DESCRIPTION OF BUSINESS
Business Development
Electro Energy Inc. is a Florida corporation, which was originally formed
on December 29, 1993 under the name MCG Diversified, Inc. ("MCG"). Effective
June 9, 2004, pursuant to the Agreement of Merger and Plan of Reorganization,
dated May 7, 2004 (the "Merger Agreement"), among privately held Electro Energy,
Inc. ("EEI"), a Delaware corporation, MCG and EEI Acquisition Corp. ("Merger
Sub"), a Delaware corporation and wholly owned subsidiary of MCG, the Merger Sub
merged with and into EEI, with EEI remaining as the surviving corporation (the
"Merger").
Although MCG acquired EEI as a result of the Merger, the stockholders of
EEI hold a majority of the voting interest in the combined enterprise.
Immediately prior to the Merger, EEI had 23 stockholders. Additionally, the
Merger resulted in EEI's management and Board of Directors assuming operational
control of MCG.
The following lists a summary of the structure of the Merger and matters
completed in connection therewith:
On July 16, 2004, the Company completed a private placement of shares of
its series A convertible preferred stock and warrants to purchase common
stock, and received at the closing of the private placement gross
proceeds of $5,501,000.
The Board of Directors and shareholders amended MCG's Amended and
Restated Articles of Incorporation to change the corporate name of MCG to
"Electro Energy Inc." and to increase the authorized number of shares of
capital stock to 50,010,000 shares, consisting of 50,000,000 shares of
Common Stock, $.001 par value per share and 10,000 shares of Preferred
Stock, $.001 par value per share.
MCG issued 9,497,557 unregistered shares of common stock, options to
purchase 2,332,121 shares of common stock and warrants to purchase
526,444 shares of common stock to the former security holders of EEI in
exchange for 100% of the outstanding capital stock, options and warrants
of EEI. As MCG did not have any meaningful operations prior to the
merger, the transaction was treated as a recapitalization of EEI, and
accounted for, on an historical cost basis. Moreover, the financial
statements set forth in this report for all periods, prior to the
recapitalization, are the financial statements of EEI and the common
stock of EEI has been retroactively restated to give effect to the
exchange for MCG common stock.
4,999,800 shares of common stock owned by one of MCG's former directors
were repurchased and cancelled by the Company for an aggregate
consideration of $100.00.
At the conclusion of the Merger, MCG's stockholders owned approximately
22% of the issued and outstanding shares of the Company's common stock,
based on 12,197,453 shares outstanding after the Merger.
The Merger Agreement may be found at Exhibit 2.1 to the Company's Current Report
on Form 8-K, as filed with the Securities and Exchange Commission on June 24,
2004.
Our Business Prior to the Merger
Prior to the Merger, MCG did not have any meaningful operations. After the
merger, the Company succeeded to the business of EEI as its sole line of
business.
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Our Business Following the Merger
Overview
We develop bipolar nickel-metal hydride batteries. Our business strategy
has historically been to seek government funding to support the development of
our novel battery concept. From 1992 to 2003, we received approximately $18
million of government funding for bipolar nickel-metal hydride battery
development. Our programs have been supported by the U.S. Army (for field radios
and silent watches), the Naval Air Systems Command and the U.S. Air Force (for
use in F-18 and F-16 fighter aircraft), the Ballistic Missile Defense
Organization (BMDO), the National Aeronautics and Space Administration (NASA),
the National Institutes of Health (NIH), the Department of Energy (DOE), The
Partnership for a New Generation of Vehicle (PNGV) and the State of Connecticut.
These programs have focused on basic materials technology and prototype
development of specialty bipolar nickel-metal hydride batteries for military
communications, satellites, aircraft auxiliary power, medical applications and
hybrid electric vehicles. We intend to use the technology and products developed
by us as a springboard into commercial applications and manufacturing. Our
management is refining our commercial market opportunities while pursuing
additional development activities. In this way, we aim to minimize our exposure
in entering niche markets while maximizing our ability to capitalize on our
product strengths and our understanding of our customers' requirements.
In October 2003, we acquired the battery operations of Eagle Picher
Technologies, LLC in Colorado Springs, Colorado. Eagle Picher is a diversified
company engaged in the manufacture of specialty batteries, chemicals and
electronic materials. The Colorado Springs operation had been established by
Eagle Picher in 1976 and has been primarily engaged in the manufacture of
specialty nickel-cadmium (also known by the chemical element symbol "Ni-Cd")
batteries for satellites and aircraft applications. As a result of an internal
restructuring of priorities, Eagle Picher management decided to close down its
Colorado Springs battery operation in 2003. We believe that the acquisition of
this facility enhances our capabilities, broadens our product lines and presents
new business opportunities for us. We entered into agreements with Eagle Picher
that included an asset purchase of the existing inventory, the equipment in the
facility, a lease of the 43,000 square-foot building that belongs to Eagle
Picher, a technology license, a supply agreement to continue to produce sintered
nickel plaque and striker assemblies for Eagle Picher and a services agreement
to continue to operate groundwater remediation on behalf of Eagle Picher. We
created a wholly-owned subsidiary, Mobile Energy Products Inc. d/b/a Electro
Energy Mobile Products, Inc., to operate the Colorado Springs operation and
employ the existing staff of 33 individuals to continue the operations of the
facility. The plan for Mobile Energy Products is to continue the Colorado
Springs operations, supply components to Eagle Picher, manufacture and sell
specialty nickel-cadmium batteries, use the Colorado Springs operation to help
transition our bipolar nickel-metal hydride battery to a broader mix of
applications and to broaden the product mix to include lithium rechargeable
batteries. The Colorado Springs operation is one of three organizations
worldwide that produce specialty nickel-cadmium batteries for satellites and one
of two that is qualified by the U.S. government.
The first list below, "Aircraft Program Highlights," shows past aerospace
programs that have purchased batteries produced by the Colorado Springs
operation and from which Mobile Energy Products is pursuing additional business.
The second list below, "Super Nickel-Cadmium Program Highlights," shows the
Super NiCdTM and MagnumTM satellite batteries still in operation that have been
produced at the Colorado Springs facility for such aerospace companies as
Lockheed Martin and Hughes Aircraft. Mobile Energy Products is the only U.S.
supplier of these batteries. Mobile Energy Products' main competitor, SAFT, is
located in Europe.
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Aircraft Program Highlights
Customer Programs Mission
U.S. Air Force Bi Bomber Nuclear and Conventional Weapons
U.S. Air Force B2 Stealth Bomber Nuclear and Conventional Weapons
U.S. Air Force B52 Bomber Nuclear and Conventional Weapons
U.S. Marines AH-1W (Super Cobra) Attack Helicopter
Bell Helicopter Bell 214ST General Purpose Civilian Helicopter
Lockheed Martin Titan IV Ground Power for System Prior to Launch
NASA NASA Middeck Payload Ground Power for Space Shuttle Tests
Super Nickel-Cadmium Program Highlights
Cells/Ampere
Program hours (Ah) Launch Closing Customer
LEASAT 96 Cells/21 Ah Jan. `90 Maritime Satellite, US Navy/Hughes
Replaced Aircraft Co.
Fleetsatcom (TRW)
PALAPA B4 64 Cells/20 Ah May `92 Indonesia Communication Hughes Aircraft Co.
Satellite
GMS-V 54 Cells/4.8 Ah Feb. `94 Japanese Meteorological Hughes Aircraft Co.
