SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| Mark One | |
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended:September 30, 2001 |
OR
| [ ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from: _____________ to ________________ | |
| Commission File Number:0-25411 |
EVERCEL, INC. |
(Exact Name of Registrant as Specified in Its Charter) |
DELAWARE |
| 06-1528142 |
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(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification Number) |
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)
GARRY A. PRIME, PRESIDENT AND CHIEF EXECUTIVE OFFICER
EVERCEL, INC.
2 LEE MAC AVENUE
DANBURY, CONNECTICUT 06810
(203) 825-3900
(Name, Address Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock, par value $.01 as of November 7, 2001 was 10,477,375.
EVERCEL, INC.
FORM 10-Q
INDEX
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| Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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EVERCEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
ASSETS |
| September 30, |
| December 31, |
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Current assets: |
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Cash and cash equivalents |
| $ 19,695 |
| $ 12,195 |
Accounts receivable |
| 252 |
| 129 |
Inventories |
| 61 |
| 2,246 |
Other current assets |
| 246 |
| 470 |
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Total current assets |
| 20,254 |
| 15,040 |
Property, plant and equipment, net |
| 1,905 |
| 8,337 |
Other assets, net |
| 2,956 |
| 3,750 |
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TOTAL ASSETS |
| $ 25,115 |
| $ 27,127 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
| $ 746 |
| $ 1,519 |
Accrued salaries and benefits |
| 275 |
| 835 |
Current portion of long term debt |
| 1,324 |
| 302 |
Accrued liabilities |
| 3,508 |
| 1,510 |
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Total current liabilities |
| 5,853 |
| 4,166 |
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Long term debt |
| - |
| 1,195 |
Other non-current liabilities |
| 14 |
| 64 |
Minority interest |
| 5,688 |
| 5,588 |
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Total liabilities |
| 11,555 |
| 11,013 |
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Shareholders' equity: |
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Preferred Stock ($0.01 par value); 1,000,000 shares authorized: 186,500 and 196,500 issued and outstanding at September 30, 2001 and December 31, 2000, respectively (with cumulative dividends at 8%). |
| 2 |
| 2 |
Common Stock ($0.01 par value); 30,000,000 shares authorized: 10,477,375 and 7,431,952 issued and outstanding September 30, 2001 and December 31, 2000, respectively. |
| 105 |
| 74 |
Additional paid-in-capital |
| 58,563 |
| 33,644 |
Note receivable from shareholder | (300) |
| (300) | |
Accumulated deficit |
| (44,810) |
| (17,306) |
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Total shareholders' equity |
| 13,560 |
| 16,114 |
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
| $ 25,115 |
| $ 27,127 |
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See condensed notes to consolidated financial statements.
EVERCEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended | ||||
September 30, | September 30, | |||
2001 | 2000 | |||
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Revenues | $ 29 | $ 30 | ||
Cost and expenses: | ||||
Cost of revenues | 630 | 41 | ||
Administrative and selling expenses | 1,743 | 1,864 | ||
Research and development | 556 | 1,366 | ||
Impairment & other charges associated with shutdown of Virginia operations | 15,129 | - | ||
Total operating costs and expenses | 18,058 | 3,271 | ||
Loss from operations | (18,029) | (3,241) | ||
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Interest income, net | 132 | 220 | ||
License fee income | - | - | ||
Losses of unconsolidated affiliate | - | (71) | ||
Loss attributable to minority interest | (128) | - | ||
Loss before income taxes | (18,025) | (3,092) | ||
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Income tax expense | - | - | ||
Net loss | (18,025) | (3,092) | ||
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Preferred stock dividends | (93) | (132) | ||
Net loss - common shareholders | $ (18,118) |
| $ (3,224) | |
Basic and diluted loss per share | $ (1.73) | $ (0.45) | ||
Basic and diluted shares outstanding | 10,474 |
| 7,128 | |
See condensed notes to consolidated financial statements.
EVERCEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Nine Months Ended | ||||
| September 30, |
| September 30, | |
| 2001 |
| 2000 | |
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Revenues | $ 716 |
| $ 94 | |
Cost and expenses: |
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Cost of revenues | 6,102 |
| 286 | |
Administrative and selling expenses | 5,924 |
| 5,079 | |
Research and development | 1,546 |
| 3,063 | |
Impairment & other charges associated with shutdown of Virginia operations | 15,129 |
| - | |
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Total operating costs and expenses | 28,701 |
| 8,428 | |
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Loss from operations | (27,985) |
| (8,334) | |
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Interest income, net | 580 |
| 454 | |
License fee income | - |
| 572 | |
Losses of unconsolidated affiliate | - |
| (114) | |
Loss attributable to minority interest | (99) |
| - | |
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Loss before income taxes | (27,504) |
| (7,422) | |
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Income tax expense (benefit) | - |
| 88 | |
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Net loss | (27,504) |
| (7,510) | |
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Preferred stock dividends | (285) |
| (396) | |
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Net loss - common shareholders | $ (27,789) |
| $ (7,906) | |
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Basic and diluted loss per share | $ (2.77) |
| $ (1.22) | |
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Basic and diluted shares outstanding | 10,040 |
| 6,455 | |
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See condensed notes to consolidated financial statements.
EVERCEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended | ||||
| September 30, | September 30, | ||
2001 | 2000 | |||
Cash flows from operating activities: | ||||
Net loss | $ (27,504) | $ (7,510) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Depreciation and amortization | 1,126 | 286 | ||
Minority interest | 99 | - | ||
Write off of fixed assets | 8 | - | ||
Impairment & other charges associated with shutdown of Virginia operations | 15,129 | - | ||
(Increase) decrease in operating assets: | ||||
Accounts receivable | (246) | 144 | ||
Inventories | (2,510) | (439) | ||
Other current assets | (74) | (371) | ||
Increase (decrease) in operating liabilities: | ||||
Accounts payable | (773) | 817 | ||
Accrued liabilities | (947) | 798 | ||
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Other long term assets | (14) | 152 | ||
Net cash used in operating activities | (15,706) | (6,123) | ||
Cash flows from investing activities: | ||||
Capital expenditures | (1,379) | (3,887) | ||
Investment in subsidiaries | - | (2,654) | ||
Net cash used in investing activities | (1,379) | (6,541) | ||
Cash flows from financing activities: | ||||
Repayments on loans payable | (129) | - | ||
Repayments on leases payable | (94) | - | ||
Preferred stock dividends paid | (299) | (286) | ||
Net proceeds from common stock issued | 25,107 | 16,429 | ||
Net cash provided by financing activities | 24,585 | 16,143 | ||
Net increase in cash and cash equivalents | 7,500 | 3,479 | ||
Cash and cash equivalents - beginning of period | 12,195 | 6,117 | ||
Cash and cash equivalents - end of period | $ 19,695 | $ 9,596 | ||
Cash paid during the period for: | ||||
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Income taxes | $ - | $ 88 | ||
Interest paid | $ 101 | $ - | ||
See condensed notes to consolidated financial statements.
EVERCEL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying financial statements represent our financial position as of September 30, 2001 and December 31, 2000 and results of operations for the three and nine months ended September 30, 2001 and 2000.
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 reflect 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 nickel-zinc applications. The nickel-zinc battery has commercial applications in markets requiring long cycle life, light weight and relative cost efficiency. Prior to the first quarter of 2001 our operations had mainly consisted of research and development activities. During 2001, we began manufacturing and selling our batteries in two markets: 1) at our manufacturing facility in Newport News, Virginia, producing EvertrollÔ brand batteries on a limited basis, for electric trolling motors used in sport fishing boats, and 2) we own a majority interest in a joint venture in Xiamen, in the People's Republic of China (PRC) that manufactures rechargeable nickel-zinc batteries, on a limited basis, for scooter and bicycle markets in Europe and Asia.
In addition to our current target markets, we believe our battery technology has future applications in other markets, including: neighborhood electric vehicles, such as golf carts; wheelchairs; electric bicycles; uninterruptible power supplies, such as back-up power supplies for computers; yard tools, including lawn mowers and trimmers; and 42-volt battery systems for automobiles and trucks.
On September 5, 2001, we announced the closing of our Newport News, Virginia manufacturing facility and consolidation of manufacturing in China.
Principles of Consolidation
The accompanying consolidated financial statements include our accounts and the accounts of our two subsidiaries - the Xiamen Three Circles-ERC Battery Corp. joint venture and the Xiamen-ERC High Technology joint venture - consolidated subsequent to December 1, 2000. Prior to that date, the Xiamen Three Circles-ERC Battery Corp subsidiary was accounted for under the equity method.
