**SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 **

**FORM 10-Q**

|            | MarkOne                                                                                            |
|-----------------|----------------------------------------------------------------------------------------------------|
| [X]             | QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934  |
|            |                                                                                               |
|            | For the quarterly period ended: June30, 2003                                                       |
|            |                                                                                               |
|            | OR                                                                                                 |
|            |                                                                                               |
| [   ] | TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES      EXCHANGE ACT OF 1934   |
|            |                                                                                               |
|            |                                                                                               |
|            | For the transition period from:_____________ to ________________                                   |
|            |                                                                                               |
|            | Commission File Number: **001-14919**                                                              |

**EVERCEL,INC.**(Exact Name ofRegistrant as Specified in Its Charter)

| DELAWARE                                                          |  | 06-1528142                                |
|-------------------------------------------------------------------|--|-------------------------------------------|
| (State or Other  Jurisdiction  of Incorporation or  Organization) |  | (I.R.S. Employer  Identification  Number) |

5 POND PARK ROADHINGHAM,MASSACHUSETTS 02043(781) 741-8800(Address, IncludingZip Code, and Telephone Number, Including Area Code,of Registrant's Principal Executive Offices)------------------------------GARRY A. PRIME,PRESIDENT AND CHIEF EXECUTIVE OFFICEREVERCEL, INC.5 POND PARK ROADHINGHAM,MASSACHUSETTS 02043(781) 741-8800(Name, AddressIncluding Zip Code, and Telephone Number, Including Area Code,of Agent For Service)

Securities registeredpursuant to Section 12(b) of the Act:NoneSecurities registeredpursuant to Section 12(g) of the Act:**Common Stock, $.01par value per share**(Title of class)

Indicate by check mark whether the registrant  (1) has filedall documents and reports required to be filed by Section 13 or 15(d) ofSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. 

Yes [X] No [  ]

The number of shares outstanding of the Registrant's CommonStock, par value $.01 as of  July 20, 2003 was 10,435,260.

----

EVERCEL, INC.FORM10-QINDEX

| PART 1 -                       | FINANCIAL INFORMATION                                                                                 |
|--------------------------------|-------------------------------------------------------------------------------------------------------|
|                           |                                                                                                  |
| Item 1.         | Unaudited Financial Statements                                                                        |
|                           |                                                                                                  |
|                           | Consolidated Balance Sheets as of      June 30, 2003 and December 31, 2002                            |
|                           |                                                                                                  |
|                           | Consolidated      Statements of Operations for the three months ended June 30, 2003 and June 30, 2002 |
|                           |                                                                                                  |
|                           | Consolidated Statements ofOperationsfor the six months ended June 30, 2003and June 30, 2002           |
|                           |                                                                                                  |
|                           | Consolidated      Statements of Cash Flows for the six months ended June 30, 2003and June 30, 2002    |
|                           |                                                                                                  |
|                           | Condensed Notes to Consolidated FinancialStatements                                                   |
|                           |                                                                                                  |
| Item 2.                        | Management's Discussion and Analysis of Financial Condition and Results of Operations                 |
|                           |                                                                                                  |
|                           |                                                                                                  |
| Item 3.         | Quantitative and Qualitative Disclosures About Market Risk                                            |
|                           |                                                                                                  |
| Item 4.         | Controls and Procedures                                                                               |
|                           |                                                                                                  |
| Item 5     | Annual Meeting                                                                                        |
|                           |                                                                                                  |
| PART II -                      | OTHER INFORMATION                                                                                     |
|                           |                                                                                                  |
| Item 6.                        | Exhibits and Reports on Form 8-K                                                                      |
|                           |                                                                                                  |
|                           | SIGNATURES                                                                                            |