Satellite
NEAR 22 Cells/9 Ah Feb. `96 Near Earth Asteroid John Hopkins APL
Rendezvous
Spacecraft
TRMM 44 Cells/50 ah Nov. `97 Tropical Rainforest NASA-Goddard
Mapping
Mission-Satellite
Lunar Prospector 22 Cells/5 Ah Jan. `98 Lunar Orbit Mission NASA/Lockheed Martin
ROCSAT 22 Cells/21 Ah Jan. `99 Republic of China TRW
Scientific
Satellite
Space Station 84 Cells/4.8 Ah 2000 Egress Lighting System BF Goodrich
Aerospace
Contour 22 Cells/9 Ah July `02 Comet Nucleous Tour John Hopkins APL
Kompsat 2 22 Cells/37 Ah TBA Korean Diehl-EP
Meteorological/Science
Government Funding for Development
The U.S. Government sponsors research and development programs designed to
improve the performance and safety of existing battery systems and to develop
new battery systems. In 2003, we were awarded government sponsored contracts for
approximately $3.0 million, which are ongoing. These efforts are directed at
developing prototype batteries and manufacturing technology development. We have
received a total of $18.0 million since inception for the development of our
bipolar nickel-metal hydride battery.
Effective March 31, 2004, we were awarded a new 12-month contract by the
U.S. Army, valued at approximately $850,000, to continue the development of its
bipolar nickel-metal hydride batteries for uses in military communications and
field equipment.
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In March 2004, we received a commitment for $500,000 investment for
technology development from In-Q-Tel, Inc., a private venture investment fund
supporting technologies of interest to the U.S. government. In consideration for
the In-Q-Tel contract, we issued to it warrants to purchase 268,594 shares of
common stock, for no consideration, exercisable within five years of issuance.
In March 2004, we received $150,000 and established a warrant subscription
receivable for the balance of $350,000. As of September 2004, $150,000 has been
collected and a $200,000 balance remains to be collected. We also granted
In-Q-Tel the right to have an observer attend our board meetings, which right
terminated on the closing of the merger. The funding from In-Q-Tel will be
directed at demonstrating the feasibility of utilizing our proprietary bipolar
wafer design, developed for nickel-metal hydride (known by the chemical element
symbol "Ni-MH") batteries for other battery chemistries. If the results prove
encouraging in the initial nine-month program, additional funding from In-Q-Tel,
or the government, for further development of complete battery systems could
occur but cannot be assured.
Effective May 18, 2004, we entered into an amendment to our existing
contract with the U.S. Air Force, increasing the contract's value by
approximately $1,700,000. The amendment provides for a 12 month continuation of
the manufacturing technology development of our bipolar nickel-metal hydride
batteries for use in aircraft. The initial $400,000 of development work under
the amendment is authorized, with the remaining work subject to further funding
authorization.
Battery Technology
A battery is an electrochemical apparatus used to store energy and release
energy in the form of electricity. There are two types of batteries: primary and
rechargeable batteries, or secondary batteries. A primary, or disposable,
battery is used until discharged and then discarded. A rechargeable, or
secondary, battery can, after discharge, be recharged and used again. Our
bipolar nickel-metal hydride batteries are designed to be rechargeable.
Rechargeable batteries can often be used in battery applications where
primary batteries are most commonly employed, but only where it is cost
effective. We are conducting research and development of an advanced,
rechargeable bipolar nickel-metal hydride battery designed to compete with other
rechargeable batteries. Primary batteries are, in most cases, too costly for
widespread use in applications currently utilizing rechargeable batteries.
No one battery system is ideal for all applications. There are numerous
performance variables which vary in importance by application. Each commercially
available battery system is stronger in certain areas and weaker in others.
Important variables include:
Voltage,
energy capacity per unit weight (energy density),
energy capacity per unit of volume (volumetric energy density),
power or discharge rate capability (how rapidly energy can be drawn from
the battery or specific power),
cycle life and how this varies with discharge rate and depth of discharge,
response to ambient temperatures,
rate of self-discharge,
shelf life in charged and discharged states,
size, shape and design flexibility,
time and other constraints on recharging,
safety, environmental and disposal considerations,
cost, and
various application-specific considerations.
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The needs of various battery applications place a different priority on
these characteristics, and thus require different solutions. In addition, for
each anode/cathode combination there are many alternative ways to design a
battery, involving choices of electrolyte and electrode materials and how
components are shaped and manufactured. Design choices involve trade-offs and,
as a result, improvement in one element of a battery's performance often comes
at a sacrifice of another characteristic. A battery optimized for just one
characteristic may not be competitive if its performance in other areas is
inferior.
We selected bipolar nickel-metal hydride for development because of its
potential to offer superior performance for battery-powered applications at
lower cost than many other commercially available battery configurations.
Below are key characteristics of how battery systems are measured and
compared:
Energy Density measures the capability of the battery to store energy, in
watt-hours per kilogram, which is critical to a battery's competitiveness. The
greater the energy density, the lower the weight and generally the smaller the
package required to store and deliver a given amount of energy. Nickel-metal
hydride has about twice the energy density of lead-acid systems and also has
higher energy density than nickel-cadmium. Nickel-zinc has an energy density
comparable to nickel-metal hydride.
Specific Power measures the ability to deliver power on demand and satisfy
the needs of a high current-drain device. Lead-acid is typically the best known
for starting a car. In power tools, HEV and EV applications, this characteristic
is as important as energy density or total capacity. In lower current-drain
applications like laptops or hearing aids, energy density and practical run-time
are more important and lithium-ion and high energy-density, low current-drain
zinc-air systems are commonly used.
Cycle Life is a measure of how many times the battery can be recharged
before it is replaced, which is important in affecting the cost in use and, to
an extent, convenience. Discharge and recharge cycles can be repeated a number
of times in rechargeable batteries, but the achievable number of cycles (cycle
life) varies among technologies and is an important competitive factor. All
rechargeable batteries experience a small, but measurable loss in energy with
each cycle. The industry commonly measures cycle life in number of cycles a
battery can achieve until 80% of the battery's initial energy capacity remains.
Cost is obviously important to the success of a battery system. With
automated production lines, lead-acid is currently the lowest cost rechargeable
battery. In volume production, we believe that our bipolar nickel-metal hydride
battery will be less expensive than other nickel-metal hydride batteries and
other rechargeable batteries. However, because we have not yet produced any of
our bipolar nickel-metal hydride batteries for volume production, there can be
no assurance that our estimates of cost of volume production of our batteries
will be accurate.
Environmental and Safety Issues surround most battery systems. Both nickel
and metal hydride, while not entirely harmless, are relatively benign compared
to other high-performance, rechargeable electrode materials. Lead is toxic,
however there are currently systems in place in the developed world to recycle
lead. There is pressure in Europe to ban or require recycling of nickel-cadmium
batteries due to the toxic nature of cadmium. Nickel-metal hydride batteries can
be disposed of in landfills, but are presently recycled due to the high value of
their materials. The prospect of stricter environmental legislation relating to
the manufacture, disposal and recycling of batteries containing lead or cadmium,
both of which are hazard and toxic, if enacted, could enhance the attractiveness
of our bipolar nickel-metal hydride battery.
The Battery Market
Based on our internal estimates, complied from independent industry
sources, the battery market consists of several market segments, as shown below.
Each market segment has its own price and performance requirements. The market
segments available to bipolar nickel-metal hydride batteries are already served
by batteries which we believe will have a price or performance advantage.
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World Battery Market
(in billions of U.S. dollars)
Market Annual Sales
[SLL] $15
Primary 15
Consular 8
Military 2
Industrial [ ]
The "established high-volume" portion of this market comprises the
so-called "4C applications": cordless power tools, cell phones, computers
(laptop) and camcorders. Cordless power tools will be a prime marketing target
for our technology because of the premium price paid for high power and low
volume.
Another target market for us is the "specialty high-performance" segment
(military and industrial applications), where customers are willing to pay a
premium for exceptional performance.
In addition, there are "emerging market" segments for 42-volt and hybrid
vehicles, electric bicycles and scooters, and distributed energy systems, which
are currently growing and may become significant.
