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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
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COMMISSION FILE NUMBER: 0-23336
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ELECTRIC FUEL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4302784
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
632 BROADWAY, SUITE 301, NEW YORK, NEW YORK 10012
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(Address of principal executive offices) (Zip Code)
(212) 529-9200
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(Registrant's telephone number, including area code)
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(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's common stock as of November 10,
2002 was 34,749,835.
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ELECTRIC FUEL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Interim Consolidated Financial Statements (Unaudited):
--------------------------------------------------------------
Consolidated Balance Sheets at September 30, 2002 (unaudited)
and December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2002 and 2001, and the Three Months Ended
September 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . 5
Consolidated Statements of Changes in Stockholders' Equity
during the Nine-Month Period Ended September 30, 2002 (unaudited). 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . 7-8
Note to the Interim Consolidated Financial Statements . . . . . . 9
Item 2 - Management's Discussion and Analysis of Financial
----------------------------------------------------------
Condition and Results of Operations . . . . . . . . . . . . . . . 17
-----------------------------------
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 39
-------------------------------------------------------------------
Item 4 - Controls and Procedures . . . . . . . . . . . . . . . . . 39
--------------------------------
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds . . . . . . . . 40
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Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . 40
----------------------------------------
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL
FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO
QUARTERLY REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001*
ASSETS (Unaudited) (Audited)
-------------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents . . . .. . . . . . . . . $ 3,034,948 $ 12,671,754
Certificates of deposit due within one year .. . . 604,457 -
Trade receivables, net of allowance for bad debt
in the amount of $61,503 and $58,153 as of
September 30, 2002 and December 31, 2001,
respectively. . . . . . . . . . . . . . . . . . . 5,072,466 765,402
Other receivables . . . . . . . . . . . . . . . . 1,147,506 448,651
Inventories . . . . . . . . . . . . . . . . . . . . 2,122,631 523,366
Assets of discontinued operations . . . . . . . . . 1,112,097 8,589,161
-------------------- --------------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . 13,094,105 22,998,334
NOTES RECEIVABLE FROM STOCKHOLDERS. . . . . . . . . - 337,365
-------------------- --------------------
SEVERANCE PAY FUND. . . . . . . . . . . . . . . . . 891,364 782,490
-------------------- --------------------
FIXED ASSETS:
Cost. . . . . . . . . . . . . . . . . . . . . . . 6,776,402 6,124,497
Less - accumulated depreciation . . . . . . . . . 4,230,873 3,834,446
-------------------- --------------------
2,545,529 2,290,051
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INTANGIBLE ASSETS AND GOODWILL. . . . . . . . . . . 7,004,032 -
-------------------- --------------------
TOTAL ASSETS $ 23,535,030 $ 26,408,240
==================== ====================
_______________
* Reclassified (see note 5). The balance sheet at December 31, 2001 has
been derived from the audited financial statements as at such date.
The accompanying notes are an integral part of the Financial Statements.
3
ELECTRIC FUEL CORPORATION
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001*
(Unaudited) (Audited)
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . $ 1,513,287 $ 791,576
Other payables . . . . . . . . . . . . . . . . . . . . . . . . 3,272,050 1,263,477
Promissory note resulting from purchase of subsidiary . . . . 964,069 -
Liabilities of discontinued operations. . . . . . . . . . . . 2,271,239 2,454,155
------------ -----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . 8,020,645 4,509,208
LONG-TERM LIABILITIES:
Liability for employee rights upon retirement . . . . . . . . . 2,837,994 2,490,975
Promissory note resulting from purchase of subsidiary . . . 743,598 -
------------ ------------
TOTAL LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . 3,581,592 2,490,975
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $0.01 par value
Authorized - 100,000,000 shares
Issued - 29,059,469 shares and 35,305,168 shares as of
December 31, 2001 and September 30, 2002, respectively
Outstanding - 28,504,136 shares and 34,749,835 shares
as of December 31, 2001 and September 30, 2002, respectively . 353,053 290,596
Preferred stock - $0.01 par value
Authorized - 1,000,000 shares, no shares outstanding . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . 112,485,550 104,254,109
Deferred stock compensation. . . . . . . . . . . . . . . . . (18,000) (18,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (96,350,196) (80,736,461)
Treasury stock, at cost (common stock - 555,333 shares) . (3,537,106) (3,537,106)
Notes receivable from stockholders. . . . . . . . . . . . . . (959,828) (845,081)
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . (40,680) -
------------- -------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . 11,932,793 19,408,057
------------- -------------
$ 23,535,030 $ 26,408,240
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____________
* Reclassified (see note 5).
The accompanying notes are an integral part of the Financial Statements.
4
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- -------------------------
2002(1) 2001* 2002(1) 2001*
------------- ------------- ------------ ------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,258,310 $ 1,536,842 $ 3,262,711 $ 632,344
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,428,844 1,352,454 1,668,941 589,018
------------- ------------- ------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,829,466 184,388 1,593,770 43,326
------------- ------------- ------------ ------------
Research and development expenses, net . . . . . . . . . . . . . . . . . . 379,785 354,961 161,138 120,677
Sales and marketing expenses . . . . . . . . . . . . . . . . . . . . . . . 712,502 55,799 552,863 12,400
General and administrative expenses (2). . . . . . . . . . . . . . . . . . 3,347,955 2,636,973 1,378,485 744,769
Amortization of intangible assets and
in process research and development.. . . . . . . . . . . . . . . . . . . 251,721 - 251,721 -
------------- ------------- ------------ ------------
4,691,963 3,047,733 2,344,207 877,847
------------- ------------- ------------ ------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,862,497) (2,863,345) (750,437) (834,521)
Financial income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 140,017 399,198 23,297 63,282
------------- ------------- ------------ ------------
Net loss before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . (2,722,480) (2,464,147) (727,140) (771,238)
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105,466) - (104,832) -
------------- ------------- ------------ ------------
Net loss before minority interest in net
income of subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . (2,827,946) (2,464,147) (831,972) (771,238)
Minority interest in net income of subsidiary. . . . . . . . . . . . . . . (91,150) - (91,150) -
------------- ------------- ------------ ------------
Net loss from continuing operations. . . . . . . . . . . . . . . . . . . . (2,919,096) (2,464,147) (923,122) (771,238)
Net loss from discontinued operations. . . . . . . . . . . . . . . . . . . (12,694,639) (9,962,215) (8,716,422) (3,639,318)
------------- ------------- ------------ ------------
Net loss for the period. . . . . . . . . . . . . . . . . . . . . . . . . . $(15,613,735) $(12,426,362) $(9,639,544) $(4,410,556)
============= ============= ============ ============
Basic and diluted net loss per share for
continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.09) $ (0.11) $ (0.03) $ (0.03)
============= ============= ============ ============
Basic and diluted net loss per share for discontinued operations . . . . . $ (0.40) $ (0.43) $ (0.26) $ (0.15)
============= ============= ============ ============
Combined basic and diluted net loss per share. . . . . . . . . . . . . . . $ (0.49) $ (0.53) $ (0.29) $ (0.19)
============= ============= ============ ============
Weighted average number of shares outstanding. . . . . . . . . . . . . . . 31,545,914 23,404,277 33,441,137 23,612,097
============= ============= ============ ============
____________
* Reclassified (see note 5).
(1) The report for the nine months and the three months ended September
30, 2002 consolidates the results of Electric Fuel Corporation for the
entire period and the results of IES and MDT beginning from July 1,
2002 (see notes 2 and 3).
(2) Includes $341,816 markdown of notes receivable from shareholders and
$185,450 expenses due to options and shares granted to suppliers for
the nine months ended September 30, 2002, compared to $0 for the nine
months ended September 30, 2001 and $0 for each of the three-month
periods ended September 30, 2002 and 2001.
The accompanying notes are an integral part of the Financial Statements.