* *

 2

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EVERCEL, INC. ANDSUBSIDIARYCONSOLIDATED BALANCESHEETS(Dollars inthousands, except per share amounts)(Unaudited)

| ** **                                                                                                                                                                                                                                                                                                                             | ** ** |             | **June 30,**                                                                                                    |             | **December 31,**                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-----------------------------------------------------------------------------------------------------------------|------------------|------------------------------------------------------------------------------------------------------------------------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                                             | ** ** |             | ** 2003**                                                                                                  |             | ** 2002**                                                                                                               |
| Current assets:                                                                                                                                                                                                                                                                                                                        |            |             |                                                                                                                 |             |                                                                                                                              |
|      Cash and cash equivalents                                                                                                                                                                                                                                                                                     |            | $                |               6,183                                      | $                |             10,377                                                    |
|      Accounts receivable                                                                                                                                                                                                                                                                                           |            |             |                   74  |             |                  172                         |
|      Inventories                                                                                                                                                                                                                                                                                                   |            |             |                 582             |             |                  728                         |
|      Other current assets                                                                                                                                                                                                                                                                                          |            |             |                   517           |             |             520                                                  |
|                                                                                                                                                                                                                                                                                                                                   |       |             |                                                                                                            |             |                                                                                                                         |
|          Total current assets                                                                                                                                                                                                                                                                  |            |             |              7,356                             |             |            11,797                                                     |
|                                                                                                                                                                                                                                                                                                                                        |            |             |                                                                                                                 |             |                                                                                                                              |
|      Property, plant and equipment, net                                                                                                                                                                                                                                                                            |            |             |              1,215                             |             |               1,312                                         |
|   Other assets, net                                                                                                                                                                                                                                                                                                               |            |             |              2,776                             |             |               2,977                                         |
|   Goodwill                                                                                                                                                                                                                                                                                                                   |            |             |                   342           |             |                       -  |
| **TOTAL ASSETS**                                                                                                                                                                                                                                                                                                                       |            | **$**            | **11,689 **                                                                                                | **$**            | ** 16,086 **                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                   |       |             |                                                                                                            |             |                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                        |            |             |                                                                                                                 |             |                                                                                                                              |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                                                                                                               |       |             |                                                                                                            |             |                                                                                                                         |
| Current liabilities:                                                                                                                                                                                                                                                                                                                   |       |             |                                                                                                            |             |                                                                                                                         |
|      Accounts payable                                                                                                                                                                                                                                                                                              |       | $                |  116                                                                                                  |             | $         142                                                                   |
|      Accrued liabilities                                                                                                                                                                                                                                                                                           |       |             |  241                                                                                                  |             | 470                                                                                                                     |
|           Total  current liabilities                                                                                                                                                                                                                                                      |       |             | 357                                                                                                        |             | 612                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                   |       |             |                                                                                                            |             |                                                                                                                         |
| Other non-current liabilities                                                                                                                                                                                                                                                                                                          |       |             | 21                                                                                                         |             | 44                                                                                                                      |
| Note payable                                                                                                                                                                                                                                                                                                                           |       |             | 2,361                                                                                                      |             |                                                                                                                         |
| Minority interest                                                                                                                                                                                                                                                                                                                      |       |             | -                                                                                                          |             | 5,005                                                                                                                   |
|      Total liabilities                                                                                                                                                                                                                                                                                             |       |             | 2,739                                                                                                      |             | 5,661                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                   |       |             |                                                                                                            |             |                                                                                                                         |
| Shareholders' equity:                                                                                                                                                                                                                                                                                                                  |       |             |                                                                                                            |             |                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                   |       |             |                                                                                                            |             |                                                                                                                         |
|       Preferred Stock ($0.01 par value); 1,000,000 shares authorized: 214,839 and  210,029 issued and outstanding at June 30, 2003 and December 31, 2002,  respectively (with cumulative dividends at 8%).                                                                                                         |       |             | 2                                                                                                          |             | 2                                                                                                                       |
|    Common Stock ($0.01 par value); 30,000,000          shares  authorized: 10,435,260 and          10,422,156 issued and outstanding at June 30, 2003           and December 31, 2002, respectively. |       |             | 104                                                                                                        |             | 104                                                                                                                     |
|       Additional paid-in-capital                                                                                                                                                                                                                                                                                   |       |             | 58,225                                                                                                     |             | 58,225                                                                                                                  |
|       Accumulated other comprehensive income                                                                                                                                                                                                                                                                       |       |             | 1                                                                                                          |             | -                                                                                                                       |
|      Accumulated deficit                                                                                                                                                                                                                                                                                           |       |             | (49,382)                                                                                                        |             | (47,906)                                                                                                                     |
|           Total shareholders' equity                                                                                                                                                                                                                                                      |       |             | 8,950                                                                                                      |             | 10,425                                                                                                                  |
| **TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                                                                                                                                                                                         |       | **11,689 ** |                                                                                                            | **16,086 ** |