The figure below shows global market share by geographic region. These
figures indicate that we would potentially be able to serve worldwide markets of
$18 billion through our plans to market and manufacture and enter into strategic
joint ventures and licenses.
Global Battery Market Share
Market Percentage
North America 26%
Japan 23%
Asia-Pacific 17%
Europe 17%
Other 17%
Source: Kline & Company, Inc.
The table below shows projected markets that we will target for our
batteries.
Electro Energy Projected Markets in 2008
(in millions of U.S. dollars)
Government Research and Development 100-150
Specialty Products 200-500
Power-Tools 300-500
Electric Bikes/Scooters 200-500
Automotive, 42-volt and Hybrid Vehicles 15,000-30,000
Utility 1,000-6,000
Total 16,800-37,650
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The table below demonstrates our bipolar nickel-metal hydride batteries'
price and performance advantage over conventional nickel-metal hydride and
nickel-cadmium batteries. This is the basis for regarding the markets for these
two battery types as being available to our bipolar nickel-metal hydride
batteries. This table also demonstrates our bipolar nickel-metal hydride
batteries' price advantages over lithium and its ability to meet or exceed
lithium's small size for a given energy requirement (known as volumetric energy
density). Based on this, we believe that a significant portion of the power tool
market (which we expect will continue to grow) can be served by our bipolar
nickel-metal hydride batteries rather than lithium batteries.
Price and Performance Comparisons
Typical Cost
(small
portable
Energy Density Energy Density Power batteries)
by Volume (watt by Volume (watt Density Typical ($/kilowatt
Chemistry hours/kg) hours/liter) (watt/kg) Cycle Life hours)
Ni-MH Electro 60-80 200-250 5001000 500-2000 300.600*
Energy
Bipolar
Ni-MH 60-70 150-200 400-500 500-2000 750-1000
Conventional
Ni-Cd 30-40 100-125 500-750 500-2000 500-600
Principal 25-40 100-150 200-300 100-200 100-300
Balance-Acid
Ni-Zn 50-70 100-150 300-400 100-400 350-500
Li-Ion 70-110 200-300 200-300 300-800 2000
Li-PE (polymer 80-120 150-250 150-350 500-1000 2000
electrolyte)
* Volume production cost based on our internal estimates.
The total market for our bipolar nickel-metal hydride batteries may be
divided into three segments: (i) established high performance markets, (ii)
specialty high performance markets and (iii) emerging markets.
Established High Performance Markets
Total 2001 revenues for the established high performance markets segment
were as follows: $3.08 billion for conventional nickel-metal hydride and nickel
cadmium batteries plus a portion of the $3.61 billion lithium ion market.
The figure below shows, on the left, the projected 2001 market by chemistry
forecast by the Santa Clara Group, an independent research firm, and, on the
right, our potential market share for bipolar nickel-metal hydride batteries in
the medium term.
Projected Battery Market Share by Chemistry
2001 Market Share Electro Energy Market Share Opportunity (Projected)
Market Percentage Market Percentage
Conv. Ni-Cd 45 BPNi-MH 43
Conv. Ni-MH 28 Conv. Ni-Cd 22
Li-ion 22 Li-ion 17
Li-polymer 5 Conv. Ni-MH 14
Li-polymer 4
The reason that the nickel-cadmium chemistry presently continues to prevail
in a number of markets is that it offers the lowest cost system and performs
best at high power. For example, nickel-cadmium batteries dominate the cordless
power tool market. Our bipolar nickel-metal hydride battery technology reduces
the cost of the nickel-metal hydride battery to be competitive with
nickel-cadmium. The increased power capability makes it an ideal candidate for
cordless power tools. Further, our bipolar nickel-metal hydride batteries do not
contain cadmium, a highly toxic material. In view of these factors, we believe
that our bipolar nickel-metal hydride battery could capture as much as 50% of
the nickel-cadmium market in the medium term, and also supplant a significant
portion of the market held by lower power and more expensive existing
nickel-metal hydride technology. The greatest growth area by application is in
the cordless power tool market, followed by computers and cell phones, with the
lowest growth area being camcorders (a relatively established market at this
time).
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Our bipolar nickel-metal hydride battery, with its flat cell design, is
able to package 3.4 Ah (compared to 2.5 Ah) at the same volume. This represents
a 35% advantage in run-time. As the markets for these products expand, cost
becomes a greater consideration in battery selection. Accordingly, there is an
overwhelming emphasis on reducing the price to broaden the market. The bipolar
nickel-metal hydride battery would have a significant cost advantage and would
compete very favorably against existing nickel-metal hydride and nickel-cadmium
products. We therefore believe that up to 50% of the nickel-metal hydride market
could be captured by our proprietary bipolar configuration. The impact of the
bipolar nickel-metal hydride battery on the lithium battery market is less
clear, since lithium batteries are lighter in weight per unit of stored energy.
However, considering that bipolar nickel-metal hydride is comparable on a
volumetric energy density basis at higher voltages and will be significantly
lower in cost, we believe that we could capture up to 25% of these two markets.
The lithium battery system gains weight as voltage and power increase due to
additional complexity. We estimate that above 50 volts the systems are
comparable with respect to weight and volume. However, we believe that our
systems will have the advantages of lower cost and higher power.
Another way to analyze the potential size of the bipolar nickel-metal
hydride battery market is to assume that it could capture 25% of each of the
market segments by application, as reflected in the figure "Projected Battery
Market Share by Chemistry" above. Each of these approaches predicts very
significant markets for the bipolar nickel-metal hydride battery. At a 10%
compounded growth rate, the worldwide portable battery market is predicted to be
$8 billion in 2005. A 25% share for the bipolar nickel-metal hydride battery
would mean a market size of $2 billion.
The market analysis described above is based on forecasts of the predicted
mix of battery-powered products now in existence. The flat and flexible shape of
the bipolar battery along with its other favorable characteristics could open up
new product opportunities. This could further expand the markets and create a
unique U.S. technology. Critical military applications would benefit by having a
U.S. source for high power batteries.
Specialty High Performance Markets
Specialty high performance applications, not including military
applications, are lower volume markets that will pay a premium for exceptional
performance, such as part 135 and 91 aircraft, utility energy systems, telecom
and critical UPS systems. This market can be served by our manufacturing line on
an incrementally profitable basis. Total 2001 revenues for the specialty high
performance markets segment were $325 million in 2001, representing 15% growth
over 2000.
This product is ideally suited to the military applications that we are
already pursuing which include military communications, space applications and
military aircraft applications (for which we have developed, on a cost-sharing
basis, batteries for F-16 and F-18 fighter aircraft). We have been able to
package three times the energy in the same volume and weight as the Hawker lead
acid, while providing four times the emergency load capacity at ambient
temperature. Although this market is small, serving it is advantageous to us.
The development funds and experience gained in manufacturing products for these
demanding customers has supported our technology development and continues to
position us in that market segment. In addition, the OEM5 serving the military
and space agencies for such applications typically also produce commercial
products requiring comparable batteries, so that serving this market provides us
with commercial sales opportunities.
Emerging Markets
Emerging markets include applications such as hybrid cars and electric
bicycles and scooters, including the 42-volt starting application now served by
the 12-volt lead acid battery.
Both Honda and Toyota have launched hybrid cars using conventional
nickel-metal hydride batteries in the U.S. market. The potential size of this
market is significant. Approximately 50,000 of these automobiles have been
produced to date.
