, which are each exercisable for one share of common
stock at $23.09 per share.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions of our certificate of incorporation and bylaws could make
the acquisition of Evercel and the removal of incumbent officers and directors
more difficult. These provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of Evercel to negotiate with us first, but these provisions may
be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interests, including those attempts that might result in a premium over the
market price for shares held by stockholders.
AUTHORIZED BUT UNISSUED SHARES
Our board of directors has the authority to issue and to establish the
rights of substantial amounts of preferred stock without stockholder approval,
upon such terms and conditions, and having such rights, privileges and
preferences, as our board of directors may determine. This authority may be used
to create voting impediments, hinder changes in control or to dilute the stock
ownership of holders of common stock seeking to obtain control of Evercel. The
rights of the holders of common stock will be subject to, and may be adversely
affected by, the rights of any preferred stock that may be issued in the future.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions, financings and other corporate
transactions, may have the effect of discouraging, delaying or preventing a
change in control.
STAGGERED BOARD
Our board of directors is divided into three classes. Each class is
elected for a three-year term. This provision makes more difficult any attempt
for a bidder to acquire control. The existence of a staggered board of directors
is considered a deterrent to a takeover attempt, even though it may be in the
best interest of our stockholders.
DELAWARE ANTI-TAKEOVER PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, or the anti-takeover law, which regulates corporate
acquisitions. The law generally prohibits business combinations between a
publicly held Delaware corporation and an interested stockholder.
o An interested stockholder is a person who, together with any
affiliates, beneficially owns, directly or indirectly, 15% or more
of the outstanding voting shares of a corporation.
o A business combination includes mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess
of 10% of the consolidated assets of the corporation.
48
<PAGE>
Section 203 prohibits any business combination that results in a
financial benefit to an interested stockholder for three years following the
date the person became an interested stockholder.
CONNECTICUT ANTI-TAKEOVER PROVISIONS
The laws of the State of Connecticut, where our principal executive
offices are located, impose restrictions on certain transactions between certain
foreign corporations and significant shareholders. Section 33-840 of the
Connecticut Business Corporation Act prohibits certain publicly held foreign
corporations that are based in Connecticut from engaging in a "business
combination" (including the issuance of equity securities which have an
aggregate market value of 5% or more of the total market value of the
outstanding shares of the company) with an "interested shareholder" as defined
in the Connecticut Business Corporation Act for a period of five years from the
date of the shareholder's purchase of stock unless approved in a prescribed
manner. The application of this statute could prevent a change of control.
Generally, approval is required by our board of directors and by a majority of
our non-employee directors and by 80% of the outstanding voting shares and
two-thirds of the voting power of the outstanding shares of the voting stock
other than shares held by the interested shareholder. We can give no assurance
that these provisions would not prevent us from entering into a business
combination that otherwise would be beneficial to our shareholders.
LIMITATION ON LIABILITY
Our certificate of incorporation and by-laws contain provisions
relating to the limitation of liability and indemnification of directors and
officers. Our certificate of incorporation specifies that none of our directors
shall be personally liable to us or our shareholders for monetary damages for a
breach of fiduciary duty, except for liability:
o for any breach of the duty of loyalty;
o for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
o for the payment of unlawful dividends and other actions prohibited
by Delaware General Corporation Law; or
o for any transaction resulting in receipt of an improper personal
benefit by the director.
Our bylaws require us to indemnify our directors and officers, so long
as their actions are in good faith, are in the best interests of the
corporation, and are not unlawful. Our bylaws also permit us to purchase and
maintain insurance on behalf of our directors, officers and agents. We intend to
obtain directors' and officers' liability insurance to provide our directors and
officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental
Stock Transfer & Trust Company, New York, New York.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be ______________ shares
of our common stock outstanding, ______________ shares if the underwriters'
over-allotment option is exercised in full, assuming no exercise of options or
warrants or conversion of Series A preferred stock. All of these shares (subject
to the "lock-up" discussed below) and all of the 3,000,000 shares sold in this
offering will be freely tradable without restriction under the Securities Act by
persons other than "affiliates" as that term is defined in Rule 144 under the
Securities Act (whose sales would be subject to certain limitations and
restrictions described below).
All of our executive officers and directors and certain other
stockholders have agreed to a "lock-up" at the request of the underwriters. In
the aggregate, this group holds ___________________ shares of our common stock,
options to purchase ____________ shares of our common stock, warrants to
purchase ______________ shares of our common stock, and Series A preferred stock
convertible into _____,000 shares of our common stock. Under the lock-up, they
agreed not to offer, sell, contract to sell, or otherwise dispose of, directly
or indirectly, any shares of common stock or securities convertible into or
exercisable for common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Morgan Keegan & Company, Inc.
When the lock-up expires, approximately __________________ additional shares
that are restricted securities will be eligible for sale under Rule 144. Shares
acquired in transactions exempt from registration under the Securities Act are
"restricted securities" as that term is defined under Rule 144. Restricted
shares may be vested only if they are registered under the Securities Act or are
sold under an exemption from registration, such as the exemption in Rule 144.
Under Rule 144, a person who has beneficially owned shares for at least
one year, including an affiliate, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock
(approximately ________ shares immediately following the
offering); and
o the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale.
We have filed a registration statement on Form S-8 with respect to
600,000 shares of common stock issuable under our stock option plan. As the
number of shares available under our stock option plan is increased, we intend
to register those shares as well. Shares issued upon the exercise of stock
options after the effective date of the Form S-8 registration statement will be
eligible for resale in the public market without restriction, except that
affiliates must comply with Rule 144.
We have also filed a registration statement on Form S-3 with respect to
the resale of the shares of common stock issuable upon conversion of the Series
A preferred stock and upon exercise of the related warrants.
In addition, shares held by persons deemed not to have been affiliates
of ours at any time during the 90 days preceding a sale and who have
beneficially owned the shares for at least two years can be sold under Rule
144(k) without regard to the volume limitations, manner of sale provisions or
other limitations of Rule 144.
50
<PAGE>
UNDERWRITING
Under an underwriting agreement, Morgan Keegan & Company, Inc. and
Burnham Securities Inc. are acting as representatives of the underwriters named
below. Under the underwriting agreement, each of the underwriters has severally
agreed to purchase from us the respective number of shares of common stock set
forth opposite its name below.
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Morgan Keegan & Company, Inc.
Burnham Securities Inc.
Total
The underwriting agreement provides that the underwriters' obligations
to purchase shares are subject to conditions set forth in the underwriting
agreement, and that if any of the shares are purchased by any underwriter under
the underwriting agreement, then all of the shares that such underwriter has
agreed to purchase under the underwriting agreement must be purchased.
The underwriters have advised us that they propose to offer the shares
directly to the public at the public offering price set forth on the cover page
of this prospectus, and to dealers at the public offering price less a selling
concession not in excess of $ _____________ per share. The underwriters may also
allow, and dealers may re-allow, a concession not in excess of $ ___________ per
share to brokers and dealers. After the offering, the underwriters may change
the offering price and other selling terms.