See condensed notesto consolidated financial statements.

3

----

EVERCEL, INC. ANDSUBSIDIARYSTATEMENTS OFOPERATIONS(Dollars inthousands, except per share amounts)(Unaudited)

| ** ** | **Three Months Ended**
** **

**June 30,**

**June 30,**

** **

**2003**

**2002**
     
Revenues

$              59 

$              19 

Cost and expenses:  

     Cost of revenues  

                193 

               102 

     Administrative and selling expenses  

                588 

               598 

     Research and development  

45 

37 

          Total operating costs and expenses  

826 

737 
     
Loss from operations  

(767)

(718)
     
Interest income, net  

5 

67 

Other income (expense), net  

(2)

3 

Minority interest

- 

52 
     
Loss before income taxes

               (764)

              (596)
     
Income tax expense (benefit)

-  

-  
     
Net loss  

(764)

(596)
     
Preferred stock dividends

(105)

(95)
     
Net loss - common shareholders

$         (869)

$         (691)
     
Basic and diluted loss per share  

$           (.08)

$           (.06)
     
Basic and diluted shares outstanding  

10,435 

10,404 
     
See condensed notes to consolidated financial  statements.        
4
EVERCEL, INC. AND SUBSIDIARYSTATEMENTS OFOPERATIONS(Dollars inthousands, except per share amounts)(Unaudited)

** **

**Six Months Ended**
** **

**June 30,**

**June 30,**

** **

**2003**

**2002**
     
Revenues

$          148 

   $          171 

Cost and expenses:  

     Cost of revenues  

397 

250 

     Administrative and selling expenses  

1,186 

1,224 

     Research and development  

57 

118 

         Total operating costs and expenses  

1,640 

1,592 
     
Loss from operations  

(1,492)

(1,421)
     
Interest income, net  

25 

111 

Other income (expense), net  
(9)
37 

Loss attributable to minority interest

-  

135 
     
Loss before income taxes

(1,476)

(1,138)
     
Income tax expense (benefit)

-  

-  
     
Net loss  

(1,476)

(1,138)
     
Preferred stock dividends

(210)

(190)
     
Net loss - common shareholders

$      (1,686)

$      (1,328)
     
Basic and diluted loss per share  

$        (0.16)

$         (0.12)
     
Basic and diluted shares outstanding  

10,435 

10,397 
     
See condensed notes to consolidated financial  statements.

       5

EVERCEL, INC. ANDSUBSIDIARYSTATEMENTS OF CASHFLOWS(Dollars inthousands)(Unaudited)

** **

** **

**Six Months Ended**             
** **

** June 30,**

** **

**June 30,**

** **

** **

** 2003**

** **

** 2002**

**Cash flows from operating activities:**

Net loss 

$        (1,476)

$        (1,138)

Adjustments to reconcile net loss to net cash used in  operating activities:

Depreciation and amortization  

247 

195 

Minority interest  

- 

(135)

(Increase) decrease in operating assets:  

Accounts receivable

97 

(89)

Inventories  

147 

(311)

Other current assets  

4 

(343)

Increase (decrease) in operating liabilities:  

Accounts payable  

(26)

34 

Accrued liabilities  

(230)

(2,045)

        Other long term assets  and liabilities 

97 

210 

    Net cash used in operating activities

(1,140)

(3,622)

**  **
   
**Cash flows from investing activities:**

    Capital expenditures  

(54)

(280)

    Acquisition of minority interest in JV

(3,000)