(3) Closing of Virginia manufacturing facility
On September 5, 2001 we announced the closing of our Newport News, Virginia manufacturing facility. As a result, a charge of $15.1 million for costs associated with the closing of the facility was recorded in the third quarter as follows:
(Dollars in millions) | |||||||||||
| Original Charge | Cash | Non-cash | Accrual as of | |||||||
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Impairment of fixed assets | $ 7.5 | - | ($7.5) | - | |||||||
Write-off of inventories | 4.7 | - | (4.7) | - | |||||||
Tentative lease obligation settlement and other costs | 2.7 | - | - | 2.7 | |||||||
Severance and other personnel costs | 0.2 | - | - | .2 | |||||||
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| $15.1 | - | ($12.2) | $2.9 | |||||||
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Pursuant to our announcement, we ceased all production at the Virginia facility. Based on an undiscounted cash flow analysis, we deemed our fixed assets at both the Virginia facility and our Connecticut facility to be impaired. We reduced the values of these fixed assets to their estimated recovery value at September 30, 2001 and we anticipate finalizing the sale of the remaining assets at an auction in the fourth quarter of 2001.
The domestic inventory we have on-hand is considered to have minimal, if any, value. Therefore, we recorded a charge to write-off all domestic inventories at September 30, 2001.
Included in our charge are severance and other personnel costs for approximately twenty- two employees to be terminated within ninety days.
(4) Cash and Cash Equivalents
In compliance with the terms of the Newport News, Virginia lease signed July 10, 2000 with Oakland Investors, LLC., we have executed a $1,000,000 letter of credit as a form of rent security, which will restrict our use of cash and cash equivalents by the same amount.
Included in cash and cash equivalents is $7,629,000 held by our joint venture subsidiaries in Xiamen, in the Peoples Republic of China.
(5) Capitalization
On February 9, 2001 we completed a stock offering of 3,000,000 common shares at $9.00 per share, resulting in total net proceeds of $25,107,000 after commissions and other expenses.
Item 2: | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report contains forward looking statements, including statements regarding the Company's plans and expectations regarding the development and commercialization of its nickel-zinc battery technology. When used in this Report, the words "expects", "anticipates", "estimates", "should", "will", "could", "would", "may", and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Factors that could cause such a difference include, without limitation, general risks associated with product development, manufacturing and introduction, rapid technological changes and competition as well as other risks set forth in the Company's filings with the Securities and Exchange Commission. Reference is hereby made to those filings for a more complete discussion of the risk factors associated with the Company. The forward-looking statements contained herein speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which any such statement is based.
Overview
We develop, design and have begun to manufacture, on a limited basis, high-performance rechargeable batteries. Prior to 2001, our operations mainly consisted of research and development. We recognize revenue on the date our products are shipped.
Our operations were originally a part of FuelCell Energy, Inc. ("FuelCell"). FuelCell had formerly licensed the rights to manufacture scooter batteries through the Joint Venture. Under our license assistance agreement with FuelCell, we had assumed the rights, benefits and obligations of FuelCell's 50.5% ownership of the Joint Venture. We accounted for our involvement in the Joint Venture under the License Assistance Agreement using the equity method of accounting, in which we recorded our share of earnings or losses from the Joint Venture in our statement of operations on one line (Losses of unconsolidated affiliate) prior to December 1, 2000. On that date, the Company received foreign governmental approval of the transfer of FuelCell's interest in the Joint Venture to us and subsequently we accounted for the investment in the Joint Venture by consolidating in our financial statements.
On February 16, 1999, FuelCell transferred the principal assets, intellectual property and liabilities related to its battery business group to us. On February 22, 1999, FuelCell distributed to its shareholders shares of our common stock in a tax-free distribution.
On September 5, 2001 we announced the closing of our Newport News, Virginia manufacturing facility and consolidation of manufacturing in China.
Results of Operations
Three Months Ended September 30, 2001 Compared with Three Months Ended September 30, 2000
We had revenues of $29,000 for the three months ended September 30, 2001 compared to $30,000 for the three months ended September 30, 2000. The revenues in the 2001 period were the result of our scooter and marine batteries sold, and in 2000 were due to consumer samples sold in our efforts to commercialize our nickel-zinc batteries. Cost of revenues of $630,000 for the three months ended September 30, 2001 increased as a result of increased personnel costs and other manufacturing expenses, including manufacturing costs associated with the Virginia facility, related to the commercialization of Evercel's nickel-zinc batteries.
Administrative and selling expenses decreased 6% to $1,743,000 for the three months September 30, 2001 from $1,864,000 for the three months ended September 30, 2000. The decrease is the result of reduction of staffing of administrative, financial and sales and marketing functions, relocation, and other employee costs, as a result of the closing of the manufacturing facility in Virginia.
