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For the fiscal year ended: December 31, 2002

OR

Commission File Number: 001-14919

(Exact Name of Registrant as Specified in Its Charter)

5 POND PARK ROAD
HINGHAM, MASSACHUSETTS 02043
(781) 741-8800
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)

GARRY PRIME, PRESIDENT AND CHIEF EXECUTIVE OFFICER
EVERCEL, INC.
5 POND PARK ROAD
HINGHAM, MASSACHUSETTS 02043
(781) 741-8800

(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 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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

Yes o No x

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $15,502,021, which is based on the closing price of $1.49 on June 28, 2002. On June 28, 2002 there were 10,404,041 shares of Common Stock of the registrant issued and outstanding.

When used in this report, the words "expects", "anticipates", "believes", "estimates", "should", "will", "could", "would", "may", and similar expressions are intended to identify forward-looking statements. Such statements include statements relating to Evercel's continued development and commercialization schedule for its patented nickel-zinc ("Ni-Zn") rechargeable battery technology, its Chinese manufacturing operation, expansion plans, licensing opportunities and the expected cost competitiveness of its technology. These and other forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results to differ materially from those forward-looking statements, including, without limitation, general risks associated with product development and introduction, changes in worldwide environmental laws and policies, potential volatility of material costs, government appropriations, rapid technological change, and competition, as well a s other risks. The forward-looking statements contained herein speak only as of the date of this Report. Evercel Inc. (the "Company," "we," "us" or "our") expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in the Company's expectations or any change in events, conditions or circumstances on which any such statement is based.

PART I

          We have developed and, through our manufacturing facility in the Peoples Republic of China ("PRC") are manufacturing rechargeable nickel-zinc batteries (See "Our Chinese Operations"). The nickel-zinc battery technology is suited for applications requiring long cycle life, light weight and relative cost efficiency. We believe that we will be able to develop markets that utilize nickel-zinc technology both in the U.S. and internationally. However, to date there has not been widespread acceptance of our technology.

          We are focusing our marketing efforts on specialty applications of our rechargeable nickel-zinc batteries where our technology has competitive advantages and where the channels of distribution are relatively narrow. At the present time, we are principally addressing applications in transportation, including:

• the small electric vehicle market, principally scooters, bicycles, wheelchairs and neighborhood electric vehicles; and
• the electric trolling motor market, primarily focused on bass fishing boats,

          We believe our rechargeable nickel-zinc batteries have a variety of other applications. We are continuing to explore additional applications such medical devices, portable power tools and lawn equipment.

          Our proprietary nickel-zinc rechargeable battery is the result of a substantial investment in the development of advanced battery technologies. Our patented technology allows us to produce batteries with the following combination of characteristics:

• extended run time;
• light weight;
• maintenance free construction;
• favorable environmental profile; and
• attractive lifetime cost.

          In many deep discharge applications where the battery functions as the primary power source, we believe our nickel-zinc batteries offer superior performance and lower lifetime cost than many other battery chemistries currently available on a commercial basis. However, the cost of materials used in our batteries results in a higher initial cost to the user compared to some alternative technologies. This factor has hindered our efforts to achieve significant market penetration. We are continuing to improve our technology to reduce the cost per kilowatt hour.

          Electric Vehicles

          The electric scooter, electric bike and neighborhood electric vehicle markets are a good fit for our technology because of the particular characteristics of our batteries. Our technology enables manufacturers to incorporate in their vehicles a high-energy power source relative to the weight of the battery. The deep cycle capability of our technology provides 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. Certain states are strengthening environmental laws and have granted consumer rebates to encourage the purchase of electric vehicles. If the market for mass-produced electric vehicles grows in the United States, we believe that we are well positioned to be a participant in this market

          The electric vehicle market primarily exists in Europe and Asia. Growing concern about air pollution in Europe is resulting in increased government restrictions on internal combustion engines and government incentives to induce consumer purchases of non-combusting vehicles. Our technology is a logical alternative that offers greater power and range than many competing technologies. Within the electric vehicle market, we expect that the majority of our sales will be direct sales to manufacturers, with a small aftermarket for battery sales directly to consumers.