- 

    Net cash used in investing activities  

(3,054)

(280)

**  **

**Cash flows from financing activities:**

    Net proceeds from common stock issued  

-

21 

Net cash provided by financing activities  

-

21 
     
Net decrease in cash and cash equivalents  

(4,194)

(3,881)

Cash and cash equivalents - beginning of period  

10,377

16,199 

Cash and cash equivalents - end of period  

$          6,183 

$        12,318 

**  **

**Cash paid during the period for:**

    Income taxes  

$                  - 

$                  - 

    Interest paid  

$                  - 

$                  - 
     
**Supplemental schedule of non-cash investing activity:**

Note issued for acquisition of minority interest in joint  venture, net of discount

($         2,346)

- 
     
**Supplemental schedule of non-cash financing activity:**

Note payable for acquisition of minority interest in  joint venture, net of discount

$          2,346 

- 

See condensed notesto consolidated financial statements.

6

EVERCEL, INC.CONDENSED NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

**(1)Basis of Presentation**

The accompanying financial statements represent ourfinancial position as of June 30, 2003 and December 31, 2002 and the results ofoperations and cash flows for the three and six months ended June 30, 2003 and2002.

Comparative amounts for the threeand six months ended June 30, 2003 and June 30, 2002 are unaudited.  In theopinion of management, the information presented in the unaudited three and sixmonth statements reflect all adjustments necessary for a fair presentation ofour results of operations for those periods.

Management has made a number of estimates and assumptionsrelating to the assets and liabilities and the reporting of revenues andexpenses to prepare these financial statements in conformity with accountingprinciples generally accepted in the United States of America.  Actual resultscould differ from those estimates.  The unaudited Consolidated FinancialStatements should be read in conjunction with the consolidated financialstatements and related notes contained in our Annual Report on Form 10-K forthe year ended December 31, 2002 as filed with the Securities and ExchangeCommission on March 31, 2003.  The results of operations and financialposition, including working capital, for interim periods are not necessarilyindicative of those to be expected for a full year.

**(2)Summary of Significant Accounting Policies**

*Nature of Business*

The Company is engaged in the design and manufacture ofinnovative, patented nickel-zinc rechargeable batteries. The nickel-zincbattery has commercial applications in markets requiring long cycle life, lightweight and relative cost efficiency. The Company manufactures batteries at itssubsidiary (wholly owned as of January 5, 2003), the EVERCEL (Xiamen) Co.,Ltd., in the People's Republic of China (PRC). 

The Company believes its battery technology has applicationsin the small electric vehicle market such as scooters; neighborhood electricvehicles, golf carts; wheelchairs and electric bicycles; also bass fishingboats, medical devices and yard tools, including lawn mowers and trimmers. 

*NewAccounting Pronouncements*

InAugust 2001, the FASB issued Statement No. 143, *Accounting for AssetRetirement**Obligations.*  Statement 143 requires recording the fairmarket value of an asset retirement obligation as a liability in the period inwhich a legal obligation associated with the retirement of tangible long-livedassets is incurred.  The Statement also requires recording the contra asset tothe initial obligation as an increase to the carrying amount of the relatedlong-lived asset and depreciation of that cost over the life of the asset.  Theliability is then adjusted at the end of each period to reflect the passage oftime and changes in the initial fair value measurement.  The Company adoptedthe provisions of Statement 143 effective January 1, 2003 and such adoption hadno effect on its financial statements.

In July 2002, the FASB issued Statement No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities.*  This statementnullifies EITF Issue No. 94-3, "Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)."  Statement No. 146 requires that aliability for costs associated with an exit or disposal activity be recognizedwhen the liability is incurred. The provisions of Statement No. 146 areeffective for exit or disposal activities initiated after December 31, 2002.  The adoption of Statement 146 had no affect on the Company's financialposition, results of operations or cash flows.