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The potential size of the electric bicycle/scooter market, located mainly
in Asia, and to a lesser extent in Europe, is also significant. In these
countries bicycles and scooters are widely used as commuter vehicles. Our
bipolar nickel-metal hydride technology makes it possible to convert this huge
market from gasoline to electric, because, for the first time, adequate range at
a modest price is possible through our technology. Most major cities in Asia are
experiencing significant air pollution caused by emissions from gas powered
bicycles and scooters. Several governments are acting to replace such vehicles
with electric counterparts. The availability of bicycles and scooters using our
batteries could enhance and accelerate this effort. As an example of the forces
behind this market, according to published reports, Taiwan has 12.0 million
motor scooters, with an additional 1.0 million purchased each year. Based on our
research, we believe that Taiwan is eager to replace these motor scooters with a
"green" alternative, and that the country is offering to potential electric
scooter buyers incentives that pay substantially all the cost of a scooter's
battery set. As a second example, Shanghai, China initially ordered all 715,000
gas-powered bicycles and scooters off its streets by the year 2000, but
subsequently delayed that deadline to 2005 because of the limited availability
of electric counterparts.
Business Strategy
Our long-term strategy is to position our technology to be used in
battery-powered products with global markets in excess of $500 million through
either direct manufacturing or licensing arrangements. We will continue to
manufacture specialty nickel cadmium batteries at Colorado Springs, continue
government-funded research and development and begin other specialty battery
manufacturing at both our Danbury and Colorado Springs locations. We are
committed to demonstrating the competitive position of bipolar nickel-metal
hydride batteries in multiple markets to avoid the risk of dependence on a
single market.
Develop prototype/commercial batteries to serve the established commercial
markets, particularly cordless power tool markets and mobile applications.
Prototypes will be developed to meet the specifications and target prices of
potential large OEM customers. Successful testing by customers is intended to
demonstrate the superior performance of our batteries and establish the basis
for future sales. The cordless power tool industry is an ideal entry market for
our technology, due, in part, to the high power technology, coupled with the
industry practice to design the tool around the battery, in order to meet the
customer requirements for weight and balance.
Identify and consummate important strategic alliances. This will include
possible acquisitions, licenses and joint ventures that will position us with
key customers to further grow our business. We have benefited from a technical
exchange with a major Japanese battery manufacturer for over a year, which may
lead to a broader relationship.
Establish and operate our first production line. Initially, we intend to
target specialty markets which are willing to pay a premium for extraordinary
performance (targeted production line start-up is early 2005). We anticipate
$0.5 million, $5.0 million and $10.0 million in revenues from specialty markets
in 2005, 2006 and 2007, respectively. We believe that these markets can be grown
to $14.5 million by 2008. This prototype production line will be used to address
the multiple market opportunities described in this prospectus and to assist us
in identifying the market available to our bipolar nickel-metal hydride battery.
We believe that additional lines will be necessary to fully address the full
market potential of this technology. We plan to continue to produce specialty
nickel-cadmium batteries and components at our Colorado Springs facility with a
yearly revenue stream of $3 million to $4 million.
Develop prototype batteries (on a cost-shared basis) with strategic
customers to serve emerging markets. Emerging markets include aircraft,
automotive, 42-volt and hybrid electric cars, and electric scooters/bicycles, on
a basis to be negotiated with OEMs. We successfully demonstrated performance and
cycle life under a cost share program with PNGV. Prototypes will be further
developed to meet the specifications and target prices of potential large OEM
customers. Our management plans to only cost share projects that are believed to
have significant commercial potential within a five-year time frame.
Maintain continued government support. We plan to continue government
supported development at the rate of approximately $3 million to $4 million
annually to support the design and development of batteries for specialty
applications and continue advancements in our technology. We have a current
backlog of government funded and pending development projects of approximately
$2 million.
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Target Market Segment Strategy
We initially targeted the military and associated markets due to the
availability of research and developmental funding. We are now positioned to
enter the specialty manufacturing stage of product development, where we plan to
initially target the military. The military is a great consumer of batteries and
often pays a premium for performance. We then intend to target other users and
consumer OEM5. We believe this strategy will enhance our business because:
We have significant relationships with the military, which has responded
favorably to our products and technology, and for which the applications
for our technology are growing. We anticipate successful flight-testing
of our batteries in the F-16 fighter jet in the coming year.
Our military customers have introduced us to commercial design teams, and
we believe that this relationship-based marketing will be greatly
beneficial to the military and to us.
We have begun building relationships with OEM5 for cordless power tool
applications, and expect to convert these relationships into test,
evaluation and design programs leading to direct product applications.
We currently have no plans to enter the retail over-the-counter or
peg-board markets that consumer battery companies such a as Duracell, Eveready
and Rayovac presently dominate in the United States. We may, however, consider
licensing arrangements with one or some of these companies.
Based on our understanding of battery market opportunities, competitive
technologies and the performance advantages of bipolar nickel-metal hydride
batteries, we have developed the following strategy for commercializing our
battery business. This strategy is summarized below.
Specialty Batteries
We are in a preferred position to pursue battery products in the specialty
market for space, aircraft and military equipment based on our relationship with
governmental agencies. Aircraft currently utilize nickel-cadmium and lead acid
batteries for auxiliary power and starting applications. We are engaged in a
program to develop a bipolar nickel-metal hydride aircraft battery for the F-16.
Thus far, in addition to the elimination of toxic cadmium and lead, the battery
energy and power density were improved by a factor of two. We intend to pursue
this market with ongoing and government development projects.
The space battery business is currently utilizing nickel-hydrogen and
nickel-cadmium rechargeable batteries. Development efforts are underway to
develop lithium versions of satellite and space batteries. Our bipolar
nickel-metal hydride technology offers a factor-of-two weight improvement over
the nickel-hydrogen and nickel-cadmium batteries now used. We believe that our
bipolar nickel-metal hydride battery will capture a significant segment of this
market due to the weight savings of our battery. This market is willing to pay a
premium for a performance/weight advantage.
There are a number of applications for military and portable electronics
that presently use rechargeable conventional nickel-metal hydride batteries or
non-rechargeable batteries. We believe that the replacement of these batteries
with our bipolar nickel-metal hydride batteries would be cost effective.
Therefore, we will continue to pursue government-funded development efforts and
prototyping products in this area, to position us for high volume manufacturing
opportunities.
Cordless Power Tools
The power tool market is also rapidly expanding. Consumers are requesting
more powerful electric drills, saws, screwdrivers, nail drivers and other
cordless power tools. Industrial and consumer applications exist that encompass
a range of requirements and pricing. To date, the battery of choice for all
these applications has been nickel-cadmium cylindrical cells. The nickel-cadmium
battery has been selected based on its characteristics of good power and modest
price. However, there is a considerable desire on the part of power tool makers
to replace nickel-cadmium batteries with a battery that would be more
environmentally friendly. In some countries, the use of nickel-cadmium batteries
is restricted. However, conventional coiled cells typically cannot provide
adequate, cost-effective power capability. Recently, some manufacturers have
begun the use of cylindrical nickel-metal hydride cells for the power tool
requirements. Because of their design, we believe that bipolar nickel-metal
hydride batteries can compete successfully in the cordless power tool market. In
doing so, our battery will provide 50% more power and twice the energy of
nickel-cadmium batteries at a lower manufacturing cost. We believe that our
proprietary bipolar wafer design with its inherent high power capabilities will
become a preferred product for this market. We intend to allocate resources to
developing prototypes for sampling to select OEM manufacturers in this market.
22
Starting, Lighting and Ignition (SLI) Applications
Starting, lighting and ignition batteries for conventional automobiles are
a major business sector for the rechargeable battery industry. Lead acid is the
12-volt battery of choice for this application based on its low cost. We do not
anticipate that any other battery type could make serious inroads in this market
in the near term because of severe cost restrictions. Therefore, this market is
not a targeted area for our technology.
However, there has been a worldwide decision to gradually move the voltage
level for conventional automobiles from 12 volts to 42 volts. For the higher
voltage applications, our battery may have a future potential but the
applications are still uncertain. The Society of Automotive Engineers has agreed
that 42 volts should be the standard voltage. The timing of such a move is still
in the planning stages with some projections as early as 2005 and with others as
far out as the 2010 model year. We intend to closely follow this market and
build prototype batteries where appropriate.