          Electric Trolling Motors

          The electric trolling motor market exists almost exclusively in the United States bass fishing industry. While the retail price of the marine battery is significantly higher than that of a lead-acid battery, we believe that the durability and extended life of the Evercel marine battery will result in a cost per hour of operation over the life of the battery that is competitive with that of a lead-acid battery. However, the initial high cost of our battery has been a barrier to greater market penetration. We are not certain we can lower manufacturing costs to a level that will allow us to lower the retail price.

          Other Markets

          Our technology lends itself to other applications where a mobile energy source is required. We believe that the motorized wheelchair may be a potentially large market for our technology. We have developed a battery that matches the dimensions of the standard for motorized wheelchairs. Our battery is significantly lighter and offers the other advantages of nickel-zinc technology. We have not yet begun to market this battery and cannot predict the level of market acceptance.

          We have explored the potential of our technology for use in medical devices and tools. While we do not currently have products suitable for these markets, we believe that the nickel-zinc batteries may be a viable power source for these applications.

          We believe we have created products that are well suited for our target markets and we have developed and patented technologies that will permit high volume manufacture of our rechargeable batteries. We believe our batteries have a longer cycle life, are lighter in weight and lower in total life cycle 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, we believe our patents and proprietary production process create a barrier of entry for potential competition in our chosen market. We have seven U.S. patents which, combined, have an average of six years remaining before expiration and one patent pending. Our batteries also have the additional advantage of lower environmental impact compared to lead-acid or nickel-cadmium batteries.

          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. During the early 1980's, extensive research and development efforts by other researchers to develop a rechargeable 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. Currently, our research and development efforts are focused on improving performance characteristics and reducing costs.

          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 or inconvenient for widespread use in applications currently utilizing rechargeable batteries.

          No one rechargeable battery system is ideal for all applications. There are numerous performance variables that vary in importance by application. Important variables in our markets include:

• specific energy (energy capacity per unit weight);
• specific power (how rapidly energy can be drawn from the battery relative to its weight);
• cycle life (which varies with discharge rate and depth of discharge, response to ambient temperatures, rate of self-discharge, charged and discharged shelf life, size, shape and design);
• energy density (energy capacity per unit volume); and
• cost of materials per kilowatt hour.

          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:

          We believe that 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 an electric vehicle 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 an electric vehicle or boat.

          In the electric vehicle and trolling motor markets, the costs must be justified by cycle life. Longer cycle life correlates to more miles in total range for an electric vehicle or more total hours of trolling over the life of the battery.

          In addition to our nickel-zinc technology, the commercial market for rechargeable batteries consists principally of lead-acid, nickel-cadmium, nickel-metal hydride and lithium-ion batteries.

• Lead-acid batteries are the most common rechargeable batteries and are primarily used in automobile starting, uninterruptible power supplies and motive power applications such as golf carts and forklifts. Although lead-acid is the lowest cost rechargeable technology currently available, these batteries are typically characterized by low cycle life and low energy density.

• Nickel-cadmium is the most common rechargeable power source used in power tools and similar consumer applications. Nickel-cadmium is considered the most powerful and robust technology in the rechargeable battery marketplace. In the last decade, nickel-cadmium has increasingly been the subject of tightening environmental and workplace regulations and related pressures for recycling and mandatory collection due to the toxicity of cadmium as a principal component.

• Nickel-metal hydride technology, primarily used in portable electronics, including mobile phones and computers, incorporates high energy density compared to nickel-cadmium. Nickel-metal hydride is also offered in electric and hybrid electric vehicles. Although the metal hydride electrode is considered environmentally preferable to cadmium, nickel-metal hydride cells and batteries typically carry a cost premium that detracts from the appeal of this technology.

• Lithium-ion batteries, primarily used in portable electronics, offer the highest energy density of all commercial rechargeable technologies available today. On a weight basis, the technology offers two to three times the energy content of nickel-cadmium and offers higher voltage than nickel-metal hydride or nickel-cadmium technologies. However, lithium-ion cells and batteries are expected to continue to be more expensive than our nickel-zinc technology.

          Competition 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 addition, several other battery manufacturers are attempting to develop and market higher performance versions of lead-acid batteries.