7

In November 2002, the FASB issued Interpretation No. 45,"Guarantor's Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others."  InterpretationNo. 45 requires the guarantor to recognize a liability for the contingent andnon-contingent component of a guarantee; which means (a) the guarantor hasundertaken an obligation to stand ready to perform in the event that specifiedtriggering events or conditions occur and (b) the guarantor has undertaken acontingent obligation to make future payments if such triggering events orconditions occur. The initial measurement of this liability is the fair valueof the guarantee at inception.  The Company is required to recognize theliability even if it is not probable that payments will be required under theguarantee or if the guarantee was issued with a premium payment or as part of atransaction with multiple elements.  Interpretation No. 45 also requiresadditional disclosures related to guarantees that have certain specifiedcharacteristics.  The Company was required to adopt, and has adopted thedisclosure provisions of Interpretation No. 45 in its financial statements asof and for the year ended December 31, 2002.  Additionally, the recognition andmeasurement provisions of Interpretation No. 45 are effective for allguarantees entered into or modified after December 31, 2002.  The adoption of therecognition and measurement provisions of this Interpretation had no affect onthe Company's financial statements.

In December 2002, the FASB issued Statement No. 148, *Accountingfor Stock‐Based Compensation - Transition and Disclosure, an amendment ofFASB Statement No. 123*. This Statement amends FASB StatementNo. 123, *Accounting for Stock‐Based Compensation*, to providealternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock‐based employee compensation. In addition,this Statement amends the disclosure requirements of Statement No. 123 torequire prominent disclosures in both annual and interim financial statements.Certain of the disclosure modifications are required for fiscal years endingafter December 15, 2002 and are included in the notes to theseconsolidated financial statements.

In May 2003, the FASB issued Statement No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*.  The Statement requires that certain financial instruments thatwere previously classified as equity now be classified as liabilities.  TheStatement is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003.  There is no impact on the Company'sfinancial position or results of operations.

 In January 2003, the FASB issued Interpretation No. 46,"Consolidation of Variable Interest Entities."  The Interpretation requiresexisting variable interest entities to be consolidated if those entities do noteffectively disperse risks among the parties involved.  The Interpretation iseffective immediately for all variable interest entities created after January 31,2003.  All variable interest entities created before February 1, 2003 shallapply the provisions of this Interpretation no later than the beginning of thefirst interim or annual reporting period after June 15, 2003.  The Company hasdetermined that adoption of this Interpretation did not and based on theCompany's current structure will not have a material effect on its financialstatements and disclosure.

*Principles of Consolidation*

On January 5, 2003, the49.5% minority interest in the Company's joint venture was acquired from the XiamenThree Circles Battery Co. by Xiamen Three Circles ERC Battery Co. Ltd. Underthe terms of the agreement the Xiamen Three Circles Battery Co. received$3,000,000 in cash and a non-interest bearing note for $2,471,000. Notepayments of approximately $988,000, $741,000 and $741,000 are due on or beforeDecember 31, 2004, 2005 and 2006, respectively. The note has been guaranteed bythe Company. The Xiamen Three Circles ERC Battery Co., Ltd. has beenrestructured as EVERCEL (Xiamen) Co., Ltd. a wholly owned foreign enterprise. In connection with this transaction, the Company recorded $467,000 in goodwill.

**(3) Cash and Cash Equivalents**

Included in cash andcash equivalents at June 30, 2003 and December 31, 2002 are $2,649,000 and$6,055,000 respectively, held by the Company's subsidiary in Xiamen, PRC.

** **8

**(4) StockOption Plan**

Statement No. 123,*"Accounting for Stock-Based Compensation,"* encourages entities torecognize as expense over the vesting period the fair value of all stock-basedawards on the date of grant. Alternatively, SFAS No. 123 allows entities tocontinue to apply the provisions of APB Opinion No. 25 and provide pro formanet income and pro forma earnings per share disclosures for employee's stockoption grants as if the fair-value-based method defined in SFAS No. 123 hadbeen applied. The Company applies the intrinsic value method of recognitionunder APB Opinion No. 25 and provides the pro forma disclosure provisions ofSFAS No. 123.