We have granted to the underwriters an option to purchase up to an
additional 450,000 shares, exercisable solely to cover over-allotments, if any,
at the public offering price less the underwriting discounts and commissions
shown on the cover page of this prospectus. The underwriters may exercise this
option at any time until 30 days after the date of the underwriting agreement.
To the extent that the underwriters exercise this option, each underwriter will
be committed, subject to conditions, to purchase the additional shares, and we
will be obligated under the over-allotment option to sell the shares to the
underwriter.
The following table shows the per share and total public offering
price, the underwriting discount to be paid by us to the underwriters and the
proceeds before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment option.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price ..........
Underwriting discount ..........
Proceeds before expenses .......
51
<PAGE>
We estimate our expenses relating to the offering to be $________
million. We will pay to the underwriters underwriting discounts and commissions
in an amount equal to the public offering price per share of common stock less
the amount the underwriters pay to us for each share of common stock.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
payments that the underwriters may be required to make with respect to these
liabilities.
For a period ending 180 days from the date of this prospectus, we and
our executive officers and directors and certain of our stockholders have agreed
that, without the prior written consent of Morgan Keegan & Company, Inc., we
will not:
o offer, pledge, contract to sell or sell any option or contract to
purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer
or dispose of, directly or indirectly, any shares of common stock
or any securities convertible into or exercisable or exchangeable
for common stock, or
o enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership
of any common stock, whether any such transaction described above
is to be settled by delivery of common stock or other securities,
in cash or otherwise.
In addition, during this 180-day period, we have also agreed not to
file any registration statement for the registration of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock without the prior written consent of Morgan Keegan & Company, Inc.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may create a syndicate short
position by making short sales of our common stock and may purchase shares of
our common stock on the open market to cover syndicate short positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than the underwriters are required to purchase in the offering.
Short sales can be either "covered" or "naked." "Covered" short sales are sales
made in an amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering. "Naked" short sales are sales in
excess of the over-allotment option. A naked short position is more likely to be
created if the underwriters are concerned that there may be a downward pressure
on the price of the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. The underwriters may
close out any covered short position by either exercising their over-allotment
or purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. The underwriters would close out any naked short position
by purchasing shares in the open market. The underwriting syndicate may reclaim
selling concessions if the syndicate repurchases previously distributed shares
in syndicate covering transactions, in stabilization transactions or in some
other way or if Morgan Keegan & Company, Inc. receives a report that indicates
clients of such syndicate members have "flipped" the shares. These activities
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of our common
stock. As a result, the price of our common stock may be higher than the price
that might otherwise exist in the open market. The underwriters are not required
to engage in these activities and may end any of these activities at any time.
52
<PAGE>
Neither we nor the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the shares. In addition, neither we nor the
underwriters make any representation that the underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares of common stock included in this offering may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sales of
any shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of that jurisdiction. Persons who receive this prospectus
are advised to inform themselves about and to observe any restrictions to this
offering of our common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of any offer to buy any
shares of common stock included in this offering in any jurisdiction where that
would not be permitted or legal.
Burnham Securities Inc., one of the underwriters in this offering,
acted as placement agent in connection with our private placement of Series A
preferred stock in 1999. In connection with that private placement, Burnham
Securities received $462,000 and warrants to purchase 67,200 shares of our
common stock. Burnham Securities will also receive 4% of the exercise price of
the warrants issued to the investors in the private placement when they are
exercised. See "Description of Capital Stock--Warrants." In addition, Burnham
Securities acted as underwriter in connection with our public offering of common
stock in May 2000 for which Burnham Securities received commissions of
$1,128,000.
As permitted by Rule 103 under the Exchange Act, certain underwriters
and selling group members, if any, may act as "passive market makers" in the
common stock which means they may make bids for or purchases of common stock in
the Nasdaq National Market until a stabilizing bid has been made. Rule 103
generally provides:
o A passive market maker's net daily purchases of the common stock
may not exceed 30% of its average daily trading volume in such
stock for the two full consecutive calendar months, or any 60
consecutive days ending within 10 days, immediately preceding the
filing date of the registration statement of which this prospectus
is a part;
o A passive market maker may not effect transactions or display bids
for the common stock at a price that exceeds the highest
independent bid for the common stock by persons who are not
passive market makers; and
o Bids made by passive market makers must be identified as such.
LEGAL MATTERS
Robinson & Cole LLP, Stamford, Connecticut will pass upon the validity
of the shares of common stock offered by this prospectus. Various legal matters
related to the offering will be passed upon for the underwriters by Vinson &
Elkins L.L.P.
EXPERTS
The financial statements of Evercel, Inc. as of December 31, 1999 and
October 31, 1999 and 1998, and for the two-month period ended December 31, 1999
53
<PAGE>
and for each of the years in the three-year period ended October 31, 1999, have
been included in this prospectus and the registration statement in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 with
respect to the common stock offered. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set forth
in the registration statement or the exhibits and schedules which are part of
the registration statement. For further information with respect to Evercel and
the common stock, you should refer to the registration statement and the related
exhibits and schedules. We also file annual, quarterly and special reports,
proxy statements and other information with the SEC. You may read and copy any
document we file at the SEC's Public Reference Room located at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms. Our SEC filings are also available
to the public from the SEC's website at www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allow us to incorporate by reference the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we later file
with the SEC will automatically update and supersede the information contained
or incorporated by reference in this prospectus. Accordingly, we incorporate by
reference our annual report on Form 10-K for the year ended December 31, 1999,
as amended, our quarterly reports for the quarters ended March 31, June 30 and
September 30, 2000 and our proxy statement for our 2000 annual meeting of
stockholders.
All documents which we subsequently file pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
termination of this offering shall be deemed to be incorporated by reference
into this prospectus from the date of filing of such documents. These documents
are or will be available for inspection or copying at the locations identified
above under the caption "Where You Can Find More Information."
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any and all of the documents that have been incorporated by reference in
this prospectus (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference but not delivered with this prospectus).