          In our target electric vehicle and trolling motor markets, we expect to compete against suppliers of rechargeable lead-acid and, to a lesser extent, nickel-cadmium and nickel-metal hydride batteries. We are competing on the basis of battery performance and economics, as well as stability, safety and environmental impact considerations. The small vehicle market is predominately powered by gasoline powered, internal combustion engines. However, electric battery powered vehicles are becoming popular with regulators, manufacturers and consumers alike. Our largest competitors in the battery market for electric vehicles are GEL and AGM types of lead acid battery manufacturers in Asia and Europe.

          The major suppliers to the trolling motor battery market are Delco Battery, Interstate Battery and Johnson Controls, Inc. who are producing and/or distributing lead-acid batteries.

          Nickel-zinc batteries are more environmentally acceptable than other commonly available rechargeable battery systems. Lead-acid batteries, our principal competitors, contain chemicals that 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. The manufacturing process also uses solvent in the electrode production process that can be reclaimed, purified and reintroduced into the process with low levels of waste.

          We are focusing our sales and marketing efforts in the following areas:

• generating direct sales to equipment manufacturers and distributors in selected applications and geographical territories
• marketing the trolling battery through a multi-channel approach including through distributors and directly to consumers;
• developing joint venture partnerships for manufacturing and distribution in applications and territories where we believe strategic partners can improve our sales revenues; and
• licensing our technology and know-how to strategic partners in applications for businesses other than our core applications, such as consumer electronics.

          In the electric vehicle market we are primarily focused on marketing directly to equipment manufacturers. 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.

          In July 1998, Xiamen Three Circles ERC Battery Co. Ltd., a joint venture, was established with the Three Circles Battery Co., a government-owned manufacturing company located in Xiamen, PRC. The mission of our joint venture in the PRC is the continued development, manufacture and sale of nickel-zinc batteries based on our technology. We received a 50.5% ownership interest in the Joint Venture and Xiamen Three Circles received a 49.5% ownership interest.

          On January 5, 2003, the joint venture acquired the 49.5% minority interest in the joint venture from the Xiamen Three Circles Battery Co. Under the terms of the agreement, the Xiamen Three Circles Battery Co. received $3,000,000 in cash and a non-interest bearing note for $2,475,000. Note payments of $990,000, $742,500 and $742,500 are due on or before December 31, 2004, 2005 and 2006, respectively. The note has been guaranteed by the Company. The Xiamen Three Circles ERC Battery Co., Ltd. has been restructured as Xiamen Evercel Battery Co., a wholly owned foreign enterprise.

          Our current manufacturing plan is to produce all of our batteries at our 48,000 square foot facility in Xiamen, PRC. We have established a semi-automated production process due to the availability of relatively inexpensive labor.

          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.

          We have seven active patents and one pending application in the United States. The average remaining life of the issued patents is six years with various expiration periods through 2016. In addition, the Company has obtained patent protection for its technology and products in Germany, France, The United Kingdom and Japan. We do not believe that the expiration of any of our earlier patents will have a material adverse effect on our business. In conjunction with our patent protection, the Company relies on its extensive Ni-Zn experience and know-how, difficult to replicate manufacturing process and trade secrets to provide additional protection when expanding its business in Asia and third-world markets.

          The Company has registered and obtained trademark protection for its company name "Evercel" and its marine product "Evertroll."

          To a limited extent, we continue to advance our battery technologies by conducting additional research and development. Research and development expenses were $0.2 million, $1.7 million and $4.6 million in the years ended December 31, 2002, 2001 and 2000 respectively.

          We employ a staff of 5 full-time and 3 part-time people in the U.S. In the PRC, we employ approximately 108 full-time people, most of whom are engaged in engineering and manufacturing.

          We maintain a website with the address www.evercel.com. We are not including the information contained on our website as a part of, or by incorporating it by reference into, the Annual Report on Form 10-K.

          You should carefully consider the risks described below as well as the other information included in or incorporated by reference in this annual report on Form 10-K. If any of these risks occur our business prospects, results of operations or financial condition could be harmed.