The following table illustrates the effect onnet loss -- common shareholders and net loss per basic and diluted share as ifthe Company had applied the fair value method to its stock-based compensation,as required under the disclosure provisions of Statement No. 123, as amended bySFAS No. 148:

**Three months Ended**

**June 30,2003**

**June 30,2002**

Net loss -- common shareholders

$    (869)

$  (691)

Add: Stock based compensation included in   reporting net  loss -- common shareholders

-

-

Deduct: Stock based compensation determined under    fair-value based method for all awards

-

-

Pro forma net loss -- common shareholders

 $  (869)

 $  (691)

Basic and diluted loss per share:

As reported

 $   (0.08)

$   (0.06)

Pro forma

 $   (0.08)

$   (0.06)

 

Six months Ended

**June 30,2003**

**June 30,2002**

Net loss -- common shareholders

$    (1,686)

$  (1,328)

Add: Stock based compensation included in reporting net  loss -- common shareholders

-

-

Deduct: Stock based compensation determined under  fair-value based method for all awards

        (359)

       (359)

Pro forma net loss -- common shareholders

 $  (2,045)

 $  (1,687)

Basic and diluted loss per share:

As reported

 $   (0.16)

$   (0.12)

Pro forma

 $   (0.19)

$   (0.15)

 The effects of applying SFAS No 123 in this pro forma disclosure are notnecessarily indicative of future amounts. 

9

**(5)Revenue Recognition and Warranty Reserve**

Revenue on productsales is recognized at the time of shipment as title passes to the Company'scustomers in accordance with its FOB shipping sales terms. The Company records,as a reduction to sales, an estimate for product returns under its warrantyprovisions as sales are recorded. The Company provides a warranty on itsbatteries for up to eighteen months from the date of sale. During the sixmonths ended June 30, 2003, the Company's warranty reserve included in accruedliabilities had the following activity:

Accrued warranty reserve at January 1, 2003

$    98 

Charged to revenues in 2003 for new warranties

      3 

Charged to revenues in 2003 for pre-existing warranties

    _ 

Spending against reserve in 2003

           (34)

Accrued warranty reserve at June 30, 2003
    $    67 
**(6) Other Comprehensive Income**

The foreigncurrency translation adjustment is the only reconciling item between net lossand comprehensive income.  For the six months ended June 30, 2003 and June 30,2002, there were no material differences between net loss and comprehensiveincome.

10

Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS 

When used in this report, the words  "expects", "anticipates", "believes", "estimates","should",  "will", "could", "would","may", and similar expressions are intended to identifyforward-looking statements.  Such statements include statements relating to Evercel'scontinued development and commercialization schedule for its patentednickel-zinc ("Ni-Zn") rechargeable battery technology and its joint venturepartner, expansion plans, licensing opportunities and the expected costcompetitiveness of its technology.  These and other forward-looking statementscontained in this report are subject to risks and uncertainties, known andunknown, that could cause actual results to differ materially from thoseforward-looking statements, including, without limitation, general risksassociated with product development and introduction, changes in worldwideenvironmental laws and policies, potential volatility of material costs, governmentappropriations, rapid technological change, and competition, as well as otherrisks. The forward-looking statements contained herein speak only as of thedate of this Report.  Evercel Inc. (the "Company") expressly disclaims anyobligation or undertaking to release publicly any updates or revisions to anysuch statement to reflect any change in the Company's expectations or anychange in events, conditions or circumstances on which any such statement isbased.

**Overview**

We develop, design and manufacture high-performancerechargeable nickel-zinc batteries at our wholly owned subsidiary in Xiamen,Peoples Republic of China (PRC).  The principal markets for our batteries arethe small electric vehicle market, i.e. scooters, neighborhood vehicles, wheelchairs,e-bicycles, and marine trolling motors.

Until January 2003, we owned a 50.5% interest in thesubsidiary in the PRC. On January 5, 2003, the 49.5% minority interest in ourjoint venture was acquired from the Xiamen Three Circles Battery Co. by thejoint venture and the joint venture became a wholly owned subsidiary of Evercel.