You should direct requests for documents to Robert L. Kanode, Evercel, Inc., 2
Lee Mac Avenue, Danbury, Connecticut 06810. The telephone number is
(203) 825-3900.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report F-2
Balance Sheets - October 31, 1998 and 1999
and December 31, 1999 F-3
Statements of Income (Loss) for the Years ended October 31,
1997, 1998 and 1990 and the Two Months ended
December 31, 1998 and 1999 F-4
Statements of Changes in Shareholders' Equity for the
Years ended October 31, 1997, 1998 and 1999 F-5
and for the Two Months ended October 31, 1999
Statements of Cash Flows for the Years ended October
31, 1997, 1998 and 1999 and for the Two Months ended
December 31, 1998 and 1999 F-6
Notes to Financial Statements F-7
Condensed Balance Sheets - December 31, 1999 and
September 30, 2000 F-19
Unaudited condensed Statements of Operations for the Nine Months
ended September 30, 1999 and 2000 F-20
Unaudited condensed Statements of Cash Flows from the Nine Months
ended September 30, 1999 and 2000 F-21
Notes to Unaudited Condensed Financial Statements F-22
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evercel, Inc.:
We have audited the accompanying balance sheets of Evercel, Inc. as of
December 31, 1999 and October 31, 1999 and 1998, and the related statements of
income (loss), changes in shareholders' equity and cash flows for the two months
ended December 31, 1999 and for each of the years in the three-year period ended
October 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Evercel, Inc. as of
December 31, 1999 and October 31, 1999 and 1998 and the results of their
operations and their cash flows for the two months ended December 31, 1999 and
for each of the years in the three-year period ended October 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
---------------------------
KPMG LLP
March 13, 2000
Stamford, CT
F-2
<PAGE>
EVERCEL, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, DECEMBER 31,
ASSETS 1998 1999 1999
------ -------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1 $ 1,820 $ 6,117
Accounts receivable 17 214 193
Inventories -- 192 159
Other current assets -- 56 35
-------- -------- --------
Total current assets 18 2,282 6,504
Property, plant and equipment, net 825 1,991 2,289
Other assets, net 333 17 17
-------- -------- --------
TOTAL ASSETS $ 1,176 $ 4,290 $ 8,810
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 603 $ -- $ --
Accounts payable 53 538 391
Accrued liabilities 97 473 351
-------- -------- --------
Total current liabilities 753 1,011 742
Shareholders' equity:
Preferred Stock ($0.01 par value); 1,000,000
shares authorized: 264,000 issued and
outstanding at December 31, 1999 (with
cumulative dividends at 8%) -- -- 3
Common Stock ($0.01 par value); 10,000,000
shares authorized: 5,722,090 issued and
outstanding at December 31, 1999 and
October 31, 1999 -- 57 57
Additional paid-in-capital -- 7,978 14,084
Note receivable from shareholder -- (300) (300)
Accumulated deficit -- (4,456) (5,776)
Net assets of Battery Group 423 -- --
-------- -------- --------
Total shareholders' equity 423 3,279 8,068
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,176 $ 4,290 $ 8,810
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
F-3
<PAGE>
EVERCEL, INC
STATEMENTS OF INCOME (LOSS)
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999, AND
TWO MONTHS ENDED DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED
------------------------------------------------- ------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 436 $ 438 $ 196 -- 13
Cost and expenses:
Cost of revenues 98 87 694 -- 220
Administrative and selling expenses 268 1,805 2,244 208 636
Depreciation & amortization 40 45 181 8 54
Research and development 897 1,832 2,449 391 451
----------- ----------- ----------- ----------- -----------
Total operating costs and expenses 1,303 3,769 5,568 607 1,361
----------- ----------- ----------- ----------- -----------
Loss from operations (867) (3,331) (5,372) (607) (1,348)
Interest income, net -- -- 90 -- 28
Equity in net loss of affiliate -- -- (36) -- --
Other expense -- -- (3) -- --
----------- ----------- ----------- ----------- -----------
Loss before income tax benefit (867) (3,331) (5,321) (607) (1,320)
Income tax benefit (295) (1,006) (360) (249) --
----------- ----------- ----------- ----------- -----------
Net loss 572 (2,325) (4,961) (358) (1,320)
Preferred stock dividends -- -- -- -- (22)
----------- ----------- ----------- ----------- -----------
Net loss - common shareholders $ (572) $ (2,325) $ (4,961) $ (358) $ (1,342)
=========== =========== =========== =========== ===========
Basic and diluted loss per share $ (0.21)(a) $ (0.84)(a) $ (1.11) $ (0.13)(a) $ (0.23)(b)
=========== =========== =========== =========== ===========
Basic and diluted shares outstanding 2,778,000(a) 2,778,000(a) 4,456,538 2,778,000(a) 5,722,000(b)
=========== =========== =========== =========== ===========
</TABLE>
(a) Represents the pro forma loss per share and shares assumed to be
outstanding based on the number of shares outstanding immediately after our
spin-off from FuelCell.
(b) Due to losses we have incurred, dilutive instruments, consisting of
shares of Series A preferred stock, options and warrants, have been excluded
from diluted shares. At December 31, 1999, there were 264,000 shares of Series A
preferred stock convertible into 960,000 shares of common stock, related
warrants exercisable for 595,268 shares of common stock and options exercisable
for 627,098 shares of common stock.
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
EVERCEL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999 AND THE
TWO MONTHS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET
NOTE ASSETS
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE OF TOTAL
------------ --------------- PAID-IN ACCUMULATED FROM BATTERY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHAREHOLDER GROUP EQUITY
------ ------ ------ ------ ------- ------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER
31, 1996 -- $ -- -- $ -- $ -- $ -- $ -- $ 111 $ 111
Net loss -- -- -- -- -- -- -- (572) (572)
Contribution from
FuelCell -- -- -- -- -- -- -- 672 672
--------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT OCTOBER
31, 1997 -- -- -- -- -- -- -- 211 211
Net loss -- -- -- -- -- -- -- (2,325) (2,325)
Contribution from
Fuel Cell -- -- -- -- -- -- -- 2,537 2,537
--------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT OCTOBER
31, 1998 -- -- -- -- -- -- -- 423 423
Net intercompany
activity -- -- -- -- -- -- -- 96 96
Net loss pre-spin -- -- -- -- -- -- -- (505) (505)
Common stock issued 2,777,712 28 -- -- (14) -- -- (14) --
Stock issued under
rights offering 2,777,712 28 -- -- 7,493 -- -- -- 7,521
Stock options
exercised 166,666 1 -- -- 499 -- (300) -- 200
Net loss post
spin-off -- -- -- -- -- (4,456) -- -- (4,456)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT OCTOBER
31, 1999 5,722,090 57 -- -- 7,978 (4,456) (300) -- 3,279
Preferred stock
issued -- -- 264,000 3 6,128 -- -- -- 6,131
Net loss -- -- -- -- -- (1,320) -- -- (1,320)
Preferred stock
dividends -- -- -- -- (22) -- -- -- (22)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER
31, 1999 5,722,090 $ 57 264,000 $ 3 $ 14,084 $ (5,776) $ (300) $ -- $ 8,068
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
EVERCEL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999, AND
TWO MONTHS ENDED DECEMBER 31, 1998 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED TWO MONTHS ENDED
--------------------------------------- --------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (572) $(2,325) $(4,961) $ (358) $(1,320)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization 40 45 181 8 54
(Increase) decrease in operating
assets:
Accounts receivable 9 16 (197) (19) 21
Inventories -- -- (192) (102) 33
Other current assets (42) 42 (56) -- --
Increase (decrease) in operating
liabilities:
Accounts payable 12 36 485 61 (147)
Accrued liabilities 1 32 376 12 (144)
Other, net -- (332) 290 (65) 21
------- ------- ------- ------- -------
Net cash used in operating activities (552) (2,486) (4,074) (463) (1,482)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (120) (652) (1,321) (177) (352)
------- ------- ------- ------- -------
Net cash used in investing activities (120) (652) (1,321) (177) (352)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from FuelCell -- 603 -- 218 --
Repayment to FuelCell -- -- (603) -- --
Proceeds from common stock issued -- -- 7,721 -- --
Proceeds from preferred stock issued -- -- -- -- 6,131
Contributions from FuelCell 672 2,536 96 422 --
------- ------- ------- ------- -------
Net cash provided by financing
activities 672 3,139 7,214 640 6,131
------- ------- ------- ------- -------
Net increase in cash and cash
equivalents -- 1 1,819 -- 4,297
Cash and cash equivalents - beginning
of period -- -- 1 1 1,820
------- ------- ------- ------- -------
Cash and cash equivalents - end of
period $ -- $ 1 $ 1,820 $ 1 $ 6,117
======= ======= ======= ======= =======
CASH PAID DURING THE PERIOD FOR:
Interest $ -- $ -- $ 18 $ -- $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
(1) BASIS OF PRESENTATION
On October 6, 1999, the board of directors voted to change the fiscal
year end of Evercel, Inc. (the "Company") from October 31 to December 31. The
accompanying financial statements represent the financial position and results
of operations of the Company as of and for the two months ended December 31,
1999; the financial position of the Company at October 31, 1999 and the results
of operations of the Battery Group of FuelCell Energy, Inc. ("FuelCell") for the
period from November 1, 1998 through February 21, 1999 and the results of
operations of the Company from February 22, 1999 through October 31, 1999; the
financial position and the results of operations of FuelCell's Battery Group as
of and for the two months ended December 31, 1998 (unaudited); the financial
position and results of operations of FuelCell's Battery Group as of and for the
twelve months ended October 31, 1998; and the results of operations of Fuel
Cell's Battery Group for the twelve months ended October 31, 1997.