          We have had limited success in the commercialization of our initial products. Our limited operating history makes predicting the future results of our operations or the risks we will face difficult. As we seek to exploit other opportunities, there is no guarantee that we will:

identify attractive business opportunities; and

if identified, be successful in consummating agreements; and

if consummated, be successful in exploiting the opportunity

          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 twelve months ended December 31, 2002, 2001 and 2000 we had losses attributable to common stockholders of $2.9 million, $28.5 million, and $12 million, respectively. We expect that we will continue to incur losses at least through 2003.

          If we determine that the carrying amount of our intellectual properties may not be recoverable, we may be required under current accounting principles to revalue those properties.

          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.

          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. We cannot assure you that patents will be issued for any pending applications.

          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 addition, some foreign countries in which we may do business provide significantly less patent and proprietary rights protection than the United States.

          Manufacturing capability is dependent upon a number of factors, including manufacturing concerns and process control issues. We have in the past experienced difficulty in achieving acceptable levels of production of quality batteries. We cannot assure you that we will be able to consistently manufacture batteries of an acceptable quality level.

          Our failure to manufacture our nickel-zinc battery products in the volume necessary to exceed our fixed overhead expenses would have an adverse impact on our results of operation.

          The facility in the PRC is currently the exclusive manufacturer of our batteries. If the Chinese operation is unable to manufacture our batteries, we have no alternative means of producing 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.

          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.

          Although we believe we are presently in compliance with all foreign, federal, state and local environmental 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.

          The value of our operation in China and its profitability may be adversely affected by changes in the political environment in the PRC. Changes in the political leadership could lead to changes that 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 operation.

          In addition to changes in the political leadership, changes in the current economic reform policies or the imposition of additional restrictions on foreign-owned enterprises could have a material adverse effect on our operation.

          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 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 operation 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.

          Our operation in China may be unable to convert sufficient Renminbi into foreign currency to enable it to comply with its foreign currency payment obligations, including royalty payments and distributions to us. In the event of a depressed market in Renminbi, the cost of foreign currency could prevent our enterprise 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.

          The PRC does not have a well-developed, consolidated body of laws governing wholly owned foreign 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, new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local laws by national laws may adversely affect our investment.

          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. We cannot assure you that we will have the resources to do this.

          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. We cannot assure you that competitors will not develop technologies or products that would render our technology and products obsolete or less marketable.

          We offer an extended warranty for our batteries. If we are unable to manufacture batteries that achieve our stated performance levels or meet our customers' expectations for quality, the resulting claims may exceed expected levels against which we have reserved.

          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. Improperly charging or discharging our batteries could possibly cause fires. There have been several incidents related to a charger, which we shipped with our batteries, which was recalled prior to December 31, 2002. Any accident involving our batteries or other battery products could impede demand for our products.

          We cannot be certain that additional financing will be available to us to meet our future capital requirements. 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. We believe that our available funds will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least 2003.

          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 board of directors may review our dividend policy from time to time, based on our performance and our financial condition.

          The Company leases 4,000 square feet of space in Hingham, Massachusetts for its corporate headquarters. The lease term has two years remaining. The annual rent is $29,500.

          The Company's subsidiary in the PRC leases 48,000 square feet of manufacturing space in Xiamen, PRC. The lease term has nineteen months remaining at an annual rent of $68,000.

          Subsequent to year end, the Company settled a wrongful discharge suit filed by Allen Charkey, its former Vice President and Chief Technical Officer. The cost of the settlement was included in accrued liabilities at December 31, 2002 and 2001.

          None.

          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.

          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.

          As of March 17, 2003, there were approximately 140 holders of record of our common stock.

          The selected financial data set forth below is for the fiscal years ended December 31, 2002, 2001 and 2000. You should read this information together with our financial statements and the notes to those statements beginning on page F-3 of this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The statement of operations data for the fiscal years ended December 31, 2002, 2001 and 2000 and the balance sheet data as of December 31, 2002, 2001 and 2000 are derived from our financial statements, which have been audited by KPMG LLP, independent accountants, and are included elsewhere in this report. 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.