5
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
ADDITIONAL DEFERRED
COMMON STOCK PAID-IN STOCK ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCK
------------- ------------ ------------ ---------- ------------- --------------
BALANCE AT JANUARY 1, 2002 - AUDITED 29,059,469 $ 290,596 $ 104,254,109 $ (18,000) $(80,736,461) $ (3,537,106)
CHANGES DURING THE
NINE-MONTH PERIOD
ENDED SEPTEMBER 30,
2002
Issuance of shares, net. . . . . . . 6,245,699 62,457 8,231,441
Loss . . . . . . . . . . . . . . . . (15,613,735)
------------- ------------- ------------- ---------- ------------- --------------
BALANCE AT SEPTEMBER
30, 2002 - UNAUDITED. . . . . . . . 35,305,168 $ 353,053 $ 112,485,550 $ (18,000) $(96,350,196) $ (3,537,106)
============= ============= ============= ========== ============= ==============
NOTES
RECEIVABLE OTHER
FROM COMPREHENSIVE
SHAREHOLDERS LOSS TOTAL
------------ -------------- -----------
BALANCE AT JANUARY 1, 2002 - AUDITED $(845,081) - $19,408,057
CHANGES DURING THE
NINE-MONTH PERIOD
ENDED SEPTEMBER 30,
2002
Issuance of shares, net . . . . . . (114,747) 8,179,151
Loss . . . . . . . . . . . . . . . . (40,680) (15,654,415)
----------- ------------ -----------
BALANCE AT SEPTEMBER
30, 2002 - UNAUDITED. . . . . . . . $(959,828) $ (40,680) $11,932,793
============ ============ ============
The accompanying notes are an integral part of the Financial Statements
6
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
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NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,919,056) $ (2,464,147)
------------- -------------
Adjustments required to reconcile loss to net cash used in operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445,270 389,000
Amortization of intangible assets and in-process research and development . . . . 251,720 -
Stock-based compensation due to options and shares granted to suppliers . . . . . 185,450 -
Stock-based compensation due to options granted to employees. . . . . . . . . . . 13,000 -
Amortization of deferred stock compensation . . . . . . . . . . . . . . . . . . . - 9,249
Minority interest in net income of subsidiary . . . . . . . . . . . . . . . . . . 91,150 -
Interest accrued on promissory note resulting from purchase of subsidiary . . . . 20,703 -
Interest accrued on notes from stockholders . . . . . . . . . . . . . . . . . . . - (157,965)
Capital gain from sale of property and equipment. . . . . . . . . . . . . . . . . (4,257) -
Markdown of notes receivable from shareholders. . . . . . . . . . . . . . . . . . 341,894 -
Liability for employee rights upon retirement, net. . . . . . . . . . . . . . . . 213,745 169,149
Changes in operating asset and liability items:
Decrease (increase) in accounts receivable. . . . . . . . . . . . . . . . . . . . (490,508) 351,586
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (409,887) (284,828)
Decrease in accounts payable and accruals . . . . . . . . . . . . . . . . . . . . (849,783) (36,932)
------------- ------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . (3,110,599) (2,024,888)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries (100%-owned)(1). . . . . . . . . . . . . . . . . . . . (2,958,083) -
Investment in subsidiaries (51% owned)(2) . . . . . . . . . . . . . . . . . . . . (1,182,723) -
Net Cash from discontinued operation. . . . . . . . . . . . . . . . . . . . . . . (5,359,212) (10,539,645)
Purchase of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (186,680) (439,459)
Repayment of suppliers due to purchase of fixed assets. . . . . . . . . . . . . . (39,335) (227,230)
Loans granted to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . (4,528) -
Proceeds from sale of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . 4,257 -
Increase in certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . (595,386) -
Decrease in demonstration inventories, net. . . . . . . . . . . . . . . . . . . . 22,330 -
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NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . (10,299,360) (11,001,826)
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FORWARD $(13,409,959) $(13,026,714)
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The accompanying notes are an integral part of the Financial Statements
7
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-----------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------
2002 2001
--------------------------------
FORWARD $(13,409,959) $(13,026,714)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of share capital, net . . . . . . 3,624,697 11,297,329
Proceeds from exercise of options and warrants . . . . . 149,997 325,226
Payment on capital lease obligation . . . . . . . . . . (1,541) -
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . 3,773,153 11,622,555
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . (9,636,806) (1,404,159)
BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . .. . . . . . . 12,671,754 11,596,225
------------- -------------
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . $ 3,034,948 $ 10,192,066
============= =============
SUPPLEMENTARY INFORMATION ON ACTIVITIES
NOT INVOLVING CASH FLOW:
Issuance of share capital (including
additional paid-in capital) upon
notes receivable. . . . . . . . . . . . . . . . . . . . .$ 85,055 $ 499,605
============= =============
Purchase of treasury stock upon notes receivable. . . . . $ - $ 3,499,375
============= =============
Exercise of options and warrants upon notes receivable.. . $ 73,000 $ -
============= =============
Dividend declared but not yet paid. . . . . . . . . .. . . $ 410,328 $ -
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - CASH (PAID) RECEIVED DURING
THE PERIOD FOR:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . $ 174,050 $ 319,329
============= =============
Advances to income tax authorities. . . . . . . . . . . . $ (28,351) $ (10,843)
============= =============
____________
(1) In July 2002, the Company acquired substantially all of the assets of
I.E.S. Electronics Industries U.S.A., Inc. ("IES"). The net fair
value of the assets acquired and the liabilities assumed, at the date
of acquisition, was as follows:
The accompanying notes are an integral part of the Financial Statements
8
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
Working capital (unaudited). . . .. . . . . . . . . . $ 2,029,066
Fixed assets (unaudited) . . . . . . . . . .. . . . . 396,776
Capital lease obligation (unaudited) . . . . . . .. . (15,526)
Intangible assets (unaudited). . . . . . . . . . . . 5,905,660
In-process research and development (unaudited). .. . 33,000
-------------
8,348,976
Issuance of shares, net (unaudited). .. . . . . . . . (3,703,929)
Issuance of promissory note (unaudited). . . . . . . (1,686,964)
------------
$ 2,958,083
============
(2) In July 2002, the Company acquired 51% of the outstanding ordinary shares of
MDT Protective Industries Ltd. ("MDT"). The net fair value of the assets
acquired was as follows:
Working capital (unaudited). . . . .. . . . . . . . . $ 443,631
Fixed assets (unaudited) . . . . . . . . . . . . . . 139,623
Minority rights (unaudited). . . . . . . . .. . . . . (319,175)
Intangible assets (unaudited). . . . . . . . .. . . . 1,357,721
------------
1,621,800
Issuance of shares, net (unaudited). . .. . . . . . . (439,077)
------------
$ 1,182,723
============
- ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Financial Statements
9
ELECTRIC FUEL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The interim consolidated financial statements of Electric Fuel Corporation
reflect all adjustments, consisting only of normal recurring accruals, which
are, in the opinion of our management, necessary for a fair statement of results
for the periods presented. Operating revenues and expenses for any interim
period are not necessarily indicative of results for a full year.
For the purpose of these interim consolidated financial statements, certain
information and disclosures normally included in financial statements have been
condensed or omitted. These unaudited statements should be read in conjunction
with our audited consolidated financial statements and notes thereto for the
year ended December 31, 2001.
NOTE 1: BASIS OF PRESENTATION
Company:
Electric Fuel Corporation ("EFC," "Electric Fuel," or the "Company") and its
subsidiaries are engaged in the design, development and commercialization of its
proprietary zinc-air battery technology for defense and security products,
military applications and electric vehicles. The Company is primarily operating
through Electric Fuel Ltd. ("EFL") a wholly-owned subsidiary based in Beit
Shemesh, Israel, through IES Interactive Training Systems, Inc., a wholly-owned
subsidiary based in Littleton, Colorado, and through M.D.T. Protective
Industries, Ltd., a majority-owned subsidiary based in Lod, Israel. The
Company's production is primarily located in Auburn, Alabama, and its research
and development are primarily located in Israel.
Accounting:
The accompanying condensed interim consolidated financial statements have been
prepared by Electric-Fuel Corporation in accordance with generally accepted
accounting principles in the United States pursuant to the rules and regulations
of the Securities and Exchange Commission, and include the accounts of
Electric-Fuel Corporation and its subsidiaries collectively. Certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States,
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company, the unaudited financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position at September 30, 2002 and the
operating results and cash flows for the nine months ended September 30, 2002
and 2001. These financial statements and notes should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto,
included in the Company's annual report on Form 10-K, as amended, filed with the
Securities and Exchange Commission.
The results of operations for the three and nine months ended September 30, 2002
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year ending December 31, 2002.
10
ELECTRIC FUEL CORPORATION
NOTE 2: ACQUISITION OF IES
Early in the third quarter of 2002, the Company entered into an asset purchase
agreement among I.E.S. Electronics Industries U.S.A., Inc. ("IES"), its direct
and certain of its indirect shareholders, itself and its wholly-owned Israeli
subsidiary, Electric Fuel Limited, pursuant to the terms of which it acquired
substantially all the assets, subject to substantially all the liabilities, of
IES, a developer, manufacturer and marketer of advanced hi-tech multimedia and
interactive digital solutions for training of military, law enforcement and
security personnel. The Company intends to continue to use the assets purchased
in the conduct of the business formerly conducted by IES (the "Business"). The
parties had agreed during negotiations that inasmuch as it would be difficult or
impossible to effect an acquisition in the middle of a financial quarter, and
since the one-month difference would not be material, the acquisition would be
effective as of the beginning of the quarter in which the agreement was signed;
i.e., July 1, 2002. Accordingly, all assets and liabilities were acquired as at
the values on such date, and the Company consolidated IES's results with its own
commencing at such date.
The assets purchased consisted of the current assets, property and equipment,
and other assets (including intangible assets such as goodwill, intellectual
property and contractual rights) used by IES in the conduct of the Business. The
Company also purchased the exclusive right to use the name "I.E.S." in
combination with the words "Interactive" or "Training." The consideration for
the assets purchased consisted of (i) cash and promissory notes in an aggregate
amount of $4.8 million ($3.0 million in cash and $1.8 million in promissory
notes), and (ii) the issuance, with registration rights, of a total of 3,250,000
shares of our common stock, $.01 par value per share, having a value of
approximately $3.65 million, which shares are the subject of a voting agreement
on the part of IES and certain of its affiliated companies. The amount of
consideration was determined based upon arm's-length negotiations between the
Company and IES and IES's shareholders.