Comparative amounts for the two months ended December 31, 1998 are
unaudited. In the opinion of management, the information presented in the
unaudited two month statement reflects all adjustments necessary for a fair
presentation of the Company's results of operations for that period.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is engaged in the design and manufacture of innovative,
patented nickel-zinc rechargeable batteries, as well as the research and design
of other advanced battery technologies. The Company believes the nickel-zinc
battery has commercial applications in markets requiring long cycle life, light
weight and relative cost efficiency.
SPIN-OFF FROM FUELCELL ENERGY, JOINT VENTURES AND LICENSE AGREEMENTS
On February 22, 1999, FuelCell effected a spin-off of the Company by
deconsolidating the financial statements of the Company and a Joint Venture from
its consolidated financial statements. As part of the spin-off of the Company,
FuelCell transferred capital assets (net), prepaid spin-off costs, accounts
receivable and short-term liabilities amounting to $1,228,000, $501,000, $36,000
and $1,096,000, respectively. FuelCell distributed to its shareholders in a
tax-free distribution one share of Evercel common stock for every three shares
of common stock of FuelCell held on the record date of February 22, 1999. On
April 5, 1999, the Company completed a rights offering of its shares at $3.00
per share and began trading on the Nasdaq Small Cap market and the Boston Stock
Exchange.
In February 1998, FuelCell entered into a the Nan Ya License Agreement
with a joint venture between Nan Ya Plastics Corporation of Taiwan, a Formosa
Plastics Group company, and Xiamen Three Circles Co., Ltd. of Xiamen, China for
the use of the Company's nickel-zinc batteries in electric and hybrid electric
vehicles in China, Taiwan, Hong Kong and Macao on an exclusive basis and for
certain other Southeast Asian countries on a non-exclusive basis. The license
agreement calls for the payment of $5.0 million in three stages and a royalty
for the exclusive and non-exclusive territories. The payments include $1.5
million received by FuelCell in 1998, of which $1.3 million and $0.2 million,
F-7
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
respectively were recorded on FuelCell's financial statements in 1999 and 1998.
A further $2.0 million is to be paid to the Company based on completion of cycle
life testing that was substantially achieved in December, 1999 and a final
payment of $1.5 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, FuelCell also entered into a Technology Transfer and
License Contract (the "Three Circles License Agreement") with Xiamen Three
Circles-ERC Battery Corp., Ltd. for the use of the Company's nickel-zinc
batteries in electric bicycles, scooters, three-wheel vehicles, off-road
vehicles, and miner's safety lamps in China on an exclusive basis and Southeast
Asia on a non-exclusive basis. The license included an initial payment to
FuelCell of $3 million. In connection with the Three Circles License Agreement,
FuelCell also entered into a joint venture agreement with Xiamen Three Circles
Co., Ltd., used this $3.0 million as its initial investment in the joint venture
and subsequently contributed an additional $80,500 to receive a 50.5% share of
the joint venture called Xiamen Three Circle-ERC Battery Corp. (the "Joint
Venture"). Through December 31, 1999, the results of operations of the Joint
Venture are immaterial. Pursuant to the Three Circles License Agreement, the
Joint Venture must also pay the Company certain royalties based upon the net
sales of nickel-zinc batteries sold, leased or transferred in the applicable
territories. In addition the Joint Venture may sub-license the Company's
technology to third parties in China, Hong Kong, Taiwan and Macao on a
non-exclusive basis.
In accordance with a License Assistance Agreement entered into between
the Company and FuelCell, the Company has agreed to provide all services and
assistance necessary for it to effectively fulfill, on behalf of FuelCell, all
of the FuelCell's obligations under the Joint Venture and the related license
agreement until such time as FuelCell's obtains the approval from the Chinese
partner and appropriate Chinese governmental authority for the assignment of
such agreements to the Company. In return for such assistance, FuelCell will pay
to the Company and the Company will pay to FuelCell an amount equal to the sum
of all money, dividends, profits, reimbursements, distributions and payments
actually paid to FuelCell or paid by FuelCell in cash or in kind or otherwise
accruing to FuelCell pursuant to the Joint Venture contract and related license
agreement. All expenses and costs incurred by the Company in meeting the
obligations under the License Assistance Agreement shall be solely those of the
Company, and FuelCell shall not be liable for their payment. The Company
accounts for its involvement in the Joint Venture under the License Assistance
Agreement in a manner similar to the equity method of accounting as a result of
the fact that it does not have significant control over the Joint Venture.
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of money market deposits with
financial institutions.
INVENTORIES
Inventories consist principally of raw materials and are stated at the
lower of cost or market.
F-8
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation provided on the straight-line method over the estimated useful
lives of the respective assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the estimated useful lives of the
assets or the term of the lease. When property is sold or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in operations for the period.
REVENUE RECOGNITION
Revenue on product sales is recognized at the time of shipment.
INTELLECTUAL PROPERTY
Intellectual property including patents and know-how is carried at no
value.
STOCK OPTION PLAN
Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," encourages entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employees stock option grants as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company applies the recognition provisions of APB Opinion No. 25 and provides
the pro forma disclosure provisions of SFAS No. 123.
EARNINGS PER SHARE (EPS)
Basic earnings per share are based upon the weighted average common
shares outstanding during the period. The Company has computed dilutive EPS
without consideration to potentially dilutive instruments due to the losses
incurred by the Company. If the Company had computed dilutive shares considering
dilutive instruments, the fully diluted shares outstanding would have been
7,940,456 at December 31 and 6,353,188 at October 31, 1999.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-9
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
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.