          (a) 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, 2002, 2001 and 2000 there were 210,029, 194,035 and 196,500 respectively, shares of Series A Preferred Stock convertible into 763,718, 705,560 and 714,523 respectively, shares of common stock, related warrants exercisable for 549,200, 549,200 and 549,200 shares of common stock and options exercisable for 456,499, 173,833 and 676,499 respectively, shares of common stock.

          We develop, design and manufacture high-performance rechargeable nickel-zinc batteries. We recognize revenue on the date our products are shipped as title passes to our customers in accordance with our FOB shipping sales terms. The principal markets for our batteries are the small electric vehicle market, i.e. scooters, neighborhood vehicles, wheelchairs, e-bicycles, and marine trolling motors. We believe that our technology offers superior performance versus traditional batteries. While we believe that over their lives nickel-zinc batteries are more economical, the initial cost of our batteries is higher than that of traditional power sources for these applications. This initial cost has been a barrier to widespread market acceptance. We have, through continued development, improved the performance and reduced the cost of our batteries. It is still uncertain whether these improvements and cost reductions will enable us to generate suf ficient revenue to justify the value of our technology. If we do not generate sufficient revenue we may be required to revalue our technology.

          Until January 2003, we owned a 50.5% interest in a joint venture in the PRC. Prior to December 1, 2000, we accounted for our involvement in that joint venture using the equity method of accounting, in which we recorded our share of earnings or losses from that joint venture in our income statement. Subsequent to December 1, 2000, we have consolidated the joint venture in our financial statements. On January 5, 2003, the 49.5% minority interest in the Company's joint venture was acquired from the Xiamen Three Circles Battery Co. by the joint venture and the joint venture became a wholly owned subsidiary of the Company.

          We own a 24.5% interest in Everplore Inc. (Tech JV). The purpose of the Tech JV is to enhance cooperation between China and the United States in the field of energy and other new advanced technology fields. The Tech JV has had limited activity and is not significant to our financial statements. We have accounted for the Tech JV using the equity method of accounting.

          In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

          Property, plant and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to our business model or changes in our capital strategy could result in the actual useful lives differing from our estimates. In those cases where we determine that the useful life of property, plant and equipment should be shortened, we would depreciate the net book value in excess of the salvage value, over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could result in shortened useful lives.

          Long-lived assets to be held and used, including fixed assets and intangibles with definite lives, are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, we estimate the undiscounted future cash flows to result from the use of the asset and its ultimate disposition. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, and changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the we recognizes an impairment loss, mea sured as the amount by which the carrying value exceeds the fair value of the asset. Long-lived assets to be disposed of are evaluated in relation to the estimated fair value of such assets less costs to sell.

          We allow customers to return their products for up to eighteen months when they meet certain Company-established criteria as outlined in our warranty provision. We regularly review and revise when deemed necessary our estimates of sales returns based primarily upon actual returns or other events that would permit customers to return items based upon the our warranty provisions. We record estimated sales returns as a reduction to sales. Returned products are recorded as inventory only if they have an expected realizable value. The cost of refurbishment, if any, is charged to cost of sales. Actual returns, as well as realized values on returned products, may differ significantly, either favorably or unfavorably, from our estimates.

          We had revenues of $281,000 for the year ended December 31, 2002, a decrease of $449,000 from revenues of $730,000 for the year ended December 31, 2001. This revenue resulted from sales of our scooter and marine batteries. The decrease in revenue was due primarily to the Company's September 2001 decision to discontinue production in the U.S. and re-focus its business plan through 2002. In addition, revenue in the third and fourth quarters was adversely affected by product returns of $58,000 resulting from the recall of a charger that we sourced from another manufacturer and sold with our marine battery. There were no direct costs to the Company as a result of the recall. Cost of sales of $605,000 for the year ended December 31, 2002, a decrease of $5,867,000 from cost of sales of $6,472,000 for the year ended December 31, 2001, was a result of declines in revenue and consisted of the material and labor costs of the product sold, scrap and m anufacturing overhead.

          Administrative and selling expenses were $2,506,000, including $241,000 of related depreciation expense for the year ended December 31, 2002. These costs were primarily salaries, wages and benefits, selling and marketing activities. Administration and selling expenses decreased $3,896,000 from $6,402,000 for the year ended December 31, 2001 due to reduced headcount, rent and other costs resulting from the Company's September, 2001 decision to discontinue production in the U.S. and re-focus its business plan through 2002.