The Company acquired tangible assets amounting to approximately $2.4 million.
Other intangible assets acquired had an estimated fair value of approximately
$5.9 million. Based upon the preliminary valuation of tangible and intangible
assets acquired, EFC has allocated the total cost of the acquisition of IES's
assets as follows:
SEPTEMBER 30, 2002
(IN THOUSANDS)
------------------
Unaudited
Intangible assets, patents, trademarks, and relationships . $ 1,433
Developed technology . . . . . . . . . . . . . . . . . . . . 2,343
In-process research and development. . . . . . . . . . . . . 33
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,130
------------------
$ 5,939
==================
NOTE 3: ACQUISITION OF MDT
Early in the third quarter of 2002, the Company entered into a stock purchase
agreement between itself and all of the shareholders of M.D.T. Protective
Industries Ltd. ("MDT"), pursuant to the terms of which the Company purchased
11
ELECTRIC FUEL CORPORATION
51% of the issued and outstanding shares of MDT, a privately-held Israeli
company that specializes in using sophisticated lightweight materials and
advanced engineering processes to armor vehicles. The Company also entered into
certain other ancillary agreements with MDT and its shareholders and other
affiliated companies. The consideration for the shares purchased consisted of
(i) cash in the aggregate amount of 5,814,000 New Israeli Shekels (approximately
$1.24 million), and (ii) the issuance, with registration rights, of an aggregate
of 390,638 shares of our common stock, $0.01 par value per share. The parties
had agreed during negotiations that inasmuch as it would be difficult or
impossible to effect an acquisition in the middle of a financial quarter, and
since the one-month difference would not be material, the acquisition would be
effective as of the beginning of the quarter in which the agreement was signed;
i.e., July 1, 2002. Accordingly, all assets and liabilities were acquired as at
the values on such date, and the Company consolidated MDT's results with its own
commencing at such date.
The Company acquired tangible assets amounting to approximately $300,000. Other
intangible assets acquired had an estimated fair value of approximately $1.4
million. Based upon the preliminary valuation of tangible and intangible assets
acquired, EFC has allocated the total cost of the acquisition to MDT assets as
follows:
SEPTEMBER 30, 2002
(IN THOUSANDS)
------------------
Unaudited
Customer list and workforce. . . . . . . . . . . . . $ 777
Developed technology . . . . . . . . . . . . . . . . . 280
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . 300
------------------
$ 1,357
==================
NOTE 4: PRO FORMA FINANCIAL INFORMATION
Early in the third quarter of 2002, the Company acquired IES and MDT, as more
fully described in "Note 2 - Acquisition of IES" and "Note 3 - Acquisition of
MDT," above (the "Acquisitions"). The following summary pro forma information
includes the effects of the Acquisitions. The pro forma data for the nine months
ended September 30, 2002 and 2001 are presented as if the Acquisitions had been
completed on January 1, 2002 and 2001, respectively. This pro forma financial
information does not purport to be indicative of the results of operations that
would have occurred had the Acquisitions taken place at the beginning of the
period, nor do they purport to be indicative of the results that will be
obtained in the future.
12
ELECTRIC FUEL CORPORATION
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2002 2001
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
(Unaudited)
Total revenues. . . . .$ 11,324 $ 8,171
============= =============
Gross profit. . . . . . 4,894 2,468
============= =============
Net loss. . . . . . . . (15,123) (13,638)
============= =============
Basic and diluted net
loss per share . . .$ (0.44) $ (0.50)
============= =============
NOTE 5: DISCONTINUED OPERATIONS
In September 2002, the Board of Directors committed to a plan to dispose of the
operations of its retail sales of consumer battery products.
The results of operations including revenue, operating expenses, other income
and expense of the retail sales of consumer battery products business unit for
2002 and 2001 have been reclassified in the accompanying statements of
operations as a discontinued operation. The Company's balance sheets at
September 30, 2002 and December 31, 2001 reflect the net liabilities of the
Retail Sales of Consumer Battery Products business as net liabilities and net
assets of discontinued operation within current liabilities and current assets.
At September 30, 2002, the estimated net losses associated with the disposition
of the retail sales of consumer battery products business were approximately
$12.6 million for 2002. These losses included approximately $5.7 million in
losses from operations for the period from January 1, 2002 through the
measurement date of September 30, 2002 and $6.9 million relating to the removal
of the net assets of the retail sales of consumer battery products business.
Obligations to employees for severance and other benefits resulting from the
discontinuation have already been reflected in the financials on an accrual
basis.
Summary operating results from the discontinued operation for the nine months
ended September 30, 2002 and 2001 are as follows:
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2002 2001
--------------- --------------
(IN THOUSANDS)
--------------------------------
(Unaudited)
Revenues. . . . . . . . . $ 1,002 $ 1,437
Cost of sales (1). . . (4,801) (3,858)
----------- --------------
Gross margin . . . . . . (3,699) (2,421)
----------- --------------
Operating expenses . . . (4,544) (7,541)
Impairment of fixed assets (4,452) -
----------- --------------
Operating loss . . . . . $(12,695) $ (9,962)
=========== ==============
______________
(1) Including write-off of inventory in the amount of $2,450.
13
ELECTRIC FUEL CORPORATION
NOTE 6: CHANGES IN MANAGEMENT
In October 2002, the Company announced that Yehuda Harats, the Company's
president and CEO and a member of its Board, had decided to resign from his
positions with the Company and its subsidiaries in order to pursue other
interests. In connection with the resignation of Mr. Harats, the Company will be
required to pay him the amounts due to him by law and under the terms of his
employment agreement. The Company is presently negotiating with Mr. Harats
concerning the amount and timing of the severance and other payments to him. The
Company has accrued the full amount of its maximum potential liability in
respect of its statutory and contractual obligations arising out of the
cessation of Mr. Harats's employment with it in its financial statements.
NOTE 7: INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
using the average cost method. The Company periodically evaluates the quantities
on hand relative to current and historical selling prices and historical and
projected sales volume. Based on these evaluations, provisions are made in each
period to write down inventory to its net realizable value. Inventories are
composed of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ ------------------
(IN THOUSANDS)
---------------------------------------
(Unaudited) (Audited)
Raw materials . . . $ 1,231 $ 454
Work-in-progress . . 471 29
Finished goods. . . 421 40
--------- ---------
$ 2,123 $ 523
========= =========
Inventory is presented net of inventory for retail sales pf consumer battery
products, which is presented in Assets of Discontinued Operations. In the third
quarter of 2002 the Company wrote off inventory for retail sales of consumer
battery products in the amount of $2.45 million due to discontinuation of this
segment.
NOTE 8: NOTES RECEIVABLE FROM SHAREHOLDERS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- ------------------
Notes receivable. . . 707,293 707,293
Markdown of notes(1) . (707,293) (206,005)
-------------------- ------------------
Total . . . . . . -- 501,288
==================== ==================
________________
(1) Total markdown of notes receivable during the nine months ended
September 30, 2002 was $501,288. Of this amount, $341,816 is presented
in general and administrative and $159,472 is presented in
discontinued operations.
The decrease in 2002 is due to a market adjustment of all notes receivable from
shareholders reflecting a diminution in the value of collateral held on
non-recourse notes.
14
ELECTRIC FUEL CORPORATION
NOTE 9: IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard No. 141, "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under SFAS 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over their
useful lives (but with no maximum life). The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS 142 effective January 1, 2002. Application of
the non-amortization provisions of SFAS No. 142 may result in an increase in net
income.
FASB recently issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), that is applicable to financial statements
issued for fiscal years beginning after December 15, 2001. FASB's new rules on
the asset impairment supersede FASB Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and portions of APB Opinion 30, "Reporting the Results of Operations." SFAS No.
144 provides a single accounting model for long-lived assets to be disposed of
and significantly changes the criteria that must be met to classify an asset as
"held-for-sale." Classification as "held-for-sale" is an important distinction
since such assets are not depreciated and are stated at the lower of fair value
and carrying amount. SFAS No. 144 also requires expected future operating losses
from discontinued operations to be displayed in the period(s) in which the
losses are incurred, rather than as of the measurement date as presently
required. The Company has adopted SFAS No. 144 commencing January 1, 2002.
FASB recently issued SFAS No. 145, "Rescission of FASB Nos. 4, 44, and 64,
Amendment of FASB 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds
FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS 145 also rescinds FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers." SFAS 145 also amends FASB Statement No.
13, "Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. FASB 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Adoption of SFAS 145 is
not expected to have a material effect on the Company's financial position or
operating results.
FASB recently also issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"). SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
15
ELECTRIC FUEL CORPORATION
improves financial reporting by requiring that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Adoption of SFAS 146 is not expected to have a material effect on the
Company's financial position or operating results.
NOTE 10: SEGMENTS INFORMATION
a. General:
The Company operates primarily in two business segments after the
discontinuation of its retail sales of consumer battery products business (see
Note 5) and follows the requirements of Statement of Financial Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131").