Prior to the spin-off by FuelCell, the Battery Business Group was
included in the consolidated tax filings of FuelCell. The provision for income
taxes of the Company represents an allocation of a portion of the FuelCell
consolidated U.S. federal income tax provision to the battery group for the
period during which the Company was a part of FuelCell. The allocated tax
provision is determined based upon the income or loss of each group as if a
separate tax return was filed. If FuelCell is unable to recognize the tax
benefit of an operating loss generated by a group through offset of the loss
against income of other members of the consolidated group, or carryback of the
loss to reduce prior year's consolidated taxable income, such benefit is not
allocated to the group. To the extent that FuelCell is subsequently able to
recognize previously unrecorded tax benefits relating to losses of a group, the
benefit is allocated to that group, as the group generates future taxable income
up to the amount of prior losses giving rise to the unrecognized tax benefit.
ACCOUNTING CHANGES
Pursuant to Financial Accounting Standards Board ("FASB") Statement No.
130, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". The
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
For the Company, comprehensive income (loss) is the same as net income (loss).
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" requires that an entity recognize all derivative instruments as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. As amended, this statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not expect the adoption of this statement to have a material impact on its
financial position or results of operations because it does not currently
purchase derivative instruments or enter into hedging activities.
During 1998, the American Institute of Certified Public Accountants
("AICPA") released its Statement of Position No. 98-1 ("SOP 98-1") "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" and
Statement of Position No. 98-5 ("SOP 98-5") "Reporting on the Costs of Start-Up
Activities," both of which are effective for fiscal years beginning after
December 15, 1998. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 also requires that the
costs related to the preliminary project stage and the post-implementation stage
of an internal-use computer software development project be expensed as
incurred. SOP 98-5 requires that the costs of start-up activities be expensed as
incurred. SOP 98-5 requires companies to report the initial application of the
F-10
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
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) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
October 31, October 31, December 31,
1998 1999 1999
---- ---- ----
Joint Venture $ -- $ 195 $ 174
U.S. Government 12 19 19
Commercial customers (samples) 5 5 5
Allowance for uncollectible amounts -- (5) (5)
----- ----- -----
Net Total $ 17 $ 214 $ 193
===== ===== =====
(4) INVENTORY
Inventories at October 31, 1998 and 1999 and December 31, 1999
consisted of the following:
October 31, October 31, December 31,
1998 1999 1999
---- ---- ----
Raw Materials $ - $ 146 $ 123
Work in Progress $ - 69 23
Finished Goods - 2 13
----- ----- -----
Gross Inventories $ - 217 159
Reserve for obsolescence - (25) -
----- ------ -----
Net inventory balance $ - $ 192 $ 159
===== ===== =====
F-11
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at October 31, 1998 and 1999 and December
31, 1999 consisted of the following:
<TABLE>
<CAPTION>
October 31, October 31, December 31, Estimated
1998 1999 1999 Useful Life
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Machinery and equipment $ 1,068 $ 1,944 $ 2,073 3-8 Years
Furniture and fixtures 9 204 204 10 Years
Leasehold improvements -- 148 148 5 Years
Construction-in-progress 603 705 928
------- ------- -------
1,680 3,001 3,353
Less, accumulated depreciation
and amortization (855) (1,010) (1,064)
------- ------- -------
Total property, plant and equipment $ 825 $ 1,991 $ 2,289
======= ======= =======
</TABLE>
(6) OTHER ASSETS
Other assets at October 31, 1998 and 1999 and December 31, 1999
consisted of the following:
October 31, October 31, December 31,
1998 1999 1999
---- ---- ----
Rights offering costs $ 307 $ -- $ --
Security Deposits 14 17 17
Organizational Costs 12 -- --
------- ------- -------
$ 333 $ 17 $ 17
======= ======= =======
(7) COMMITMENTS AND CONTINGENCIES
On January 15, 1999, the Company entered into a lease for five years
with an option to extend for an additional five years. Minimum lease payments
are $171,000 for the first three years (1999, 2000 and 2001) with increases to
$178,000 in year four (2002) and $185,000 in year five (2003).
F-12
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
(8) STOCK OPTION PLAN
The Board had adopted the 1998 Stock Option Plan in anticipation of the
spin-off of the Company from Fuel Cell as a separate publicly-held company.
Under the terms of the Plan, options to purchase up to 600,000 (177,334 shares
have been exercised) shares of common stock may be granted to officers, key
employees and directors of the Company. The board of directors has recommended
to the stockholders that the common shares issuable under the Plan be increased
to 1,300,000. Pursuant to the Plan, the Board is authorized to grant incentive
stock options or nonqualified options and stock appreciation rights to officers
and key employees of the Company and may grant nonqualified options and stock
appreciation rights to directors of the Company.
Stock options have restrictions as to transferability. The option
exercise price shall be fixed by the Board but, in the case of incentive stock
options, shall not be granted at an exercise price less than 100% of the fair
market value of the shares subject to the option on the date the option is
granted. Stock appreciation rights may be granted in conjunction with options
granted under the Plans. Stock options that have been granted are exercisable
commencing one year after grant at the rate of 25% of such shares in each
succeeding year, unless otherwise agreed.
In connection with the hiring of the Company's Chairman of the Board
and Chief Executive Officer, options were granted to purchase 166,666 and
200,000 shares of the Company's common stock at the purchase price of $3.00 per
share (the market value at the date of the grant). In addition, the Company and
FuelCell agreed to issue the Chairman of the Board one share of the Company's
Common Stock for every 2.25 shares of FuelCell Common Stock which he purchases
pursuant to his exercise of FuelCell Options. Under this agreement, an option
has been granted to acquire a total of 166,666 shares of Common Stock at an
exercise price based proportionally upon the relative fair market value of
FuelCell Common Stock and the Company's Common Stock.
<TABLE>
<CAPTION>
Risk Free
Dividend Interest Rate Expected Volatility
Rate Range Life Factor
-------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Two Months Ended December 31, 1999 0% 4.70-6.35% 10 years .5971-.6225
Years Ended October 31, 1999 0% 4.31-6.35% 10 years .5495-.6225
</TABLE>
F-13
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
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.
Year ended Two Months ended
October 31, December 31,
1999 1999
---------- ----------------
Net Loss:
As reported $ (4,961) $ (1,320)
Pro forma (6,128) (1,350)
Loss per share:
As reported - Basic $ (1.11) $ (0.23)
Pro forma - Basic (1.38) (0.24)
Pro forma net income reflects only options granted in 1999.