Research and development expenses decreased 59% to $556,000 for the three months ended September 30, 2001 from $1,366,000 for the three months ended September 30, 2000, as we have shifted our focus to a manufacturing operation.
As a result of closing our facility in Newport News, Virginia, we recorded a charge of $15,129,000 in the three months ended September 30, 2001 for impairment and other costs associated with the shutdown of the operations. See Note 3 of the Condensed Notes to the Consolidated Financial Statements.
Net interest income of $132,000 for the three months ended September 30, 2001 decreased from $220,000 for three months ended September 30, 2000, as a result of increased interest expenses associated with the increase in debt.
Nine Months Ended September 30, 2001 Compared with Nine Months Ended September 30, 2000
We had revenues of $716,000 for the nine months ended September 30, 2001 compared to $94,000 for the nine months ended September 30, 2000. The revenues in the 2001 period were the result of our scooter and marine batteries sold, and in 2000 were due to consumer samples sold in our efforts to commercialize our nickel-zinc batteries. Cost of revenues of $6,102,000 for the nine months ended September 30, 2001 increased as a result of increased personnel costs and other manufacturing expenses, including manufacturing costs associated with the Virginia facility, related to the commercialization of Evercel's nickel-zinc batteries.
Administrative and selling expenses increased 17% to $5,924,000 for the nine months ended September 30, 2001 from $5,079,000 for the nine months ended September 30, 2000. The increase is the result of additional staffing of administrative, financial and sales and marketing functions, relocation, and other employee costs, in addition to increased legal and financial costs.
Research and development expenses decreased 50% to $1,546,000 for the nine months ended September 30, 2001 from $3,063,000 for the nine months ended September 30, 2000, as we have shifted our focus to a manufacturing operation.
As a result of closing our facility in Newport News, Virginia, we recorded a charge of $15,129,000 in the nine months ended September 30, 2001 for impairment and other costs associated with the shutdown of the operations. See Note 3 of the Condensed Notes to the Consolidated Financial Statements.
Net interest income of $580,000 for the nine months ended September 30, 2001 increased from $454,000 for nine months ended September 30, 2000 due to interest income on funds received from the February 2001 offering, partially offset by the increase in interest expense associated with the increase in debt.
Liquidity and Capital Resources
We have funded our operations primarily through cash generated from sales of equity. On February 9, 2001 we concluded a stock offering of 3 million shares of our common stock resulting in total net proceeds of $25,107,000.
At September 30, 2001 we had working capital of $14,401,000, including cash and cash equivalents of $19,695,000, compared to working capital of $10,874,000, including cash and cash equivalents of $12,195,000 at December 31, 2000. In compliance with the terms of the Newport News, Virginia lease signed July 10, 2000 with Oakland Investors, LLC., we have executed a $1,000,000 letter of credit as a form of rent security, which will restrict our use of cash and cash equivalents by the same amount. Additionally, we have outstanding letters of credit in the amount of $600,000 to purchase raw materials.
Preferred stock dividends accrued on the Series A Preferred Stock issued in December 1999 were $93,000 and $285,000 in the three and nine-month period ended September 30, 2001. Dividend payments for each quarter are due and payable 15 days after the quarter end. As part of the December 1999 preferred offering, investors and the underwriter, Burnham Securities Inc., were issued warrants to purchase our common stock. If our common stock reaches certain price levels, we can redeem the warrants. If all the warrants were exercised, we would receive approximately $4.6 million in gross proceeds.
Our capital expenditures were primarily for production equipment in Newport News, Virginia. Capital expenditures were $1,379,000 for the nine-month period ended September 30, 2001.
We anticipate that our existing capital resources will be adequate to satisfy current obligations arising from existing financial requirements and agreements, as we continue to reduce our cost structure and evaluate strategic alternatives.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The investment portfolio includes money market accounts in U.S. financial institutions. Cash is invested overnight with high credit quality financial institutions. Based on the Company's overall interest exposure, including all interest rate sensitive instruments, a near-term change in interest rate movements of 100 basis points would increase or decrease our net loss for the quarter ended September 30, 2001 by $49,000.
PART II - OTHER INFORMATION
Item 6: | EXHIBITS AND REPORTS ON FORM 8-K |
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
None
In accordance with the requirements of the Securities Exchange of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EVERCEL, INC. | |
| (Registrant) | |
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| By: /s/ Daniel J. Samela | |
| Name: Daniel J. Samela | |
Date: November 13, 2001 | Title: Chief Financial Officer |