The Company's reportable segments are strategic business units that offer
different products. They are managed separately because each business requires
different marketing strategies.
b. The following is information about reported segment gains, losses and
assets for the nine months ended September 30, 2002 and 2001:
DEFENSE
ELECTRIC AND SAFETY
NINE MONTHS ENDED SEPTEMBER 30, VEHICLES PRODUCTS TOTAL
-------- ---------- -----
(U.S. DOLLARS, IN THOUSANDS)
--------------------------------------------
2002:
Revenues from outside customers $ 379 $ 3,879 $ 4,258
2001:
Revenues from outside customers $ 539 $ 998 $ 1,537
c. Revenues from major customers:
2001
------------ ----------
%
-------------------------
Electric vehicles:
Customer A --- 12%
Customer B 9% 22%
Defense and safety products:
Customer C 17% 13%
Customer D (1) 30% -
_______________
(1) Revenues attributable to Customer D are the result of consolidation of
a subsidiary that was purchased during 2002 (see Note 3).
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
INHERENT RISKS AND UNCERTAINTIES. WHEN USED IN THIS DISCUSSION, THE WORDS
"BELIEVES," "ANTICIPATED," "EXPECTS," "ESTIMATES" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE
SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH ELSEWHERE IN THIS REPORT. PLEASE
SEE "RISK FACTORS," BELOW, AND IN OUR OTHER FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
ELECTRIC FUEL IS A REGISTERED TRADEMARK OF ELECTRIC FUEL CORPORATION. ALL
COMPANY AND PRODUCT NAMES MENTIONED MAY BE TRADEMARKS OR REGISTERED TRADEMARKS
OF THEIR RESPECTIVE HOLDERS. UNLESS OTHERWISE INDICATED, "WE," "US," "OUR" AND
SIMILAR TERMS REFER TO ELECTRIC FUEL AND ITS SUBSIDIARIES.
The following discussion and analysis should be read in conjunction with
the interim financial statements and notes thereto appearing elsewhere in this
Quarterly Report. We have rounded amounts reported here to the nearest thousand,
unless such amounts are more than 1.0 million, in which event we have rounded
such amounts to the nearest hundred thousand.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, we evaluate our estimates and judgments, including those related
to arrangements with extended payment terms, product returns, bad debts, income
tax provisions and legal contingencies. We base our estimates and judgments on
historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Under different assumptions or
conditions, actual results may differ from these estimates.
We believe the following critical accounting policies, among others
(including without limitation those set forth under "Note 9: Impact of
Recently-Issued Accounting Standards" to our financial statements, above),
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
17
ELECTRIC FUEL CORPORATION
REVENUE RECOGNITION AND BAD DEBT
We recognize revenues from long-term research and development agreements
subcontracted for the U.S. government when services are rendered. We recognize
revenues in respect of products when, among other things, we have delivered the
goods being purchased and we believe collectibility to be reasonably assured.
Our provision for returns is based on our past experience. We perform ongoing
credit evaluations of our customers' financial condition and we require
collateral as deemed necessary. An allowance for doubtful accounts is determined
with respect to those accounts that we have determined to be doubtful of
collection. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required, and this might cause a revision of recognized
revenues.
INVENTORIES
We state our inventories at the lower of cost or market value. Inventory
write-offs and write-down provisions are provided to cover risks arising from
slow-moving items or technological obsolescence. Our reserves for excess and
obsolete inventory are primarily based upon forecasted demand for our products,
and any change to the reserves arising from forecast revisions would be
reflected in cost of sales in the period the revision is made.
RECENT DEVELOPMENTS
IES ACQUISITION
Early in the third quarter of 2002, we entered into an asset purchase
agreement among I.E.S. Electronics Industries U.S.A., Inc. ("IES"), its direct
and certain of its indirect shareholders, ourselves and our wholly-owned Israeli
subsidiary, Electric Fuel Limited, pursuant to the terms of which we acquired
substantially all the assets, subject to substantially all the liabilities, of
IES, a developer, manufacturer and marketer of advanced hi-tech multimedia and
interactive digital solutions for training of military, law enforcement and
security personnel. These systems are sold to corporations, government agencies,
and military and law enforcement professionals around the world.
IES offer products and services that allow organizations to train their
personnel in safe, productive, and realistic environments. With its training
systems, IES offers more functionality, greater flexibility, realism, options,
and customer support. IES's interactive training systems range from the powerful
Range 2000 use of force simulator system to the multi-faceted A2Z Classroom
Training system. We plan to continue to use the assets purchased in the conduct
of the business formerly conducted by IES (the "Business").
The assets purchased consisted of the current assets, property and
equipment, and other assets (including intangible assets such as goodwill,
intellectual property and contractual rights) used by IES in the conduct of the
Business. We also purchased the exclusive right to use the name "I.E.S." in
combination with the words "Interactive" or "Training." The amount of
consideration was determined based upon arm's-length negotiations between
ourselves and IES and its shareholders.
18
ELECTRIC FUEL CORPORATION
The consideration for the assets purchased consisted of (i) cash and
promissory notes in an aggregate amount of $4,800,000 ($3,000,000 in cash and
$1,800,000 in promissory notes), and (ii) the issuance, with registration
rights, of a total of 3,250,000 shares of our common stock, $.01 par value per
share, which shares are the subject of a voting agreement on the part of IES and
certain of its affiliated companies. The source of the funds used was working
capital.
MDT ACQUISITION
Early in the third quarter of 2002, we entered into a stock purchase
agreement between us and all of the shareholders of M.D.T. Protective Industries
Ltd. ("MDT"), pursuant to the terms of which we purchased 51% of the issued and
outstanding shares of MDT, a privately-held Israeli company that specializes in
using sophisticated lightweight materials and advanced engineering processes to
armor vehicles, and we entered into certain other ancillary agreements with MDT
and its shareholders and other affiliated companies. The consideration for the
shares purchased consisted of (i) cash in the aggregate amount of 5,814,000 New
Israeli Shekels (approximately $1,240,000), and (ii) the issuance, with
registration rights, of an aggregate of 390,638 shares of our common stock,
$0.01 par value per share. The source of the funds used was working capital.
CHANGES IN MANAGEMENT
In October 2002, we announced that Yehuda Harats, our president and CEO and
a member of our Board, had decided to resign from his positions with Electric
Fuel and its subsidiaries in order to pursue other interests. The Board of
Directors selected Robert S. Ehrlich, Chairman of the Board, to be the new
President and CEO. In connection with the resignation of Mr. Harats, we will be
required to pay him the amounts due to him by law and under the terms of his
employment agreement, which liabilities have already been accrued on our balance
sheet under the headings "Liability for employee rights upon retirement" and
"Liabilities of discontinued operations." We believe that our maximum potential
liability in respect of our statutory and contractual obligations arising out of
the cessation of Mr. Harats's employment with us is $1.2 million, and an amount
in excess of this sum has already been accrued on our financial statements. We
are presently negotiating with Mr. Harats concerning the amount and timing of
the severance and other payments to him.
DISCONTINUATION OF RETAIL SALES OF CONSUMER BATTERY PRODUCTS
In September 2002, we committed to a plan to dispose of the operation of
our retail sales of our Instant Power consumer battery products because of the
high costs associated with consumer marketing and low volume manufacturing. We
are using our inventory to continue to fulfill all our existing contractual
obligations, online sales, and sales to OEMs and the military. The
discontinuation of the consumer retail products resulted in a one-time, pre-tax
charge of approximately $6.9 million in the third quarter of 2002, reflecting a
write-down of inventory and net fixed assets as well as costs associated with
the reduction in our workforce. Almost all these charges were non-cash impacting
items.
PHASE III OF THE ELECTRIC VEHICLE PROGRAM
In October 2002, we received approval and funding from the United States
Federal Transit Administration (FTA) to begin Phase III of our American
19
ELECTRIC FUEL CORPORATION
all-electric transit bus development project, which will focus on an evaluation
of the performance of zinc-air battery propulsion systems for transit buses; the
installation of new advanced ultra capacitors; and the implementation of an
advanced control system for auxiliaries.
GENERAL
During the quarter ended September 30, 2002, we completed our acquisitions
of IES and MDT. Additionally, we focused on increasing our activities in the
defense and security sectors, following the expansion of our battery development
and procurement contracts with the US Army's Communications Electronics Command
(CECOM) and other defense-related agencies, while searching for new
opportunities to market our core Zinc-Air technology for commercial applications
and to OEMs. With an expanded focus on defense and homeland security technology
and business opportunities, we launched new Zinc-Air battery products designed
to meet the requirements of this market. We also concentrated intensive efforts
on various cost-cutting strategies, including downsizing staff in areas showing
lower productivity and mandating participation among salaried employees in our
options-for-salary plan, whereby employees permanently waived a portion of their
salaries (generally between 15% and 25%) in exchange for options to purchase
shares of our common stock at a ratio of options to purchase 2.5 shares of our
stock for each dollar in salary waived. These options are issued at a market
value exercise price, so that they are not recorded as an expense on our
financials.
In conjunction with these cost-cutting efforts and with the movement of our
activities away from consumer sales and in the direction of defense and security
products and services, we decided during the third quarter to discontinue retail
sales of our consumer battery products, effective in October 2002. As a result
of this decision, more than 60 employees were terminated. The discontinuation of
the consumer retail products resulted in a one-time, pre-tax charge of
approximately $6.9 million in the third quarter of 2002, reflecting a write-down
of inventory and net fixed assets as well as costs associated with the reduction
in our workforce. Almost all these charges were non-cash impacting items.