F-14
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
The following table summarizes the plan activity:
<TABLE>
<CAPTION>
Number Range of Weighted average
of Options Option Prices Option Price
---------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at October 31, 1998
Granted 649,764 $3.00 - $6.28 $ --
Exercised (166,666) $3.00 - $3.00 $ 3.48
Cancelled (18,666) $5.72 - $5.72 $ 5.72
-------- -------
Outstanding at October 31, 1999 464,432 $3.00 - $6.28 $ 3.52
Granted 2,000 $10.00 - $10.00 $ 10.00
Cancelled (6,000) $5.72 - $5.72 $ 5.72
-------- -------
Outstanding at December 31, 1999 460,432 $ 3.00-$10.00 $ 3.52
======== =======
</TABLE>
Options outstanding and exercisable at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$3.00 to $4.75 389,998 8.90 $ 3.09 98,498 $ 3.00
$5.72 TO $10.00 70,434 9.47 $ 5.89 -- --
--------------- --------- ------ ------- -------- -------
$3.00 to $10.00 460,432 8.99 $ 3.52 98,498 $ 3.00
=============== ========= ====== ======= ======== =======
</TABLE>
(9) PRIVATE PLACEMENT OF EQUITY SECURITIES
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 $6.88. The Preferred
Shares are callable by the Company three years following the issue date, or at
any time one year following the issue date if certain Common stock price levels
are reached. Each Preferred Share also carries a five-year warrant, which is
exercisable into two shares of common stock at $8.25 per Share. The warrants are
callable at any time after one year following the issue date if certain common
stock price levels are reached during the warrant's five-year period. Each owner
of Series A Shares is subject to a call by the Company to purchase additional
F-15
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
Convertible Preferred Shares in an amount equal to 50 percent of its investment
in Series A Shares. The call right by the Company expires August 31, 2000.
(10) EMPLOYEE BENEFITS
Subsequent to October 31, 1999, the Company started a defined contribution
401(K) plan ("The Safe Harbor Plan"). The plan provides for the Company to match
employee contributions to The Safe Harbor Plan up to a maximum of 3% of the
employees' gross W-2 earnings. For the years ended October 31, 1999 and 1998,
the company participated in the FuelCell Capital Accumulation Plan. The Company
contributed $2 and $28 to this plan for those periods, respectively. For the two
months ended December 31, 1998, the Company contributed $8 to the Safe Harbor
Plan. The Company also participated in the FuelCell Pension Plan for the year
ended October 31, 1998, to which the Company contributed $33.
(11) INCOME TAXES
The components of income tax expense (benefit) were as follows for the years
ended October 31, 1998 and 1999 and the two months ended December 31, 1999:
October 31, October 31, December 31,
1998 1999 1999
----------- ----------- ------------
Current:
Federal $(1,006) $ (315) --
State -- (45) --
------- ----
(1,006) (360) --
------- ------- ----
Deferred:
Federal -- -- --
State -- -- --
------- ------- ----
Total income tax benefit $(1,006) $ (360) $--
======= ======= ====
F-16
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
The reconciliation of the statutory income tax rate to the Company's
effective income tax rate for the years ended October 31, 1998 and 1999 and the
two months ended December 31, 1999 was as follows:
October 31, October 31, December 31,
1998 1999 1999
---- ---- ----
Statutory federal income tax rate (34.0%) (34.0%) (34.0%)
Nondeductible expenditures 3.8% (0.4%) 1.1%
State tax, net of federal benefit -- (0.9%) --
Valuation Allowance -- 28.5% 32.9%
---- ---- ----
Effective income tax rate (30.2%) (6.8%) 0.0%
==== ==== ====
The Company's deferred tax assets and liabilities consisted of the
following at October 31, 1999 and December 31, 1999:
October 31, December 31,
1999 1999
--------------- ------------
Deferred tax assets:
Incentive bonuses $ 6 $ --
Vacation accrual 15 46
Allowance for doubtful accounts -- 2
Net operating loss carryforwards 1,929 2,451
-------- --------
Gross deferred tax assets 1,950 2,499
Valuation allowance (1,937) (2,445)
-------- --------
Deferred tax assets after Valuation
allowance 13 54
Deferred liability -
Accumulated depreciation (30) (40)
Incentive bonuses -- (30)
Other -- (1)
-------- --------
Gross deferred tax liability (30) (71)
Net deferred tax assets/liability) $ (17) $ (17)
========= =========
The Company has a federal net operating loss carryforward of
approximately $5.8 million, of which $4.4 million will expire in 2018 and $1.4
million will expire in 2019.
F-17
<PAGE>
EVERCEL, INC.
Notes to Financial Statements
October 31, 1998, October 31, 1999 and December 31, 1999
(dollars in thousands except per share amounts)
(12) SUBSEQUENT EVENT
The Company declared a 100% stock dividend having the effect of 2 for 1
stock split payable on March 22, 2000 to shareholders of record on March 7,
2000. All share and per share data have been adjusted retroactively to give
effect to the stock dividend.
F-18
<PAGE>
EVERCEL, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1999 2000
------- (UNAUDITED)
------------ -------------
Current assets:
Cash and cash equivalents $ 6,117 $ 9,596
Accounts receivable 193 49
Inventories 159 598
Other current assets 35 406
-------- --------
Total current assets 6,504 10,649
Property, plant and equipment, net 1,703 3,213
Other assets, including deposits on new
equipment, net 603 5,311
-------- --------
TOTAL ASSETS $ 8,810 $ 19,173
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 391 $ 1,208
Accrued liabilities 351 1,259
-------- --------
Total current liabilities 742 2,467
Long-term liabilities -- 115
-------- --------
Total liabilities 742 2,582
Shareholders' equity:
Preferred Stock ($0.01 par value);
1,000,000 shares authorized: 264,000
issued and outstanding at September
30, 2000 and December 31, 1999 (with
cumulative dividends at 8%) 3 3
Common Stock ($0.01 par value);
30,000,000 shares authorized:
7,137,504 and 5,722,090 issued and
outstanding at September 30, 2000 and
December 31, 1999, respectively 57 71
Additional paid-in-capital 14,084 30,103
Note receivable from shareholder (300) (300)
Accumulated deficit (5,776) (13,286)
-------- --------
Total shareholders' equity 8,068 16,591
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 8,810 $ 19,173
======== ========
See notes to condensed financial statements.
F-19
<PAGE>
EVERCEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
Revenues $ -- $ 94
Cost and expenses:
Cost of revenues -- 286
Administrative and selling
expenses 1,817 5,079
Research and development 1,946 3,063
------- -------
Total operating costs and
expenses 3,763 8,428
------- -------
Loss from operations (3,763) (8,334)
Interest income, net 80 454
License fee income -- 572
Losses of unconsolidated affiliate -- (114)
Other income (expense) (1) --
------- -------
Loss before income taxes (3,684) (7,422)
Income tax expense (benefit) (111) 88
------- -------
Net loss (3,573) (7,510)
Preferred stock dividends -- (396)
------- -------
Net loss - common shareholders $(3,573) $(7,906)
======= =======
Basic and diluted loss per share $ (0.80) $ (1.22)
======= =======
Basic and diluted shares outstanding 4,466 6,455
======= =======
See notes to condensed financial statements.