Electric and Hybrid Vehicles
All Electric Automobiles. The limited range of electric vehicles
restricts the market to second car users and delivery vans. Because of
the cost and range limitations, all electric vehicles have not received a
warm reception to date. The bipolar nickel-metal hydride battery does
offer a potentially lower cost and better packaged battery than
conventional nickel-metal hydride batteries but does not eliminate the
range restriction. Therefore, we will not focus on the electric car
market for our technology in the near term. However, we will seek to
establish some collaboration agreements with vehicle developers to
evaluate our battery technology.
Hybrid Electric Cars and Buses. Both Honda and Toyota launched hybrid
cars using conventional nickel-metal hydride batteries in the U.S. in the
year 2000. We believe that the price/performance characteristics of
bipolar nickel-metal hydride batteries make them an extremely attractive
lower cost/higher performance alternative to conventional nickel-metal
hydride batteries for this application. We were formerly contracted by
The Partnership for a New Generation of Vehicles (PNGV), a partnership of
the U.S. "Big 3" automobile manufacturers, to develop a modular battery
on a 50/50 cost sharing basis. The result of the program was that our
modular battery met the power and life requirements and approached the
cost goals of the program. Due to the probable change from 12V to 42V,
PNGV lost a great deal of its momentum and we did not believe it was in
our best interest to continue development efforts at that time. Indeed,
General Motors and Ford have recently announced their plans to
discontinue all their lines of electric cars and trucks due to
uneconomical cost structures and insignificant consumer demand. We will
continue to market our products to other automakers, in particular Honda
and Toyota, to seek potential customer/partner teaming arrangements for
this market segment.
Electric Bicycles and Scooters. Most major Asian cities are experiencing
significant air pollution caused by exhaust emissions from gas-assisted
bicycles and gas-powered scooters. As a result, many Asian governments
are seeking alternatives to these vehicles. Since the bipolar
nickel-metal hydride battery is the first battery to provide adequate
range for these vehicles at a reasonable price, we believe that this
application represents a large potential market for our bipolar
nickel-metal hydride batteries. We plan to develop prototypes for these
applications as soon as acceptable terms can be negotiated with an OEM.
Emergency Power Back-up/Load Leveling
There is a broad spectrum of needs for batteries for emergency power
back-up, utility load leveling, peak shaving and customer demand side purposes.
These markets are driven mainly by initial battery cost and life. The lead acid
battery system has been the battery of choice to date. If an alternate battery
type were developed that was cost effective on a life cycle basis it could find
a share of this market. In 2001, we received a U.S. Department of Energy
contract to develop the cell chemistry for distributed power batteries. This
contract, which was directed at high power and power quality applications,
resulted in revenues of approximately $1.2 million in 2002 and $1.3 million in
2003. This contract was extended through February 2005.
23
Industry Analysis - Bipolar Nickel-Metal Hydride Batteries
We believe we must become a successful producer of bipolar nickel-metal
hydride batteries in order to fully develop our technology value and command the
highest possible licensing fees. This is partly because our product is unique,
and its processing requires different equipment than what is generally available
in the industry. We will, however, continue to pursue on a global basis, the
licensing of our technology to, or joint venturing with, manufacturers to assist
us in expanding market penetration.
We believe that, as a producer, it is important to work with both the
purchasing groups and design engineers of military and consumer electronic OEMs.
Our products will be competing with products that are familiar to the design
engineers. We offer designers a lighter, smaller and higher power product. We
have found designers to be relatively open to our new technology. We believe
that we will be very cost competitive, but we do not have the extensive
real-world testing in the designers' products that our competitors have. We
therefore must use the various contacts and testing by the military to induce
designers to embrace our products.
Industry Participants
There are several players involved in the worldwide rechargeable battery
industry. The industry is divided by chemistry: lead acid, nickel, lithium and
others. There are many small development houses that perform contract work and
support the larger companies, at times crossing technology boundaries. In the
battery industry these small research houses are often first to develop a vast
majority of new technology.
The lead acid industry has carved out the commodity automotive SLI market.
They produce low cost batteries extremely efficiently, at times at only
$1/battery profit ($2/kwh). This market shows slow growth and is not currently
of interest to us. There are a few small consumer applications that still use
lead acid batteries in cylindrical and flat plate configurations. We believe
that we or others will penetrate these niche markets in the short term. Lead
acid competes solely on initial cost, since its cycle life is not good in
applications requiring high power and cycle life. In late 2000, Johnson
Controls, Inc. purchased Optima Batteries. We believe that Johnson Controls
intends to use the Optima technology along with the technology gained from its
license from Bolder Technologies to meet the 42 Volt SLI market. We doubt
whether the lead-acid technology will meet all the demands of the 42 Volt
market, but the combination of both technologies plus Johnson Controls' strong
automotive ties may allow it to merge into the 42 Volt market and even slow the
total conversion to 42 Volt market by the automotive manufacturers. Exide does
not appear to have a product for the 42 Volt market at this time and has filed
for reorganization under bankruptcy. Exide may be able to regroup as a lower
cost producer, possibly further delaying automotive migration to non lead acid
batteries. Delphi Automotive appears to be investigating lithium systems for the
application, but, by its own report, has had limited success.
The nickel battery business is made up of several large companies and a few
small companies like us. Nickel batteries normally include cadmium, hydrogen,
hydride and zinc. Cadmium batteries had been the backbone of portable
electronics until environmental concerns of cadmium toxicity led to its
replacement by the hydride system. There are two basic hydride systems in the
marketplace, commonly known as AB2 and AB5. The AB2 system is manufactured by
Ovonic. Ovonic has had an aggressive licensing and litigation campaign to make
industry participants use its hydride of AB2, but even with the licensing
agreements in place, most companies are using the AB5 low-pressure system. This
is due primarily to that system's easier battery design, and reproducible active
materials. We do not believe that the Ovonics patents are relevant to its
design. SAFT of France, SANYO, Matsushita (Panasonic) of Japan, Gold Peak, Great
Power and Shida Battery of China are the predominate players. The nickel zinc
system has been under development for a long time. If successful, it would be a
lower cost system compared to other conventional nickel batteries but long life
is an issue in many applications. Evercel was the most recent
developer/manufacturer, but appears to have not been able to create a viable
product for its selected markets.
The rechargeable lithium battery industry is also growing rapidly. The
development of the intercalated carbon electrode has improved the safety of the
lithium system significantly. There are many smaller companies developing the
technology and they have identified the key development hurdles to be addressed.
The rechargeable lithium battery leader is Sony of Japan. The majority of
developers worldwide are using the Sony technology as the baseline with only
modest improvements being made. The systems offer good energy but lower power
than most nickel systems. The systems can operate at a slightly higher
temperature than nickel batteries but do not operate at temperatures below
-10°C, an unacceptable limitation for many applications. Sanyo is second to Sony
in market share in this chemistry. The development funds from In-Q-Tel will
provide us with an opportunity to evaluate the applicability of our wafer cell
design to the lithium chemistry and if successful, it will add to our product
mix and be a significant advancement to the baseline technology. The development
is directed initially at a specialty application but has strong commercial
application potential.
24
Our Solution
Bipolar Nickel-Metal Hydride Technology
We have developed a unique, advanced-design bipolar nickel-metal hydride
battery that is high power high energy, long life, clean, safe, and low cost to
be used in a broad range of applications. The primary use of the funds obtained
in the private placement is to commercialize this technology.