Our line of existing products for the military and defense sectors includes
12/24V, 30/60Ah Advanced Zinc-Air Power Packs (AZAPPs) utilizing our most
advanced cells (which have specific energy of 400 Wh/kg), a line of
super-lightweight AZAPPs that feature the same 400 Wh/kg cell technology in new
16Ah cells, and our new, high-power 12V Zinc-Air Power Packs (ZAPPs), which
offer extended-use 12V portable power and current ratings up to 3.5A, using our
commercial Zinc-Air cell technology.
As of September 30, 2002, we had 42 unexpired U.S. patents and 15
corresponding European patents issued covering general aspects and various
applications of our zinc-air technology; these patents expire between 2007 and
2018.
Our Electric Vehicle Division is continuing its American all-electric
transit bus development project, subcontracted by the Federal Transit
Administration (FTA). We successfully completed phase I and phase II of the FTA
program in June 2000, and have recently received approval and funding from the
FTA to begin Phase III of the program, which will focus on an evaluation of the
performance of zinc-air battery propulsion systems for transit buses; the
20
ELECTRIC FUEL CORPORATION
installation of new advanced ultra capacitors; and the implementation of an
advanced control system for auxiliaries.
Our Defense and Security Products Division is continuing with the
production of zinc-air fuel cell packs for the U.S. Army's CECOM. The 12/24
volt, 800 watt-hour battery pack for battlefield power, which is based on our
zinc-air fuel cell technology, is approximately the size and weight of a
notebook computer. The battery is based on a new generation of lightweight, 30
ampere-hours cells developed by us for both military and future commercial
products with high energy requirements. Additionally, the Defense and Security
Products Division is continuing with the introduction of the new emergency
lights for the marine life jackets market.
We have experienced significant fluctuations in the sources and amounts of
our revenues and expenses, and we believe that the following comparisons of
results of operations for the periods presented do not necessarily provide a
meaningful indication of our development. Our research and development expenses
have been offset, to a limited extent, by the periodic receipt of research
grants from Israel's Office of the Chief Scientist. We expect that, because of
these and other factors, including our acquisitions of IES and MDT, our
discontinuation of certain of our operations, and general economic conditions
and delays due to legislation and regulatory and other processes and the
development of competing technologies, future results of operations may not
necessarily be meaningfully compared with those of current and prior periods.
Thus, we believe that period-to-period comparisons of its past results of
operations should not necessarily be relied upon as indications of future
performance.
We incurred significant operating losses for the years ended December 31,
1999, 2000 and 2001 and the first nine months of 2002. While we expect to
continue to derive revenues from sales of defense and safety products that we
manufacture (directly and through our subsidiaries) and from components of the
Electric Fuel Electric Vehicle System, there can be no assurance that we will
ever derive such revenues or achieve profitability.
FUNCTIONAL CURRENCY
We consider the United States dollar to be the currency of the primary
economic environment in which we and our Israeli subsidiary, Electric Fuel
(E.F.L) Ltd. ("EFL") operate. Further, we believe that the operations of EFL's
subsidiaries are an integral part of the Israeli operations. EFL has therefore
adopted and is using the United States dollar as its functional currency.
Transactions and balances originally denominated in U.S. dollars are presented
at the original amounts. Gains and losses arising from non-dollar transactions
and balances are included in net income.
RESULTS OF OPERATIONS
PRELIMINARY NOTE
Results for the three months and nine months ended September 30, 2002
include the results of IES and MDT for such periods as a result of our
acquisitions of these companies early in the third quarter of 2002. The results
of IES and MDT were not included in our operating results for the corresponding
periods in 2001. Accordingly, the following period-to-period comparisons should
not necessarily be relied upon as indications of future performance.
21
ELECTRIC FUEL CORPORATION
In addition, these results are net of the operations of our retail consumer
battery products operations, which were discontinued in the third quarter of
2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001.
REVENUES. Revenues for the third quarter of 2002 totaled $3.3 million,
compared to $632,000 in the comparable period in 2001, an increase of $2.6
million, or 416%. This increase was primarily the result of the inclusion of IES
and MDT in our results this quarter.
During the third quarter of 2002, we recognized revenues from the sale of
interactive use-of-force training systems (through our IES subsidiary), from
payments under vehicle armoring contracts (through our MDT subsidiary), and from
the sale of lifejacket lights, as well as under contracts with the U.S. Army's
CECOM for deliveries of batteries and for design and procurement of production
tooling and equipment. We also recognized revenues from subcontracting fees
received in connection with the United States Department of Transportation (DOT)
program, which began in 1998 and, after we completed Phase I in July of 2001,
was extended in the fourth quarter of 2001. We participate in this program as a
member of a consortium seeking to demonstrate the ability of the Electric Fuel
battery system to power a full-size, all-electric transit bus. The total program
cost of Phase II is $2.7 million, 50% of which will be covered by the DOT
subcontracting fees. Subcontracting fees cover less than all of the expenses and
expenditures associated with our participation in the program. In 2001, we
derived revenues principally from the sale of lifejacket lights and consumer
batteries.
During the third quarter of 2002, revenues were $3.2 million for the
Defense and Security Products Division (compared to $410,000 in the comparable
period in 2001, an increase of $2.8 million, or 677%), due primarily to the
inclusion of IES and MDT in our results this quarter, and $77,000 for the
Electric Vehicle Division (compared to $223,000 in the comparable period in
2001, a decrease of $146,000, or 65%), due primarily to revenues from a German
consortium project relating to our electric vehicle that were included in 2001
but that did not exist during 2002, which was only partly offset by the
recognition of revenues from the FTA project.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues totaled $1.7 million
during the third quarter of 2002, compared to $589,000 in the comparable period
in 2001, an increase of $1.1 million, or 183%. Gross profit was $1.6 million
during the third quarter of 2002, compared to $43,000 in the comparable period
in 2001, an increase of $1.6 million, or 3,579%. This increase was primarily the
result of the inclusion of IES and MDT in our results this quarter.
Direct expenses for our two divisions during the third quarter of 2002 were
$2.1 million for the Defense and Security Products Division (compared to
$482,000 in the comparable period in 2001, an increase of $1.7 million, or
342%), primarily due to the inclusion of the results of IES and MDT, and
$184,000 in the Electric Vehicle Division (compared to $186,000 during the third
quarter of 2001, a decrease of $2,000, or 1%).
RESEARCH AND DEVELOPMENT EXPENSES, NET. Research and development expenses
less royalty-bearing grants for the third quarter of 2002 were $161,000,
compared to $121,000 during the third quarter of 2001, an increase of $40,000,
or 33%. This increase was primarily the result of the inclusion of IES and MDT
in our results
22
ELECTRIC FUEL CORPORATION
this quarter. No royalty-bearing grants from Israel's Office of the Chief
Scientist were recognized in the third quarter of 2002 (compared to $206,000 in
the third quarter of 2001).
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the third
quarter of 2002 were $553,000, compared to $12,000 in the third quarter of 2001,
an increase of $541,000, or 4,508%, primarily attributable to the increase in
marketing consultants for our defense and security products division as well as
due to the consolidation of both IES and MDT.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the third quarter of 2002 were $1.4 million, compared to $745,000 in the
third quarter of 2001, an increase of $634,000, or 85%, primarily attributable
to the inclusion of IES and MDT in our results this quarter.
AMORTIZATION OF INTANGIBLE ASSETS AND IN PROCESS R&D. Due to the
acquisitions of IES and MDT in the third quarter of 2002, and based upon our
preliminary valuation of tangible and intangible assets acquired, we booked
$33,000 as an expense for amortization of intangible assets, and $218,000 for
in-process research and development.
FINANCIAL INCOME. Financial income, net of interest expenses and exchange
differentials, totaled approximately $23,000 in the third quarter of 2002,
compared to $63,000 in the same quarter in 2001, a decrease of $40,000, or 63%.
This decrease was due primarily to lower interest rates and lower balances of
invested funds as a result of our use of the proceeds of private placements of
our securities.
INCOME TAXES. We and our Israeli subsidiary EFL incurred net operating
losses or had earnings arising from tax-exempt income during the quarters ended
September 30, 2002 and 2001 and, accordingly, we were not required to make any
provision for income taxes. Taxes in these entities incurred in 2002 and 2001
are primarily composed of United States federal alternative minimum taxes. Our
MDT subsidiary had taxable income and has made a provision for income taxes in
the amount of $105,000.
NET LOSS FROM CONTINUING OPERATIONS. Due to the factors cited above, we
reported a net loss from continuing operations of $923,000 in the third quarter
of 2002, compared to a net loss of $771,000 in the third quarter of 2001, an
increase of $152,000, or 20%.
NET LOSS FROM DISCONTINUED OPERATIONS. In the third quarter of 2002, we
decided to discontinue operations relating to the retail sales of our consumer
battery products. Accordingly, all revenues and expenses related to this segment
have been presented in our consolidated statements of operations for the three
and nine months ended September 30, 2002 in an item entitled "Loss from
discontinued operations."