F-20
<PAGE>
EVERCEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,573) $ (7,510)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 128 286
(Increase) decrease in operating assets:
Accounts receivable 13 144
Inventories (155) (439)
Other current assets -- (371)
Increase (decrease) in operating liabilities:
Accounts payable 49 817
Accrued liabilities 297 798
Other, net 291 152
-------- --------
Net cash used in operating activities (2,950) (6,123)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,107) (3,887)
Investment in subsidiaries -- (2,654)
-------- --------
Net cash used in investing activities (1,107) (6,541)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from FuelCell Energy, Inc (821) --
Preferred stock dividends paid -- (286)
Proceeds from common stock issued 7,735 16,429
Contributions from FuelCell Energy, Inc. (340) --
-------- --------
Net cash provided by financing activities 6,574 16,143
-------- --------
Net increase in cash and cash equivalents 2,517 3,479
Cash and cash equivalents - beginning of period 1 6,117
-------- --------
Cash and cash equivalents - end of period $ 2,518 $ 9,596
======== ========
CASH PAID DURING THE PERIOD FOR:
Income taxes $ -- $ 88
======== ========
See notes to condensed financial statements.
F-21
<PAGE>
EVERCEL, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
On October 6, 1999, the Board of directors voted to change the fiscal year end
of Evercel, Inc. from October 31 to December 31. The accompanying financial
statements represents our financial position as of September 30, 2000 and
December 31, 1999, and the results of operations of Evercel, Inc. for the three
and nine months ended September 30, 2000 , the three months ended September 30,
1999 and of the operations of the Battery Group of FuelCell Energy, Inc
("FuelCell") for the period January 1, 1999 through February 21, 1999 and of
Evercel from February 22, 1999 through September 30, 1999.
Comparative amounts for the three and nine months ended September 30 are
unaudited. In the opinion of management, the information presented in the
unaudited three and nine month statements reflects all adjustments necessary for
a fair presentation of our results of operations for those periods.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
We are engaged in the design and manufacture of innovative, patented nickel-zinc
rechargeable batteries, as well as the research and design of other advanced
battery technologies. The nickel-zinc battery has commercial applications in
markets requiring long cycle life, light weight and relative cost efficiency.
SPIN-OFF FROM FUELCELL ENERGY, JOINT VENTURES AND LICENSE AGREEMENTS
On February 22, 1999, FuelCell effected a spin-off of us by deconsolidating the
financial statements of Evercel and a Joint Venture from its consolidated
financial statements. As part of the spin-off , FuelCell transferred capital
assets (net), prepaid spin-off costs, accounts receivable and short-term
liabilities amounting to $1,228,000, $501,000, $36,000 and $1,096,000,
respectively. FuelCell distributed to its shareholders in a tax-free
distribution one share of Evercel common stock for every three shares of common
stock of FuelCell held on the record date of February 22, 1999. On April 5,
1999, we completed a rights offering of our shares at $3.00 per share and began
trading.
In February 1998, FuelCell entered into the Nan Ya License Agreement with a
joint venture between Nan Ya Plastics Corporation of Taiwan, a Formosa Plastics
Group company, and Xiamen Three Circles Co., Ltd. of Xiamen, China for the use
of our nickel-zinc batteries in electric and hybrid electric vehicles in China,
Taiwan, Hong Kong and Macao on an exclusive basis and for certain other
Southeast Asian countries on a non-exclusive basis. The license agreement calls
for the payment of $5.0 million in three stages and a royalty for the exclusive
and non-exclusive territories. The payments include $1.5 million received by
FuelCell in 1998, of which $1.3 million and $0.2 million, respectively, were
recorded on FuelCell's financial statements in 1999 and 1998. A further $2.0
million was to be paid to us based on cycle life testing that was substantially
achieved in December, 1999. Although we believe the principal milestone
conditions have been achieved and we have received $572,000, we cannot guarantee
that we will receive the remaining balance. If we receive the balance of the
$2.0 million payment, we may also be entitled to a final payment of $1.5 million
to be paid to us upon completion of duplication of the battery at its facilities
in China. The Nan Ya License Agreement provides that we have the right to invest
F-22
<PAGE>
the final payment in equity in the joint venture manufacturing and sales
organization formed between Nan Ya Plastics and Xiamen Three Circles Co., Ltd.
In July 1998, FuelCell also entered into a Technology Transfer and License
Contract (the "Three Circles License Agreement") with Xiamen Three Circles-ERC
Battery Corp., Ltd. for the use of our nickel-zinc batteries in electric
bicycles, scooters, three-wheel vehicles, off-road vehicles, and miner's safety
lamps in China on an exclusive basis and Southeast Asia on a non-exclusive
basis. The license included an initial payment to FuelCell of $3 million. In
connection with the Three Circles License Agreement, FuelCell also entered into
a joint venture agreement with Xiamen Three Circles Co., Ltd., used this $3.0
million as its initial investment in the joint venture and subsequently
contributed an additional $80,500 to receive a 50.5% share of the joint venture
called Xiamen Three Circle-ERC Battery Corp. (the "Joint Venture"). Pursuant to
the Three Circles License Agreement, the Joint Venture must also pay us certain
royalties based upon the value of nickel-zinc batteries sold, leased or
transferred in the applicable territories. In addition, the Joint Venture may
sub-license our technology to third parties in China, Hong Kong, Taiwan and
Macao on a non-exclusive basis. In August 2000, we invested an additional $2.5
million in the joint venture.
In accordance with a License Assistance Agreement entered into between us and
FuelCell, we have agreed to provide all services and assistance necessary for it
to effectively fulfill, on behalf of FuelCell, all of FuelCell's obligations
under the Joint Venture and the related license agreement until such time as
FuelCell obtains the approval from the Chinese partner and appropriate Chinese
governmental authority for the assignment of such agreements to us. In return
for such assistance, FuelCell will pay to us an amount equal to the sum of all
money, dividends, profits, reimbursements, distributions and payments actually
paid to FuelCell pursuant to the Joint Venture contract and related license
agreement. We would pay FuelCell all payments made by FuelCell pursuant to the
Joint Venture contract and related license agreement. All expenses and costs
incurred by us in meeting the obligations under the License Assistance Agreement
shall be solely ours, and FuelCell shall not be liable for their payment. We
account for our involvement in the Joint Venture under the License Assistance
Agreement under the equity method of accounting because we do not have
significant control over the Joint Venture.
On July 13, 2000 Madison Capital Group, USA, LLC, acting as financial advisor to
the participating investors, announced the incorporation of OXYGEN, S.p.A. in
Italy. We have invested $154,000 in Oxygen, representing an initial investment
interest of 26.7%, and we will be the exclusive supplier of batteries to Oxygen,
which has been created to provide a complete transportation solution in Italy,
including non-polluting electric two-wheeled vehicles and the necessary
infrastructure to make these vehicles feasible and affordable.
(3) CAPITALIZATION
We declared a 100% stock dividend having the effect of a 2-for-1 stock split
payable on March 22, 2000 to shareholders of record on March 7, 2000. All share
and per share data have been adjusted retroactively to give effect to the stock
dividend.
On May 12, 2000 we completed a stock offering of 1,250,000 common shares at
$12.50 per share, and on May 22, 2000 the underwriter, Burnham Securities Inc.,
exercised an over-allotment option of 141,080 shares resulting in total net
proceeds of $15,940,000.