**Discussionof Critical Accounting Policies**

In the ordinary course of business, wehave made a number of estimates and assumptions relating to the reporting ofresults of operations and financial condition in the preparation of ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America.  Actual results could differsignificantly from those estimates and assumptions.  We believe that thefollowing discussion addresses the Company's most critical accounting policy,and is that which is most important to the portrayal of the Company's financialcondition and results and requires management's most difficult, subjective andcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.  

11

*Long-lived assets, including intangibleassets*

Long-lived assets to be held and used,including fixed assets and intangibles with definite lives, are reviewed by usfor impairment whenever events or changes in circumstances indicate that thecarrying amount of any such asset may not be recoverable.  Ifevents or changes in circumstances indicate that the carrying amount of an assetmay not be recoverable, we estimate the undiscounted future cash flows toresult from the use of the asset and its ultimate disposition. The estimate of cashflow is based upon, among other things, certain assumptions about expectedfuture operating performance.  Our estimates of undiscounted cash flow maydiffer from actual cash flow due to, among other things, technological changes,economic conditions, and changes to its business model or changes in itsoperating performance.  If the sum of the undiscounted cash flows (excludinginterest) is less than the carrying value, we recognize an impairment loss,measured as the amount by which the carrying value exceeds the fair value ofthe asset.  Long-lived assets to be disposed of are evaluated in relation tothe estimated fair value of such assets less costs to sell.

Additionally, goodwill is reviewed forimpairment at least annually by comparing the estimated fair value of the assetwith its carrying value. 

**Results of Operations**

*Three Months Ended June 30, 2003 Compared with Three Months Ended June 30,2002*

We had revenues of $59,000 forthe three months ended June 30, 2003 compared to $19,000 for the three monthsended June 30, 2002.  The revenues in the 2003 and 2002 periods were from thesale of our scooter and marine batteries. Cost of revenues increased $91,000 inthe quarter ended June 30, 2003 versus the quarter ended June 30, 2002.  Theincrease in the cost of revenue was consistent with the increased revenue.

Administrative and selling expenses decreased $10,000 to$588,000 for the three months ended June 30, 2003 from $598,000 for the threemonths ended June 30, 2002.  Research and development expenses increased $8,000to $45,000 for the three months ended June 30, 2003 from $37,000 for the threemonths ended June 30, 2002. 

Net interest income of $5,000for the three months ended June 30, 2003 decreased from $67,000 for threemonths ended June 30, 2002, primarily as a result of the reduced cash balanceof the company.

*Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002*

We had revenues of $148,000 forthe six months ended June 30, 2003 compared to $171,000 for the six monthsended June 30, 2002, a decrease of $23,000.  The revenues in the 2003 and 2002periods were from the sale of our scooter and marine batteries. Cost ofrevenues increased $147,000 in the six months ended June 30, 2003 versus thesix months ended June 30, 2002.  Cost of revenue was favorably impacted in thesix months ended June 30, 2002 from the sale of certain lower cost inventory.

Administrative and selling expenses decreased $38,000 to$1,186,000 for the six months ended June 30, 2003 from $1,224,000 for the sixmonths ended June 30, 2002.  Research and development expenses decreased$61,000 to $57,000 for the six months ended June 30, 2003 from $118,000 for thesix months ended June 30, 2002. This reduction in research and development is aresult of significant new product development and introduction in 2002 that hasdecreased in 2003. 

Net interest income of $25,000 for the six months ended June30, 2003 decreased from $71,000 for six months ended June 30, 2002, primarilyas a result of the reduced cash balance of the company.

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**Liquidity and Capital Resources**

At June 30, 2003 we had working capital of $6,999,000,including cash and cash equivalents of $6,183,000, compared to working capitalof $11,185,000, including cash and cash equivalents of $10,377,000 at December31, 2002.    Included in cash and cash equivalents are $2,649,000 and $6,055,000as of June 30, 2003 and December 31, 2002 respectively, held by our subsidiaryin Xiamen, PRC.  The decrease in cash and cash equivalents during the sixmonths ended June 30, 2003 was due primarily to the acquisition of the minorityinterest in the joint venture in the PRC.