          Research and development expenses were $208,000 for the year ended December 31, 2002 consisting primarily of personnel costs. Research and development expenses have decreased $1,469,000 from $1,677,000 for the year ended December 31, 2001 as a result of the shift of research and development to China in 2002 from the U.S. and a re-focus on the Company's business plan.

          Net interest income of $202,000 for the year ended December 31, 2002 was earned on investment of our cash and has decreased $617,000 from $819,000 for the year ended December 31, 2001 due to lower cash balances on hand and lower average interest rates on deposits in 2002 as compared to 2001.

          Minority interest income of $364,000 for the year ended December 31, 2002 represents the elimination of minority interest holders share of losses generated by our Joint Venture in the PRC which has increased for the twelve months ended December 31,2002 versus the twelve months ended December 31, 2001.

          The net loss was $2,472,000 and the net loss per basic and diluted common share was $0.28 for the year ended December 31, 2002.

          We had revenue of $730,000 for the year ended December 31, 2001. This revenue resulted from sales of our scooter and marine batteries. Cost of sales of $6,472,000 for the year consisted of the material and labor costs of the product sold, scrap and manufacturing overhead.

          Administrative and selling expenses were $6,402,000, including $138,000 of related depreciation expense. These costs were primarily salaries, wages and benefits, selling and marketing activities and the costs of establishing our facility in Newport News, Virginia, including the relocation of personnel and professional services.

          Research and development expenses were $1,677,000 for the year, consisting primarily of personnel costs as well as travel related expenditures in an effort to assist in the start up of production at our Virginia manufacturing facility.

          In September 2001, we announced the closing of our Newport News, Virginia manufacturing facility as a result of our decision to discontinue production in the U.S. and to fully source our production from the Joint Venture in the PRC. As a result, we recorded a charge of $15,003,000. This charge was to cover the write-down of inventory and fixed assets as well as other costs associated with the shutdown of the facility and transfer of manufacturing to our joint venture. See note 15 to the consolidated financial statements.

          Net interest income of $819,000 for the year ended December 31, 2001 was earned on investment of the proceeds from our stock sales.

          Minority interest expense of $123,000 for the year ended December 31, 2001 represents the elimination of minority interest holders share of income generated by our Joint Venture in the PRC.

The net loss was $28,128,000 and the net loss per basic and diluted common share was $2.82 for the year ended December 31, 2001.

          Working capital at December 31, 2002 was $11,185,000 versus $13,558,000 at December 31, 2001. Included in working capital at December 31, 2002 was cash of $10,377,000, compared to cash of $16,199,000 at December 31, 2001. The decrease of $5,822,000 in cash during the twelve months ended December 31, 2002 was the result of cash needed to fund the Company's operating activities of $5,490,000, due mainly to a net loss of $2,472,000 and decreases in accrued liabilities for payments made related to the shutdown of the Virginia facility in 2001 and cash used for capital expenditures of $353,000, offset by cash received from the issuance of common stock of $21,000. In 2001 cash increased by $4,004,000 which was the result of $17,873,000 used to fund operating activities and capital expenditures of $1,438,000 offset by an increase in cash of $23,315,000 from financing activities.

          To continue to meet our operating and capital requirements, we completed a public offering of our common stock in May 2000. This public offering raised net proceeds of $15,900,000 through the sale of 1,391,080 shares of our common stock at $12.50 per share. Additionally, we completed another public offering in February 2001. This offering raised net proceeds of $25,100,000 million through the sale of 3,000,000 shares of our common stock at $9.00 per share.

          In December 2000, we borrowed approximately $1,000,000 from the Virginia Small Business Financing Authority and $250,000 from the City of Newport News, Virginia, Redevelopment and Housing Authority, which were fully repaid as of December 31, 2001.

          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 (See Risk Factors). We believe that the cash on hand will be sufficient to enable us to meet our anticipated cash requirements at least through 2003. However, there can be no assurance that the cash on hand at December 31, 2002 will be sufficient to meet our long-term cash requirements.