F-23
<PAGE>
On July 19, 2000 at our Annual Meeting, our shareholders approved an increase in
the number of common shares authorized from 10 million to 30 million and
expanded the authorization of shares under the 1998 Equity Incentive Plan from
600,000 to 1,300,000 shares.
(4) INVENTORY
Inventories consists of the following:
December September
31, 30,
1999 2000
---- ----
Raw Materials $ 123 $ 501
Work in Progress 23 97
Finished Goods 13 --
------ ------
Total Inventories $ 159 $ 598
====== ======
(5) SUBSEQUENT EVENTS
On October 12, 2000, we signed a joint Memorandum of Understanding with Oxygen,
S.p.A. and Eurosolare, the solar energy division of the ENI Group of Italy, to
develop a series of solar powered electric vehicle maintenance and charging
stations in key areas of major cities in Italy for use with our nickel-zinc
batteries and traditional batteries. The charging stations will be used with
Oxygen's electric scooters, as well as other electric vehicles. The first
"stations" are planned for Rome (two) and Palermo (one) by December 31, 2000.
Currently there are no further financial commitments to either Oxygen or
Eurosolare.
F-24
<PAGE>
================================================================================
__________, 2001
[EVERCEL LOGO]
3,000,000 SHARES OF COMMON STOCK
----------------
PROSPECTUS
----------------
MORGAN KEEGAN & COMPANY, INC. BURNHAM SECURITIES INC.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
NATURE OF EXPENSE AMOUNT
----------------- ------
SEC Registration Fee $ 8,194
NASD Filing Fee $ 3,778
Nasdaq National Market Listing Fee $*
Accounting Fees and Expenses $*
Legal Fees and Expenses $*
Printing Expenses $*
Blue Sky Qualification Fees and Expenses $*
Transfer Agent's Fee $*
Miscellaneous $*
--------
TOTAL $500,000
*To be completed by amendment.
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
our certificate of incorporation provides that no director of Evercel shall be
personally liable to Evercel or its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to Evercel or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) in respect of unlawful dividend payments or stock
redemptions or purchases, or (4) for any transaction from which the director
derived an improper personal benefit.
Our by-laws provide for indemnification by Evercel of its officers,
directors and from time-to-time its employees and agents under certain
circumstances against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with prosecuting,
defending, investigating or being a witness in any threatened, pending or
completed legal proceeding in which any such person is involved by reason of the
fact that such person is or was an officer, director, employee or agent of the
registrant if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of Evercel,
and, with respect to criminal actions or proceedings, if such person had no
reasonable cause to believe his or her conduct was unlawful.
Prior to the offering, we will have entered into indemnification
agreements with each of our directors. The form of indemnification agreement
provides that we will indemnify our directors for expenses incurred because of
their status as a director to the fullest extent permitted by Delaware law, our
certificate of incorporation and our by-laws.
<PAGE>
ITEM 16. EXHIBITS
(a) EXHIBITS. The following is a complete list of exhibits filed or incorporated
by reference as part of this Registration Statement.
EXHIBIT
NO. DESCRIPTION
------- -----------
1 Form of Underwriting Agreement*
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to exhibit of the same number
contained in the Company's SB-2/A Amendment 2 dated February 9,
1999).
3.2 Certificate of the Designation, Powers, Preference and Rights of
the Series A Cumulative Convertible Preferred Stock, the Series
A-1 Cumulative Convertible Preferred Stock and the Series B
Cumulative Convertible Preferred Stock (incorporated by reference
to exhibit of the same number contained in the Company's
Registration Statement on Form S-3 (No. 333-33090).
3.3 Form of Warrant issued to holders of Series A preferred stock and
placement agent, dated December 16, 1999 ((incorporated by
reference to exhibit of the same number contained in the
Company's Registration Statement on Form S-3 (No. 333-33090).
3.4 Form of Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
4.1 Form of Specimen Stock Certificate (incorporated by reference to
exhibit of the same number contained in the Company's SB-2/A
Amendment 2 dated February 9, 1999).
4.2 Registration Rights Agreement dated December 16, 1999
(incorporated by reference to exhibit of the same number
contained in the Company's Registration Statement on Form S-3
(No. 333-33090).
5.1 Opinion of Robinson & Cole LLP.*
10.1 Sales Agency Agreement, dated December 16, 1999, between Burnham
Securities Inc. and the Company.*
23.1 Consent of KPMG LLP
23.2 Consent of Robinson & Cole LLP (included in Exhibit 5.1)
24 Power of Attorney (contained in the signature page to this
Registration Statement).
* To be filed by amendment.
<PAGE>
(b) FINANCIALS STATEMENT SCHEDULES
All schedules have been omitted because they are not required or
because the required information is given in the consolidated financial
statements or notes to those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
ARTICLE 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Danbury, state of Connecticut, on January 5, 2001.
EVERCEL, INC.
(Registrant)
By:/s/ Robert L. Kanode
---------------------------------------------------
Name: Robert L. Kanode
Title: President and Chief Executive Officer
We, the undersigned directors and officers of Evercel, Inc., do hereby
constitute and appoint each of Mr. Robert L. Kanode and Mr. Daniel J. Samela,
each with full power of substitution, our true and lawful attorney-in-fact and
agent, to do any and all acts and things in our names and on our behalf in our
capacities stated below, which acts and things either of them may deem necessary
or advisable to enable Evercel, Inc. to comply with the Securities Act of 1933,
and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this registration statement, including
specifically, but not limited to, power and authority to sign for any and all of
us in our names, in the capacities stated below, any and all amendments
(including post-effective amendments) hereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission; and we do hereby ratify
and confirm all that they shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Robert L. Kanode
---------------------------------------------------
Name: Robert L. Kanode Date: January 4, 2001
Title: President, Chief Executive Officer
and Director
/s/ Allen Charkey
---------------------------------------------------
Name: Allen Charkey Date: January 4, 2001
Title: Executive Vice President and Chief
Technology Officer
/s/ Daniel J. Samela
---------------------------------------------------
Name: Daniel J. Samela Date: January 4, 2001
Title: Chief Financial and Accounting
Officer
<PAGE>
/s/ Jerry D. Leitman
---------------------------------------------------
Name: Jerry D. Leitman Date: January 4, 2001
Title: Chairman of the Board of Directors
/s/ Thomas L. Kempner
---------------------------------------------------
Name: Thomas L. Kempner Date: January 4, 2001
Title: Director
/s/ William A. Lawson
---------------------------------------------------
Name: William A. Lawson Date: January 4, 2001
Title: Director
/s/ Warren D. Bagatelle
---------------------------------------------------
Name: Warren D. Bagatelle Date: January 4, 2001
Title: Director
---------------------------------------------------
Name: James D. Gerson Date: /2001
Title: Director
/s/ Robert Gable
---------------------------------------------------
Name: Robert Gable Date: January 4, 2001
Title: Director
/s/ John H. Gutfreund
---------------------------------------------------
Name: John H. Gutfreund Date: January 4, 2001
Title: Director