Net loss from discontinued operations in the third quarter of 2002 was $8.7
million, compared to $3.6 million in the third quarter of 2001, an increase of
$5.1 million or 140%. This increase was primarily attributed to a write off of
inventory and net fixed assets related to the consumer battery division,
amounting to $6.9 million. This increase was offset to some extent by the
decrease in sales and marketing, research and development, and production
expenses in the third quarter of 2002 in comparison to the identical period in
2001.
NET LOSS. Due to the factors shown above, we reported a net loss of $9.6
million in the third quarter 2002, compared to a net loss of $4.4 million in the
third quarter of 2001, an increase of $5.2 million, or 118%. Included in the net
loss for 2002 is a one-time, pre-tax charge of approximately $6.9 million,
reflecting a write-down of inventory and net fixed assets, as well as costs
associated with a reduction in workforce, in connection with the discontinuation
of our operations relating to the retail sales of our consumer battery products.
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ELECTRIC FUEL CORPORATION
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001.
REVENUES. Revenues for the first nine months of 2002 totaled $4.3 million,
compared to $1.5 million in the comparable period in 2001, an increase of $2.7
million, or 177%. This increase was primarily the result of the inclusion of IES
and MDT in our results beginning with the third quarter.
During the first nine months of 2002, we recognized revenues from the sale
of interactive use-of-force training systems (through our IES subsidiary), from
payments under vehicle armoring contracts (through our MDT subsidiary), and from
the sale of lifejacket lights, as well as under contracts with the U.S. Army's
CECOM for deliveries of batteries and for design and procurement of production
tooling and equipment. We also recognized revenues from subcontracting fees
received in connection with the United States Department of Transportation (DOT)
program which began in 1998 and, after we completed Phase I in July of 2001, was
extended in the fourth quarter of 2001. We participate in this program as a
member of a consortium seeking to demonstrate the ability of the Electric Fuel
battery system to power a full-size, all-electric transit bus. The total program
cost of Phase II is $2.7 million, 50% of which will be covered by the DOT
subcontracting fees. Subcontracting fees cover less than all of the expenses and
expenditures associated with our participation in the program. In 2001, we
derived revenues principally from the sale of lifejacket lights and consumer
batteries.
During the first nine months of 2002, revenues were $3.9 million for the
Defense and Security Products Division (compared to $1.0 million in the
comparable period in 2001, an increase of $2.8 million, or 289%), due primarily
to the inclusion of IES and MDT in our results during the third quarter, and
$379,000 for the Electric Vehicle Division (compared to $539,000 in the
comparable period in 2001, a decrease of $160,000, or 30%), due primarily to the
recognition of lower revenues in 2001 compared to that of 2001, as well as
revenues from a German consortium project relating to our electric vehicle that
were included in 2001 but that did not exist in 2002.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues totaled $2.4 million
during the first nine months of 2002, compared to $1.4 million in the comparable
period in 2001, an increase of $1.1 million, or 80%). Gross profit was $1.8
million during the first nine months of 2002, compared to $184,000 in the
comparable period in 2001, an increase of $1.6 million, or 892%. This increase
was primarily the result of the inclusion of IES and MDT in our results
beginning with the third quarter.
Direct expenses for our three divisions during the first nine months of
2002 were $2.9 million for the Defense and Security Products Division (compared
to $1.0 million in the comparable period in 2001, an increase of $1.9 million,
or 200%), primarily due to the inclusion of the results of IES and MDT beginning
with the third quarter, and $584,000 in the Electric Vehicle division (compared
to $605,000 during the first nine months of 2001, a decrease of $21,000, or 3%).
RESEARCH AND DEVELOPMENT EXPENSES, NET. Research and development expenses
less royalty-bearing grants for the first nine months of 2002 were $380,000,
compared to $355,000 during the first nine months of 2001, an increase of
$25,000, or 7%). This increase was primarily the result of the inclusion of IES
24
ELECTRIC FUEL CORPORATION
and MDT in our results beginning with the third quarter. We recognized $49,000
in royalty-bearing grants from Israel's Office of the Chief Scientist in the
first nine months of 2002 (compared to $206,000 in the first nine months of
2001).
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the first
nine months of 2002 were $713,000, compared to $56,000 in the first nine months
of 2001, an increase of $657,000, or 1,173%, primarily attributable to the
increase in marketing consultants for our defense and security products division
as well as due to the consolidation of both IES and MDT.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the first nine months of 2002 were $3.3 million compared to $2.6 million in
the first nine months of 2001, an increase of $710,000, or 27%. This increase
was primarily attributable to the inclusion of IES and MDT in our results
beginning with the third quarter. Other, less significant, factors were the
non-cash write-down of notes receivable from certain stockholders reflecting a
diminution in the market value of securities collateralizing such notes, and
expenses related to compensation due to options we granted to suppliers.
FINANCIAL INCOME. Financial income, net of interest expenses and exchange
differentials, totaled approximately $140,000 in the first nine months of 2002
compared to $399,000 in the same half in 2001, a decrease of $259,000, or 65%.
This decrease was due primarily to lower interest rates and lower balances of
invested funds as a result of our use of the proceeds of private placements of
our securities.
INCOME TAXES. We and our Israeli subsidiary EFL incurred net operating
losses or had earnings arising from tax-exempt income during the nine months
ended September 30, 2002 and 2001 and, accordingly, we were not required to make
any provision for income taxes. Taxes in these entities incurred in 2002 and
2001 are primarily composed of United States federal alternative minimum taxes.
Our MDT subsidiary had taxable income and has made a provision for income taxes
in the amount of $105,000.
NET LOSS FROM CONTINUING OPERATIONS. Due to the factors cited above, we
reported a net loss from continuing operations of $2.9 million in the first nine
months of 2002, compared to a net loss of $2.5 million in the first nine months
of 2001, an increase of $455,000, or 18%.
NET LOSS FROM DISCONTINUED OPERATIONS. In the third quarter of 2002, we
decided to discontinue operations relating to the retail sales of our consumer
battery products. Accordingly, all revenues and expenses related to this segment
have been presented in our consolidated statements of operations for the three
and nine months ended September 30, 2002 in an item entitled "Loss from
discontinued operations."
Net loss from discontinued operations in the nine months ended September
30, 2002 was $12.7 million, compared to $10.0 million in the comparable period
of 2001, an increase of $2.7 million, or 27%.
NET LOSS. Due to the factors cited above, we reported a net loss of $15.6
million in the first nine months of 2002, compared to a net loss of $12.4
million in the first nine months of 2001, an increase of $3.2 million, or 26%.
Included in the net loss for 2002 is a one-time, pre-tax charge of approximately
$6.9 million, reflecting a write-down of inventory and net fixed assets, as well
as costs associated with a reduction of workforce, in connection with the
discontinuation of our operations relating to the retail sales of our consumer
battery products.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, we had cash and cash equivalents of approximately
$3.0 million, and certificates of deposit due within one year amounting to
$604,000, compared to $10.2 million as of September 30, 2001.
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ELECTRIC FUEL CORPORATION
We used available funds in the third three months of 2002 primarily for the
acquisition of IES and MDT, and other working capital needs. We increased our
investment in fixed assets by $159,000 during the quarter ended September 30,
2002. Our fixed assets amounted to $2.5 million at quarter end after the
write-off of net fixed assets in the amount of $4.5 million due to
discontinuation of our consumer battery business.
Net cash used in operating activities for the nine months ended September
30, 2002 and 2001 was $3.1 million and $2.0 million, respectively, an increase
of $1.1 million, or 55%. This increase was primarily the result of an increase
in accounts receivable and a decrease in accounts payable and in accruals in
comparison to the nine months ended September 30, 2001.
Net cash used in investing activities for the nine months ended September
30, 2002 and 2001 was $10.3 million and $11.0 million, respectively, a decrease
of $723,000, or 7%. This decrease was primarily the result of a decrease in cash
used in discontinued operations. The decrease was offset by our investment in
the acquisition of IES and MDT.
Net cash provided by financing activities for the nine months ended
September 30, 2002 and 2001 was $3.8 million and $11.6 million, respectively, a
decrease of $7.8 million, or 67%. This decrease was primarily the result of
lower amounts of funds raised through sales of our common stock in 2002 compared
to 2001.
Based on our internal forecasts, we believe that our present cash position
and cash flows from operations will be sufficient to satisfy our estimated cash
requirements through the next year. This belief is based on certain assumptions,
which our management believes to be reasonable. We may seek additional funding,
including through the issuance of equity or debt securities. However, there can
be no assurance that we would be able to obtain any such additional funding, and
if such additional funding could not be secured, we would have to further
modify, reduce, defer or eliminate certain of our anticipated future commitments
and/or programs, in order to continue future operations.
RISK FACTORS
You should carefully consider these risk factors in addition to our
financial statements. In addition to the following risks, there may also be
risks that we do not yet know of or that we currently think are immaterial that
may also impair our business operations. If any of the following risks occur,
our business, financial condition or operating results could be adversely
affected.