Bipolar nickel-metal hydride battery technology provides considerable
performance advantages over conventional battery systems. The bipolar
nickel-metal hydride battery design also delivers superior energy density and
cost advantages over conventional nickel-metal hydride and nickel cadmium
battery designs. Bipolar nickel-metal hydride batteries are approximately one
half the weight and size and have three times the life of the best commercially
available lead acid batteries.
Our patented bipolar battery design and plastic bonded electrode technology
represent established technological advancements in the nickel-metal hydride
battery industry for high volume, high power applications. This technology also
offers what we believe to be a sustainable cost advantage over conventional
nickel-metal hydride and nickel cadmium battery designs. This cost advantage
positions our bipolar battery technology to be the most likely technology to
meet the performance and cost requirements of many consumer electronics (power
tools), commercial bikes, scooters, hybrid electric vehicles (HEV5) and
distributed energy applications.
Importance of Bipolar Nickel-Metal Hydride Technology
Our bipolar nickel-metal hydride battery technology offers a sustainable
cost advantage with high energy density and high power density capabilities. The
bipolar wafer cell and plastic bonded electrode technologies are unique in their
cost-to-performance ratio. The improvements in energy density from the bipolar
wafer cell and the plastic bonded electrodes are significant when viewed in
light of the design goals for many applications.
A number of manufacturers around the world are pursuing the development of
conventional cylindrical and prismatic battery designs for the nickel-metal
hydride system. The most notable manufacturers are Matsushita Electric
Industrial Co., Ltd., Sanyo Electric Co., Ltd. and Toshiba Corp. in Japan, SAFT
of France, and Cobasys, formerly Texaco (GM)-Ovonic, in the United States. This
attests to the cost/performance advantages of the basic nickel-metal hydride
battery chemistry. This cost performance ratio is enhanced by our technology.
Our bipolar nickel-metal hydride battery is a unique, clean, safe battery
technology that is ideally suited for many applications.
Conventional cylindrical and small prismatic nickel-metal hydride batteries
have become commercial successes as rechargeable power sources for a variety of
portable electronic equipment. Conventional nickel-metal hydride batteries are
utilized in the two major automotive HEVs, the Toyota Prius and the Honda
Insight, and have been demonstrated as a high-performance option in the General
Motors EV1 (an all-electric vehicle). The commercial success of nickel-metal
hydride electric vehicle batteries will require a lower cost with better energy
density than provided by conventional nickel-metal hydride batteries. Our
technology has been proven to meet the life requirements under accelerated
testing for HEV applications.
Nickel-Metal Hydride Battery Systems
Environmental considerations have become paramount in this decade and will
drive the evolving battery market. Lead acid and nickel-cadmium chemistries
suffer from the presence of undesirable heavy metals. It is generally accepted
that lead acid batteries do not offer an acceptable energy density for many
applications. Highly toxic cadmium has rendered nickel-cadmium batteries
undesirable for commercial products. The overriding goal of eliminating highly
toxic materials from rechargeable batteries, the environmentally benign
characteristic of the nickel-metal hydride system, and the entry of the
nickel-metal hydride system into the commercial marketplace in small spirally
wound cylindrical cells have elevated this system's appeal.
25
Nickel-metal hydride batteries have the potential to become the preferred
system for many future applications based on its high power density and high
energy density, sealed maintenance-free operation, and long stable cycle-life.
While lithium rechargeable batteries have higher energy per unit of weight than
nickel-metal hydride batteries, they are costly, complex to control during
charge and discharge, and potentially hazardous due to the reactivity of lithium
and the electrolyte. In fact, in applications where the volume of a flat shaped
battery is of primary importance, our bipolar nickel-metal hydride batteries out
perform lithium rechargeable batteries, but at a much lower cost, while
delivering higher power. We plan to continue to also sell specialty
nickel-cadmium batteries and lithium batteries in the future. No one battery
type does all things for all applications and some chemistries are best suited
for a given application. By having a broad mix of products, we can be more
responsive to customer needs, making competitive, superior products for many
applications.
Our Bipolar Nickel-Metal Hydride Battery System
For more than a century, conventional rechargeable batteries have been
based on a design geometry that is termed monopolar. Unlike a bipolar cell,
monopolar cells have no electrically conductive "bipolar" plate that
simultaneously contacts both a positive and negative electrode. Rather, the
current in the individual electrodes in a monopolar cell is conducted through a
comparatively torturous path of wire grids and edge leads, through tabs to
external cell terminals. These monopolar cells are then connected in series
through a bus bar to create a battery of the desired voltage. An automotive
battery, for example, has six 2.0 Volt cells in series (in a single battery
case).
Unfortunately, traditional monopolar designs do not use space efficiently.
Current must flow through a long resistive pathway in the plane of the
electrodes, through the wire grids, tabs and interconnections. Not only do these
connections take up valuable space and add weight, but they also create
bottlenecks, which degrade high-power performance, that is essential for many
present and future battery applications.
A bipolar design, in contrast, maximizes space allocation and power by
eliminating the monopolar electrode interconnects, tabbing, and current
collector grids. The pathway for current is the cell thickness.
We have developed a unique approach to the design of a bipolar battery
based on the use of stackable wafer cells. Our bipolar nickel-metal hydride
battery design consists of a stack of flat single wafer cells. Each 1.2-volt
unit cell is contained in a sealed conductive envelope such that the cell faces
act as positive and negative cell terminals. Current flows through the cell
interfaces. Batteries of a desired voltage are constructed by stacking the cells
like a deck of cards in an outer container. This design approach eliminates
weight and volume normally taken up by individual cell terminals and cases as
well as internal components such as current collectors and grids. The result is
higher energy power density for the bipolar batteries.
In many battery applications, charge and discharge rate capability is
paramount. Rate capability in bipolar batteries is significantly improved
because current flow is perpendicular to the electrode plane, across the
electrode interface(s), bypassing the bottlenecks encountered in a monopolar
design.
Because there are no leads attached to individual electrodes, the
components can be symmetric, and thereby are well suited to low-cost
manufacture. Cost-savings are also attributable to the use of plastic-bonded
electrode technology. These highly conductive electrodes are fabricated from a
dry mix process that is far less costly than the traditional multi-step
labor-intensive techniques used to manufacture plaque-based or nickel foam based
electrodes. The wafer cell design scales well to large systems.
Competitive Comparison and Competitors
We have developed a bipolar nickel-metal hydride battery that is up to 50%
more powerful, 40%smaller, 30% less costly to manufacture, compared to other
nickel-metal hydride batteries. Nickel-metal hydride batteries are direct
replacements for nickel-cadmium batteries and are environmentally friendly,
containing no toxic heavy metals such as lead and cadmium, or organic solvents,
such as those used in lithium batteries. Nickel-metal hydride batteries have
excellent cold weather performance, providing power in harsh environments where
other battery technologies would be unable to function.
26
We face competition from a number of companies including established and
new manufacturers of batteries, and manufacturers of alternative power sources,
most of which are significantly larger and have greater financial and marketing
resources.
Procurement of Government Contracts
We will compete for most of our government development contracts in an open
bidding process. Requests for Proposals (RFP5) are generally advertised in
FedBizOpps, an electronic government publication. Bids are generally due from 30
to 60 days after the release of the RFP and the ensuing proposal evaluation
process generally requires three to six months.
We have typically bid on three types of government contracts: (I) CPFF,
(ii) T&M and (iii) fixed price. CPFF contracts provide for reimbursement for all
of our allowable costs and a fixed profit. T&M contracts require us to provide a
certain number of labor hours at a rate prescribed by the contract. We are
reimbursed for the hours spent on T&M contracts at the prescribed labor rate for
each category and for all materials utilized. The fee in a T&M contract is
generally slightly higher than for CPFF contracts. Fixed-price contracts require
us to deliver the work product described in the work statement at a fixed price,
which has the largest risk to us, but generally also has the largest potential
profit margin. In the year ended December 31, 2003, approximately, 78%, 0% and
22% of Electro Energy's government contract revenues were derived from CPFF, T&M
and fixed-price contracts, respectively.