          In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement 143 requires recording the fair market value of an asset retirement obligation as a liability in the period in which a legal obligation associated with the retirement of tangible long-lived assets is incurred. The Statement also requires recording the contra asset to the initial obligation as an increase to the carrying amount of the related long-lived asset and depreciation of that cost over the life of the asset. The liability is then increased at the end of each period to reflect the passage of time and changes in the initial fair value measurement. The Company is required to adopt the provisions of Statement No. 143 effective January 1, 2003. The adoption of Statement No. 143 is not currently expected to have a material affect on the Company's financial position, results of operations or cash flows upon adoption.

          In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of Statement No. 146 are effective for exit or disposal activities initiated after December 31, 2002 and thus will become effective for the Company on January 1, 2003. The Company will continue to apply the provisions of EITF Issue 94-3 to any exit activities that have been initiated under an exit plan that met the criteria of EITF Issue 94-3 before the adoption of Statement No. 146. The adoption of Statement No. 1 46 is not currently expected to have a material affect on the Company's financial position, results of operations or cash flows upon adoption.

          In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. Statement No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Should the Company elect to transition to fair value recognition of stock-based employee compensation, not all of the alternatives outlined in Statement No. 148 will be available after December 31, 2002. The Company has included the disclosure requirements of SFAS No. 148 in its consolidated financial statements and is currently evaluating the impact of adopting fair value recognition and transition alternatives.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Interpretation No. 45 requires the guarantor to recognize a liability for the contingent and non-contingent component of a guarantee; which means (a) the guarantor has undertaken an obligation to stand ready to perform in the event that specified triggering events or conditions occur and (b) the guarantor has undertaken a contingent obligation to make future payments if such triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The Company is required to recognize the liability even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. Interpretation No. 45 also requires additional disclosures related to guarantees that have certain specified characteristics. The Company was required to adopt, and has adopted the disclosure provisions of Interpretation No. 45 in its financial statements as of and for the year ended December 31, 2002.

Additionally, the recognition and measurement provisions of Interpretation No. 45 are effective for all guarantees entered into or modified after December 31, 2002. The Company is currently evaluating the effect of the recognition and measurement provisions of this Interpretation.

The following table aggregates all contractual commitments and commercial obligations that affect the Company's financial condition and liquidity position as of December 31, 2002:

The Company entered into a lease effective April 1, 2002 for 4,000 square feet of office space in Hingham, Massachusetts, for our corporate headquarters. The lease term is for three years, with a fixed annual rent of $29,500.

          We have no off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others which are reasonably likely to have a material current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

          We held no derivative instruments as of December 31, 2002. We are exposed to market fluctuations in foreign currency exchange and repatriation, interest rates and commodity pricing. The nature of each is as follows:

          We currently have international operations in the PRC through our subsidiary. The currency of exchange is U.S. dollars for all current international transactions, except for transactions of the Chinese operation. Although the PRC controls the rate of exchange for the Renminbi, a devaluation or free market valuation could impair the Chinese operation's ability to make payments to us. Additionally, for the foreseeable future, we expect to continue to reinvest in the PRC all monies earned as net income of the subsidiary. The PRC may restrict the payments under our agreement whereby we acquired the minority interest in the Chinese operation. As a result, we might not be able to receive distributions from the Chinese subsidiary 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.

          We have invested and expect to invest excess funds in money market accounts in U.S. and PRC financial institutions. Based upon the cash and cash equivalents balance at December 31, 2002, an increase or decrease of interest rates of 100 basis points would have an effect on the Company's results of operations and cash flows of approximately $104,000.

          We do not hedge against price fluctuation in the commodities used in the manufacturing of our products and as a result, we are exposed to market price fluctuations for these commodities. We will reevaluate this policy as needed commensurate with the risk inherent in the business.

The Financial Statements and Supplementary Data of the Company are listed under Part IV, Item 14, in this report.

None.

          The following table sets forth information with respect to our executive officers, directors and certain key employees:

Garry A. Prime has been our President, Chief Executive Officer and Director since July 2001. He also is a director of the wholly owned foreign enterprise in the PRC. Since 1986, Mr. Prime has been president of Sontek Industries, Inc., a private operating and investment company. He has led several successful turnarounds of both public and private companies over the past 25 years. Mr. Prime is also a director of Oxygen S.p.A. Oxygen is marketing light electric vehicles such as motor scooters and bicycles in Europe and the U.S.