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ELECTRIC FUEL CORPORATION
BUSINESS-RELATED RISKS
WE HAVE HAD A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.
We were incorporated in 1990 and began our operations in 1991. We have
funded our operations principally from funds raised in each of the initial
public offering of our common stock in February 1994; through subsequent public
and private offerings of our common stock and securities convertible into shares
of our common stock; research contracts and supply contracts; funds received
under research and development grants from the Government of Israel; and sales
of Instant Power batteries, Instant Power chargers, and lifejacket lights. We
incurred significant operating losses for the years ended December 31, 1997,
1998, 1999, 2000 and 2001 and during the first nine months of 2002, and expect
to continue to incur significant operating losses in 2002. Additionally, as of
September 30, 2002, we had an accumulated deficit of approximately $96.3
million. These losses may increase as we expand our research and development
activities and establish production facilities, and these losses may fluctuate
from quarter to quarter. There can be no assurance that we will ever achieve
profitability or that our business will continue to exist. Additionally, because
we do not presently meet the transaction requirements for filing registration
statements for primary offerings of our securities on the simpler Form S-3
registration statement, raising capital through sales of our securities may be
more difficult in the future than it has been in the past.
WE NEED SIGNIFICANT AMOUNTS OF CAPITAL TO OPERATE AND GROW OUR BUSINESS.
We require substantial funds to conduct the necessary research, development
and testing of our products; to establish commercial scale manufacturing
facilities; and to market our products. We continue to seek additional funding,
including through the issuance of equity or debt securities. However, there can
be no assurance that we will obtain any such additional financing in a timely
manner or on acceptable terms. If additional funds are raised by issuing equity
securities, stockholders may incur further dilution. If additional funding is
not secured, we will have to modify, reduce, defer or eliminate parts of our
anticipated future commitments and/or programs.
Moreover, the acquisitions of IES and MDT required us at closing to pay
cash as part of the consideration: $3.0 million in the case of IES and $1.2
million in the case of MDT. The IES transaction also requires us to pay an
additional $1.0 million on or before June 30, 2003, $400,000 on or before
December 31, 2003, and $400,000 on or before June 30, 2004. We may require
additional financing to meet these obligations while sustaining further growth
and expanding our business. There can be no assurance that we will be able to
successfully negotiate or obtain additional financing or that such financing
will be on terms favorable or acceptable to us.
Additionally, both our agreement with IES and our agreement with MDT are
governed by Israeli law, which may differ in certain respects from American law.
WE MAY NOT BE SUCCESSFUL IN OPERATING A NEW BUSINESS.
Prior to the IES and MDT acquisitions, our primary business was the
marketing and sale of products based on primary and refuelable Zinc-Air fuel
cell technology and advancements in battery technology for defense and security
products and other military applications, electric vehicles and consumer
electronics. As a result of the IES and MDT acquisitions, a substantial
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ELECTRIC FUEL CORPORATION
component of our business will be the marketing and sale of hi-tech multimedia
and interactive digital solutions for training military, law enforcement and
security personnel and sophisticated lightweight materials and advanced
engineering processes used to armor vehicles. These are new businesses for us
and our management group has limited experience operating these types of
businesses. Although we have retained the management personnel at IES and MDT,
we cannot assure that such personnel will continue to work for us or that we
will be successful in managing this new business. If we are unable to
successfully operate these new businesses, especially the business of IES, our
business, financial condition and results of operations could be materially
impaired.
WE CANNOT ASSURE YOU OF MARKET ACCEPTANCE OF OUR MILITARY ZINC-AIR BATTERY
PRODUCTS AND ELECTRIC VEHICLE TECHNOLOGY.
Our batteries for the defense industry and a signal light powered by
water-activated batteries for use in life jackets and other rescue apparatus are
the only commercial Zinc-Air battery products we currently have available for
sale. Significant resources will be required to develop and produce additional
consumer products utilizing this technology on a commercial scale. Additional
development will be necessary in order to commercialize our technology and each
of the components of the Electric Fuel System for electric vehicles and defense
products. We cannot assure you that we will be able to successfully develop,
engineer or commercialize our Zinc-Air energy system, or that we will be able to
develop products for commercial sale or that, if developed, they can be produced
in commercial quantities or at acceptable costs or be successfully marketed. The
likelihood of our future success must be considered in light of the risks,
expenses, difficulties and delays frequently encountered in connection with the
operation and development of a relatively early stage business and with
development activities generally.
We believe that public pressure and government initiatives are important
factors in creating an electric vehicle market. However, there can be no
assurance that there will be sufficient public pressure or that further
legislation or other governmental initiatives will be enacted, or that current
legislation will not be repealed, amended, or have its implementation delayed.
In addition, we are subject to the risk that even if an electric fuel vehicle
market develops, a different form of zero emission or low emission vehicle will
dominate the market. In addition, we cannot assure you that other solutions to
the problem of containing emissions created by internal combustion engines will
not be invented, developed and produced. Any other solution could achieve
greater market acceptance than electric vehicles. The failure of a significant
market for electric vehicles to develop would have a material adverse effect on
our ability to commercialize this aspect of our technology. Even if a
significant market for electric vehicles develops, there can be no assurance
that our technology will be commercially competitive within that market.
OUR ACQUISITION STRATEGY INVOLVES VARIOUS RISKS.
Part of our strategy is to grow through the acquisition of companies that
will complement our existing operations or provide us with an entry into markets
we do not currently serve. Growth through acquisitions involves substantial
risks, including the risk of improper valuation of the acquired business and the
risk of inadequate integration. There can be no assurance that suitable
acquisition candidates will be available, that we will be able to acquire or
manage profitably such additional companies or that future acquisitions will
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ELECTRIC FUEL CORPORATION
produce returns that justify our investments therein. In addition, we may
compete for acquisition and expansion opportunities with companies that have
significantly greater resources than we do. Furthermore, acquisitions could
disrupt our ongoing business, distract the attention of our senior managers,
make it difficult to maintain our operational standards, controls and procedures
and subject us to contingent and latent risks that are different, in nature and
magnitude, than the risks we currently face.
We may finance future acquisitions with cash from operations or additional
debt or equity financings. There can be no assurance that we will be able to
generate internal cash or obtain financing from external sources or that, if
available, such financing will be on terms acceptable to us. The issuance of
additional common stock to finance acquisitions may result in substantial
dilution to our stockholders. Any debt financing may significantly increase our
leverage and may involve restrictive covenants which limit our operations.
WE MAY NOT SUCCESSFULLY INTEGRATE OUR NEW ACQUISITIONS.
In light of our recent acquisitions of IES and MDT, our success will depend
in part on our ability to manage the combined operations of these companies and
to integrate the operations and personnel of these companies along with our
other subsidiaries and divisions into a single organizational structure. There
can be no assurance that we will be able to effectively integrate the operations
of our subsidiaries and divisions and our newly-acquired businesses into a
single organizational structure. Integration of these operations could also
place additional pressures on our management as well as on our key technical
resources. The failure to successfully manage this integration could have an
adverse material effect on us.
If we are successful in acquiring additional businesses, we may experience
a period of rapid growth that could place significant additional demands on, and
require us to expand, our management, resources and management information
systems. Our failure to manage any such rapid growth effectively could have a
material adverse effect on our financial condition, results of operations and
cash flows.
IF WE ARE UNABLE TO MANAGE OUR GROWTH, OUR OPERATING RESULTS WILL BE
IMPAIRED.
We are currently experiencing a period of growth and development activity
which could place a significant strain on our personnel and resources. Our
activity has resulted in increased levels of responsibility for both existing
and new management personnel. Many of our management personnel have had limited
or no experience in managing growing companies. We have sought to manage our
current and anticipated growth through the recruitment of additional management
and technical personnel and the implementation of internal systems and controls.
However, our failure to manage growth effectively could adversely affect our
results of operations.
WE WILL NEED TO DEVELOP THE EXPERIENCE TO MANUFACTURE CERTAIN OF OUR
PRODUCTS IN COMMERCIAL QUANTITIES AND AT COMPETITIVE PRICES.
We currently have limited experience in manufacturing in commercial
quantities and have, to date, produced only limited quantities of military
batteries and components of the batteries for electric vehicles. In order for us
to be successful in the commercial market, these products must be manufactured
to meet high quality standards in commercial quantities at competitive prices.
The development of the necessary manufacturing technology and processes will
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ELECTRIC FUEL CORPORATION
require extensive lead times and the commitment of significant amounts of
financial and engineering resources, which may not be available to us. We cannot
assure you that we will successfully develop this technology or these processes.
Moreover, we cannot assure you that we will be able to successfully implement
the quality control measures necessary for commercial manufacturing.
SOME OF THE COMPONENTS OF OUR TECHNOLOGY AND OUR PRODUCTS POSE POTENTIAL
SAFETY RISKS WHICH COULD CREATE POTENTIAL LIABILITY EXPOSURE FOR US.
Some of the components of our technology and our products contain elements
that are known to pose potential safety risks. Also, because electric vehicle
batteries contain large amounts of electrical energy, they may cause injuries if
not handled properly. In addition to these risks, and although we incorporate
safety procedures in our research, development and manufacturing processes,
there can be no assurance that accidents in our facilities will not occur. Any
accident, whether occasioned by the use of all or any part of our products or
technology or by our manufacturing operations, could adversely affect commercial
acceptance of our products and could result in significant production delays or
claims for damages resulting from injuries. Any of these occurrences would
materially adversely affect our operations and financial condition.