The nature of our government contracts requires ongoing interaction between
our key management and technical personnel and the various government agencies.
These interactions provide us with useful insight with respect to our customers'
needs, and lead to opportunities through solicited or unsolicited proposals to
address these needs. Our management has also historically participated on
several energy and power committees such as the SAE Power Systems and NASA
review panels. In addition, through our ongoing contracts and our efforts to
position itself as a technology resource to government groups, we have improved
our ability to expand our business opportunities.
Suppliers
We have been working with our suppliers in the development of our bipolar
nickel-metal hydride battery. The construction of the bipolar nickel-metal
hydride battery utilizes a large percentage of nickel-metal and its alloys,
hydride materials and plastics. Therefore, we have built a good working
relationship with our suppliers for both nickel-hydroxide and metal hydride. We
have supply relationships with UMEX, 0MG and Tanaka, a Japanese supplier. INCO
of Canada, a supplier of specialty nickel powders and nickel-based chemicals,
has also become a supplier to us.
We also use a low-pressure metal hydride (AB5) alloy in our development and
fabrication processes. There are many alloy suppliers, but we are presently
working with Santoku, formally Rhodia, and Treibacher Auermet. We have not to
date experienced any shortages in the availability of the alloy, although an
effort to optimize the alloy for expanding applications and lower cost is
ongoing.
Other materials utilized in our design, such as metal foils, plastics and
adhesives, are commodities and should not become a supply issue. However, due to
possible formulation changes, we will continue to monitor these materials, and
ask the manufacturers to notify us if formulations are changed so that we can
seek other materials if necessary.
Future Products
We plan on continued use of government support to facilitate product and
technology development. By capitalizing on our proven ability to obtain grants,
Small Business Innovation Research contracts (SBIR) and application contracts,
we intend to continue our development of customized power sources and apply
those developed technologies to both the government and commercial market
sectors. We have typically responded annually to three to five SBIRs along with
three to four major application specific programs.
27
Since our founding, we had not been actively trying to apply our technology
to commercial products since the technology was not ready to be deployed on a
large-scale basis. However, in late 2003, we reached a point in the development
of our technology where niche marketing and product definition is only limited
by our ability to manufacture. The technology has been thoroughly evaluated and
its capabilities and weaknesses have been assessed. We are now able to apply the
technology towards specific applications. Our present government contracts have
expanded our potential products into aerospace, including NASA and commercial
satellite power, electric and hybrid vehicles, aircraft, military pulse power
missions, distributed energy and power systems. Future commercial opportunities
which we intend to exploit include cordless power tools, utility and residential
peak shaving, power factoring and conditioning systems, electric bikes and
scooters, EV5 and HEVs.
In pursuing the commercial development of our technology, we will add a
marketing individual who will make commercial customer contacts, gain insight
into market opportunities and interface with customers to coordinate the
development of special prototypes for various market segments.
Intellectual Property
We regard our battery technology and production processes as proprietary
and rely primarily on a combination of domestic and foreign patent and trade
secret laws of general applicability, employee confidentiality and invention
assignment agreements, licensing and OEM protection agreements and other
intellectual property protection methods to safeguard our technology and
processes.
We hold seven issued United States patents, which expire beginning in 2012
and ending in 2020. We also hold four issued foreign patents and a number of
pending foreign patent applications, which cover the technology that is the
subject of the United States patents. These include (i) bipolar electrochemical
battery of stacked wafer cells; (ii) method of making electrodes for bipolar
electrochemical battery; and (iii) method for preparing conductive
electrochemically active material. In addition, we have new applications pending
and a number of new inventions for which we intend to file additional patent
applications both domestically and internationally as we continue to improve our
existing technology, develop new technology and make advances to our bipolar
nickel-metal hydride battery.
Government Regulation
Because of our participation in government contracts, we will be subject to
audit from time to time for our compliance with government regulations by
various agencies, including the Defense Contract Audit Agency, the Defense
Investigative Service and the Office of Federal Control Compliance Programs.
These and other governmental agencies may also periodically conduct inquiries or
investigations that may cover a broad range of our activity. Responding to any
such audits, inquiries or investigations may involve significant expense and
divert management attention. In addition, an adverse finding in any such audit,
inquiry or investigation could involve penalties that may be significant.
Our facilities will also be subject to a broad range of federal, state and
local laws and regulations relating to the environment, including those
governing discharges to the air, water and land, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at our facilities and at
off-site disposal locations. Risk of environmental liability is inherent in our
business, and there can be no assurance that material environmental costs will
not arise in the future. In particular, we might incur capital and other costs
to comply with increasingly stringent environmental laws and enforcement
policies.
We believe that we operate our business in material compliance with
applicable government regulations.
Employees
As of November 30, 2004, we had 67 employees. We enjoy good employee
relations.
Description of Property
We are located in two leased facilities at 30 Shelter Rock Road, Danbury
Connecticut and 3820 South Hancock Expressway, Colorado Springs, Colorado. The
14,000-square-foot Connecticut facility includes offices, battery fabrication
and testing departments, pilot equipment, process development and machine shop
areas. Presently, batteries, test cells for customers and laboratory testing
hardware are fabricated at this site manually, or with hand operated tools.
28
We have a fully automated state-of-the-art battery testing facility in
Connecticut, managing data acquisition, cycling, and thermal testing. The
facility can test over 1,500 different cells/batteries at any given time, each
with their own test regime. In addition, we have computer assisted design (CAD)
capabilities, and each engineer, technician and administrative person, has
his/her own computer work station.
The monthly rent for the Danbury, Connecticut facility is approximately
$9,239 under a lease expiring in July 2005. We are currently developing process
equipment to automate our electrode fabrication and cell assembly processes, and
intend to lease additional space as necessary.
The 43,000-square-foot facility in Colorado Springs consists of a dry
powder nickel sinter line, a wet slurry nickel sinter line, to make nickel
plaque, facilities for vacuum impregnation and electrochemical impregnation of
nickel and cadmium electrodes, water treatment facilities, electrode and battery
formation equipment, assorted battery fabrication and assembly equipment, and
battery test facilities. The monthly rent for this facility is $23,875 under a
lease expiring in March 2009.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth information regarding the members of our
Board of Directors, its executive officers and significant employees. The
directors listed below will serve until the next annual meeting of our
stockholders.
Name Age Position
------------------- ------------ ----------------------------------------------------
Martin G. Klein 67 Founder, Chairman of the Board of Directors and
Chief Executive Officer
Michael D. Eskra 47 President, Chief Operating Officer and member of the
Board of Directors
Joseph Engelberger 76 Member of the Board of Directors
Warren D. Bagatelle 65 Member of the Board of Directors
Farhad Assari 43 Member of the Board of Directors
Audra J. Mace 33 Chief Financial Officer and Secretary
Albert J. Estrada 39 Vice President, Marketing and Sales
Paula Ralston 45 Operations Manager - Danbury, Connecticut office
Dr. Jack Brown 72 Manager - Washington, D.C. office and Technical
Advisor
Rolan Farmer 61 Operations Manager - Mobile Energy Products Group,
Colorado Springs, Colorado
Dr. Alvin Salkind 74 Chief Scientific Advisor
------------------- ------------ ----------------------------------------------------
|
The principal occupations for the past five years (and, in some instances,
for prior years) of each of our directors, officers and significant employees
are as follows:
Martin G. Klein is the Chairman of our Board of Directors and our Chief
Executive Officer. Mr. Klein is the founder of EEI, and has over 40 years of
experience in the advanced battery field. In 1970, prior to forming EEI, Mr.