Daniel J. McCarthy has been Chief Operating Officer since joining the Company in September 2002. Mr. McCarthy had served as COO of Conceptronic, Inc, a publicly traded manufacturer of capital equipment for the electronics industry from 1993 to 2000. Prior to that, he was the COO of Eldim, Inc., a manufacturer of specialty materials.

Anthony P. Kiernan has been our Chief Financial Officer, Treasurer and Secretary since December 2001. He also is a director of the foreign enterprise. Prior to joining Evercel, he had been the Chief Financial Officer of Sunblush Technologies (USA) since 1998. Prior to joining Sunblush, he was Controller and Assistant Treasurer of Haemonetics Corporation from 1987-1998.

James D. Gerson has been our Chairman since July 2001. He has been a director of Evercel since September 1998. Mr. Gerson also serves as chairman of the Board of Directors of the foreign enterprise. 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 Energy, Inc., Ag Services of America, Inc., a company financing farm inputs, and American Power Conversion Corp., a company producing power protection and related products. Mr. Gerson is also a director of Oxygen S.p.A. and chairman of Sontek Industries.

Warren D. Bagatelle has been a director since September 1998. He has been a Managing Director of Loeb Partners Corporation, a financial services company, and a general partner of Loeb Investors Co LXXV, an affiliate of Loeb Partners Corporation, an investment company, since 1988. Mr. Bagatelle is a director of FuelCell Energy, Inc.

Dr. Chao Ming Huang has been a Director since August 2001 and a Vice President of Far East Operations since July 1999. He is also a director of the foreign enterprise and has been the General Manager since January 1999. Prior to joining Evercel, He held various positions, including Director for Advanced Materials Research at FuelCell Energy, Inc. He received a Ph. D. in Mechanical Engineering from the University of Wyoming.

John H. Gutfreund has been a director since January 2000. He is Senior Managing Director of C. E. Unterberg Towbin. 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 AccuWeather, Inc., an internet weather forecasting service, Nutrition 21, Inc., a manufacturer of nutrition products; Ascent Assurance, Inc., an insurance holding company; Maxicare Health Plans, Inc., a managed health care company; LCA-Vision, Inc., a provider of services to outpatient eye surgery facilities; LongChamp Core Plus Fund and Universal Bond Fund.

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 a director of FuelCell Energy, Inc.

          The terms of Messrs. Gerson and Gutfreund will expire in 2005, Messrs. Bagatelle and Prime will expire in 2004, and Messrs. Huang and Lawson's terms will expire in 2003.

          Our Board has established an audit committee and a compensation committee

          Our audit committee consists of three independent Directors. Currently, our audit committee consists of Messrs. Bagatelle (Chairman), Lawson and Gerson. The audit committee selects the firm of independent accountants that will audit our financial statements, reviews the scope and result of the audit and other services provided by our independent auditors and reviews and evaluates our internal control functions.

          Our compensation committee consists of at least three disinterested Directors who are non-employee directors. Currently, our compensation committee consists of Messrs. Lawson (Chairman), Gutfreund and Gerson. The compensation committee reviews, approves and recommends to the Board of Directors the terms and conditions of incentive bonus plans applicable to corporate officers and key management personnel, reviews and approves the annual salary of our chief executive officer, and administers our 1998 Equity Incentive Plan.

          The annual compensation paid each non-employee director consists of a retainer of $10,000. The Chairman and each committee chair are paid an extra $4,000 and $2,000, respectively. We reimburse each non-employee director for out-of-pocket expenses incurred in connection with attending board meetings.

          Messrs. Gutfreund and Huang were granted options to buy 20,000 and 30,000 shares respectively, at the time they joined the Board of Directors. It is the Company's intention to grant future Board Members options to buy shares when they join the Board.

          The table below sets forth information concerning the compensation we paid to our chief executive officer and the other former and current executive officers whose salary and bonus exceeded $100,000 in 2002.