We anticipate that our existing capital resources will beadequate to satisfy current obligations arising from existing financialrequirements and agreements for the foreseeable future, as we continue tomanage our cost structure and evaluate strategic alternatives.

*New Accounting Pronouncements*

In January 2003, the Financial Accounting Standards Boardissued Interpretation No. 46, "Consolidation of Variable Interest Entities." The Interpretation may have an effect on existing practice because it requiresexisting variable interest entities to be consolidated if those entities do noteffectively disperse risks among the parties involved.  The Interpretation iseffective immediately for all variable interest entities created after January31, 2003.  All variable interest entities created before February 1, 2003 shallapply the provisions of this Interpretation July 1, 2003.  We have determinedthat adoption of this Interpretation did not and based on the Company's currentstructure will not have a material effect on its financial statements anddisclosure.

In April 2003, the FASB decided to require all companies toexpense the value of employee stock options. Companies will be required tomeasure the cost according to the fair value of the options.  The FASB alsotentatively decided in principle to measure employee equity-based awards attheir date of grant.  The FASB plans to issue an exposure draft later this yearthat could become effective in 2004. Until a new Statement is issued, theprovisions of APB No. 25 and SFAS No. 123 will remain in effect.  We willevaluate the impact of any new Statement regarding employee equity-based awardsas requirements are finalized and a new Statement is issued.

**Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We have invested and expect to invest excess funds in moneymarket accounts in U.S. and PRC financial institutions. Based upon the cash andcash equivalents balance at June 30, 2003, an increase or decrease of interestrates of 100 basis points would have an effect on the Company's results ofoperations and cash flows of approximately $17,000 per quarter.

**Item 4: CONTROLS AND PROCEDURES**

Based on an evaluation of the Company's disclosure controlsand procedures by the Company's management, with the participation of theCompany's Chief Executive Officer and Chief Financial Officer (who are itsprincipal executive officer and principal financial officer, respectively) asof the end of the period covered by this Form 10-Q, such officers haveconcluded that, as of such date, the Company's disclosure controls andprocedures were generally effective to ensure that information required to bedisclosed by the Company in the reports filed or submitted by it under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the SEC's rules and that suchinformation is accumulated and communicated to management including the ChiefExecutive Officer and Chief Financial Officer as appropriate to allow timelydecisions regarding disclosure.

There was not any change in the Company's internal control overfinancial reporting that occurred during the Company's most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Company's internal control over financial reporting.  

 

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**Item 5: ANNUAL MEETING**

**            **Theannual meeting of Evercel, Inc. was held on June 30, 2003.  Mr. William Lawson and Dr. Chao Huang were elected to three year terms.  The vote for Mr.Lawson was 9,722,871 for and 25,958 withheld.  The vote for Dr. Huang was9,619,509 for and 132,320 withheld.

Directors remaining on the Board who were not up forreelection this year are Mr. Warren Bagatelle, Mr. Garry Prime, Mr. James D. Gersonand Mr. John H. Gutfreund .  

**PART II -OTHER INFORMATION**

**Item 6: EXHIBITS AND REPORTS ON FORM 8-K**

**(A)       EXHIBITS**

31.1     Certification of CEO pursuant to Section  302 of the Sarbanes-Oxley  Act of 2002

31.2     Certification of CFO pursuant to Section  302of the Sarbanes-Oxley  Act of 2002

32.1     Certificationby CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

32.2     Certificationby CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

**(B)  REPORTS ON FORM 8-K**

The Company filed a Current Report on Form 8-K dated August 14, 2003 with respect to the Company's press release announcing its earnings forthe quarter ended June 30, 2003.

 

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**SIGNATURES**

                In accordancewith the requirements of the Securities Exchange of 1934, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
 
EVERCEL,INC.
 
(Registrant)
    
By:  /s/Anthony P. Kiernan
 
     Name:     Anthony P. Kiernan
Date: August 14, 2003
     Title:       Chief Financial Officer

 

 

 

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