Klein was one of the founding principals of Energy Research Corporation (now
Fuel Cell Energy Inc.) and served as its Executive Vice President through 1990
and as a director through 1992. Mr. Klein has developed and worked on several
battery chemistries and fuel cell systems. Prior to his association with Energy
Research Corporation, he held positions in the battery field at U.S. Army Signal
Corps, Yardney Electric Corp., Electrochimica Corp., and Electro Optical
Systems. Mr. Klein, considered an expert in the field of electrochemistry, has
contributed to many of the fundamental reference books on the subject and has
authored numerous technical papers. Mr. Klein provided consulting services and
served as an assistant professor at Rutgers University from 1990 to 1992. Mr.
Klein holds more than 15 patents in the field of advanced electrochemical
systems and has a bachelor's degree in Chemical Engineering.
29
Michael D. Eskra is our President, Chief Operating Officer and a member of
our Board of Directors, and has over 20 of years experience in the rechargeable
battery business. Prior to joining the company, Mr. Eskra worked at General
Motors and Johnson Controls, Inc. During the 13 years at Johnson Controls, Inc.
(Sears DieHard and Interstate Batteries), Mr. Eskra held several positions
including process engineer, plant engineering manager, plant superintendent,
plant manager, program manager, and Manager of the Advanced Battery Business
Unit, where he also was part of the company's strategy board. These positions
were directly related to the development and commercialization of new
technologies and products. At General Motors he served as assistant platform
manager for the Electric Vehicle Program, staff engineer of Advanced Technology
Vehicles (all electric and hybrid vehicles), and as a member of the Technical
and Business Management Team of the United States Advanced Battery Consortium
(USABC) and the Partnership for New Generation Vehicle (PNGV), for the
development of hybrid vehicles. Mr. Eskra presented to the U.S. Congress, former
Vice President Al Gore, and the National Science Foundation the USABC and PNGV
technology program strategy and funding requirements. Mr. Eskra assisted the
automotive companies in the strategy and preparation of the testimony to the
U.S. Justice Department for the formation of the pre-competitive R&D
partnerships to alleviate antitrust concerns. Mr. Eskra is the holder of five
patents related to batteries.
Joseph Engelbergerhas been a member of the Board of Directors of EEI since
1992. Mr. Engelberger has over 50 years of experience as an
entrepreneur/engineer and has participated in the founding and start-up of a
number of high technology companies. Mr. Engelberger was a founding principle of
Unimation, and the founding principle of Helpmate Robotics.
Warren D. Bagatelle has been a Managing Director of Loeb Partners
Corporation, an investment banking firm, and a director of Full Cell Energy,
Inc. (Nasdaq: FCEL), a world leader in the development of high temperature
hydrogen fuel cells for clean electric power generation, since 1988. Mr.
Bagatelle is also the Chairman of the Board of VirtualScopics, LLC, a
privately-held medical imaging services company.
Farhad Assari has been involved in the international investment management
business for the past 20 years, working in Europe, the Middle East and Africa as
well as the U.S. From 2001 to 2003, he built the Miami offices of Neuberger
Berman. He is currently the Deputy Head of Credit Suisse Private Advisors in
Miami.
Audra J. Mace is our Secretary and Chief Financial Officer. She has served
in senior finance and information technology positions with privately held and
publicly traded companies for 12 years, including Mormac Marine Enterprises,
Inc, Acme United Corp. and BIC Corporation. Recently, as Director of Finance and
Information Technology at Acme United Corp (Amex: ACU), a manufacturer and
multi-national wholesale distributor of consumer products, she orchestrated an
integral part of the company's turn-around effort, managing debt restructurings,
financial reporting and compliance and reshaping internal controls. As Director
of IT, she led the transformation of Acme's MIS cost center into a strategic IT
business partner, overhauling the network infrastructure, implementing a new ERP
system, exploiting internet solutions and re-engineering business processes and
controls. Ms. Mace is a certified management accountant and has served on the
national board of directors of the American Society of Women Accountants.
Albert J. Estrada is our Vice President, Marketing and Sales. He has served
as Senior Director of Sales, North America for Alcatel Space, a division of
Alcatel (Paris: CGEP.PA), Europe's leading satellite communications
manufacturer. In this position, Mr. Estrada was responsible for sales of
commercial satellites to the North American satellite operators and direct
broadcast service providers. Previously, Mr. Estrada served as Director,
Americas Sales & Marketing, for Space Systems/Loral, a leading global satellite
communications manufacturer. There, he was responsible for marketing, strategy
and sales of commercial satellites within the competitive Americas region. Mr.
Estrada formerly held key business development positions with DIRECTV, Inc. as
Director of Distribution and Sales and with DIRECTV Latin America as Director of
Marketing.
Paula Ralston is the Operations Manager for our Danbury, Connecticut
office. Ms. Ralston joined EEI in 1992. Ms. Ralston brings 25 years of broad,
hands-on experience in research, development and manufacturing to EEI. Prior to
joining EEI, Ms. Ralston was with VISX, formerly Taunton Technologies and the
developer of Laser Ophthalmic Surgical equipment (LASIK(TM)). Ms. Ralston also
served Perkin Elmer's Micralign division as prototype specialist and program
supervisor.
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Dr. Jack Brown is the Manager of our Washington D.C. office and is a
Technical Advisor to the Company on a retained independent consultant basis. Dr.
Brown is in charge of our governmental marketing and is directly involved with
meeting customers and assisting in business and technical issues. Dr. Brown
assists in formulating government business strategy and technology thrusts. Dr.
Brown has 45 years of experience in the battery/fuel cell field and had a
35-year career with Westinghouse, where he served as Manager of Fuel Cell and
Battery Research and Development. Dr. Brown spent much of his career at
Westinghouse, where he held positions from engineer through senior management.
When Dr. Brown left Westinghouse he was Laboratory Director. He has authored
over 100 technical papers and 15 patents. Dr. Brown received his Ph.D. degree,
majoring in Electrochemistry and Physical Metallurgy, at Case Western Reserve
University.
Rolan C. Farmer is the Operations Manager of the Company's Mobile Energy
Products Group, located in Colorado Springs, Colorado. Mr. Farmer has over 38
years experience in the battery industry. After graduating with a B.S in
Mechanical Engineering from the University of Missouri, Mr. Farmer began his
career with Eagle Picher as an engineer in the Thermal Battery Department in
Joplin, Missouri. Over the next 12 years, Mr. Farmer served as Project Engineer,
Program Manager, Manager of Contract Administration, and Marketing Manager.
Since 1976, Mr. Farmer has been located in Colorado Springs and served as
Operations Manager, Plant Manager, General Manager and Corporate Vice President
of Eagle Picher. His responsibilities included profit and loss for all Colorado
operations. During his 38 years with Eagle Picher, Mr. Farmer has been involved
with many different battery systems, including, thermal, silver-zinc,
nickel-hydrogen, nickel-cadmium and nickel-zinc batteries.
Dr. Alvin Salkind is a member of the Board of Directors of EEI. Dr. Salkind
has over 40 years of experience in the electrochemical battery field, and was
the former Director of Research at ESB Inc. (now Exide Battery Company). Dr.
Salkind also serves as the Scientific Advisor to the Company as a consultant on
a number of Electro Energy projects. Dr. Salkind is a Professor and Director of
the Battery and Electrochemical Systems Center at Rutgers University and also
Professor and Chief of the Bioengineering Section of the Department of Surgery
at UMDNJ/Robert Wood Johnson Medical School at Rutgers University. Dr. Salkind
received his Ph.D. in Chemical Engineering from the Polytechnic Institute in New
York and had additional graduate and management training at Penn State
University and the Harvard Business School. Dr. Salkind has had a dual
academic-industrial career, which includes 25 years of industrial experience in
electrochemical operations, focusing batteries and electro-medical devices.
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