WE MAY FACE PRODUCT LIABILITY CLAIMS.
To date, there have been no material claims or threatened claims against us
by users of our products, including the products manufactured by MDT, based on a
failure of our products to perform as specified. In the event that any claims
for substantial amounts were to be asserted against us, they could have a
materially adverse effect on our financial condition and results of operations.
We maintain general product liability insurance. However, there is no assurance
that the amount of our insurance will be sufficient to cover potential claims or
that the present amount of insurance can be maintained at the present level of
cost, or at all.
SOME OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT CONTRACTS.
Most of IES's customers to date have been in the public sector of the U.S.,
including the federal, state and local governments, and in the public sectors of
a number of other countries. A significant decrease in the overall level or
allocation of defense spending or law enforcement in the U.S. or other countries
could have a material adverse effect on our future results of operations and
financial condition.
Sales to public sector customers are subject to a multiplicity of detailed
regulatory requirements and public policies as well as to changes in training
and purchasing priorities. Contracts with public sector customers may be
conditioned upon the continuing availability of public funds, which in turn
depends upon lengthy and complex budgetary procedures, and may be subject to
certain pricing constraints. Moreover, U.S. government contracts and those of
many international government customers may generally be terminated for a
variety of factors when it is in the best interests of the government and
contractors may be suspended or debarred for misconduct at the discretion of the
government. There can be no assurance that these factors or others unique to
government contracts or the loss or suspension of necessary regulatory licenses
will not have a material adverse effect on our future results of operations and
financial condition.
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ELECTRIC FUEL CORPORATION
OUR FIELDS OF BUSINESS ARE HIGHLY COMPETITIVE.
The competition to develop defense and security products and electric
vehicle battery systems, and to obtain funding for the development of these
products, is, and is expected to remain, intense.
Our defense and security products compete with other manufacturers of
specialized training systems, including Firearms Training Systems, Inc., a
producer of interactive simulation systems designed to provide training in the
handling and use of small and supporting arms. In addition, we compete with
manufacturers and developers of armor for cars and vans, including O'Gara-Hess &
Eisenhardt, a division of Armor Holdings, Inc.
Our battery technology competes with other battery technologies, as well as
other Zinc-Air technologies. The competition in this area of our business
consists of development stage companies, major international companies and
consortia of such companies, including battery manufacturers, automobile
manufacturers, energy production and transportation companies, consumer goods
companies and defense contractors. Many of our competitors have financial,
technical, marketing, sales, manufacturing, distribution and other resources
significantly greater than ours.
Various battery technologies are being considered for use in electric
vehicles and defense and safety products by other manufacturers and developers,
including the following: lead-acid, nickel-cadmium, nickel-iron, nickel-zinc,
nickel-metal hydride, sodium-sulfur, sodium-nickel chloride, zinc-bromine,
lithium-ion, lithium-polymer, lithium-iron sulfide, primary lithium,
rechargeable alkaline and Zinc-Air. Additionally, some manufacturers of primary
alkaline batteries offer alkaline battery packs for cellphone users.
If we are unable to compete successfully in each of our operating areas,
especially in the defense and security products area of our business, our
business and results of operations could be materially adversely affected.
FAILURE TO RECEIVE REQUIRED REGULATORY PERMITS OR TO COMPLY WITH VARIOUS
REGULATIONS TO WHICH WE ARE SUBJECT COULD ADVERSELY AFFECT OUR BUSINESS.
Regulations in Europe, Israel, the United States and other countries impose
various controls and requirements relating to various components of our
business. While we believe that our current and contemplated operations conform
to those regulations, we cannot assure you that we will not be found to be in
non-compliance. We have applied for, and received, the necessary permits under
the Israel Dangerous Substances Law, 5753-1993, required for the use of
potassium hydroxide and zinc metal. However, there can be no assurance that
changes in these regulations or the adoption of new regulations will not impose
costly compliance requirements on us, otherwise subject us to future
liabilities, or restrict our ability to operate our business.
OUR BUSINESS IS DEPENDENT ON PATENTS AND OTHER PROPRIETARY RIGHTS THAT MAY
BE DIFFICULT TO PROTECT AND COULD AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
Our ability to compete effectively will depend on our ability to maintain
the proprietary nature of our technology and manufacturing processes through a
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ELECTRIC FUEL CORPORATION
combination of patent and trade secret protection, non-disclosure agreements and
licensing arrangements. We hold patents, or patent applications, covering
elements of our technology in the United States and in Europe. In addition, we
have patent applications pending in the United States and in foreign countries,
including the European Community, Israel and Japan. We intend to continue to
file patent applications covering important features of our technology. We
cannot assure you, however, that patents will issue from any of these pending
applications or, if patents issue, that the claims allowed will be sufficiently
broad to protect our technology. In addition, we cannot assure you that any of
our patents will not be challenged or invalidated, that any of our issued
patents will afford protection against a competitor or that third parties will
not make infringement claims against us.
Litigation, or participation in administrative proceedings, may be
necessary to protect our proprietary rights. This type of litigation can be
costly and time consuming and could divert company resources and management
attention to defend our rights, and this could harm us even if we were to be
successful in the litigation. The invalidation of patents owned by or licensed
to us could have a material adverse effect on our business. In addition, patent
applications filed in foreign countries are subject to laws, rules and
procedures that differ from those of the United States. Therefore, there can be
no assurance that foreign patent applications related to patents issued in the
United States will be granted. Furthermore, even if these patent applications
are granted, some foreign countries provide significantly less patent protection
than the United States. In the absence of patent protection, and despite our
reliance upon our proprietary confidential information, our competitors may be
able to use innovations similar to those used by us to design and manufacture
products directly competitive with our products. In addition, no assurance can
be given that others will not obtain patents that we will need to license or
design around. To the extent any of our products are covered by third-party
patents, we could require a license under such patents to develop and market our
patents.
Despite our efforts to safeguard and maintain our proprietary rights, we
may not be successful in doing so. In addition, competition is intense, and
there can be no assurance that our competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our
technology. Moreover, in the event of patent litigation, we cannot assure you
that a court would determine that we were the first creator of inventions
covered by our issued patents or pending patent applications or that we were the
first to file patent applications for those inventions. If existing or future
third-party patents containing broad claims were upheld by the courts or if we
were found to infringe third party patents, we may not be able to obtain the
required licenses from the holders of such patents on acceptable terms, if at
all. Failure to obtain these licenses could cause delays in the introduction of
our products or necessitate costly attempts to design around such patents, or
could foreclose the development, manufacture or sale of our products. We could
also incur substantial costs in defending ourselves in patent infringement suits
brought by others and in prosecuting patent infringement suits against
infringers.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, through non-disclosure and confidentiality agreements with our
customers, employees, consultants, strategic partners and potential strategic
partners. We cannot assure you that these agreements will not be breached, that
we would have adequate remedies for any breach or that our trade secrets will
not otherwise become known or be independently developed by competitors.
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ELECTRIC FUEL CORPORATION
WE HAVE UNDERGONE RECENT MANAGEMENT CHANGES.
In October 2002, Yehuda Harats, who had been our CEO since the inception of
our company, resigned from his positions with us in order to pursue other
interests. Our Board of Directors selected our long-time Chairman of the Board,
Robert S. Ehrlich, to be our new President and CEO. Our success will depend to
some extent on our ability to quickly and smoothly execute the change in
leadership as a result of this change of CEO.
WE ARE DEPENDENT ON KEY PERSONNEL AND OUR BUSINESS WOULD SUFFER IF WE FAIL
TO RETAIN THEM.
We are highly dependent on certain members of our management and
engineering staff, and the loss of the services of one or more of these persons
could adversely affect us. We are especially dependent on the services of our
Chairman, President and Chief Executive Officer, Robert S. Ehrlich. The loss of
Mr. Ehrlich could have a material adverse effect on us. We are party to an
employment agreement with Mr. Ehrlich, which agreement expires at the end of
2002, with an option on our part to extend through 2003 (which we have
exercised). We do not have key-man life insurance on Mr. Ehrlich.
THERE ARE RISKS INVOLVED WITH THE INTERNATIONAL NATURE OF OUR BUSINESS.
A significant portion of our sales are made to customers located outside
the U.S., primarily in Europe and Asia. In 2001, 2000 and 1999, 66.0%, 29.9% and
12.6%, respectively, of our revenues, including the revenues of IES and MDT on a
pro forma basis, were derived from sales to customers located outside the U.S.
We expect that our international customers will continue to account for a
substantial portion of our revenues in the near future. Sales to international
customers may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations, foreign taxes,
longer payment cycles and changes in import/export regulations and tariff rates.
In addition, various forms of protectionist trade legislation have been and in
the future may be proposed in the U.S. and certain other countries. Any
resulting changes in current tariff structures or other trade and monetary
policies could adversely affect our sales to international customers.
WE MAY BE SUBJECT TO INCREASED UNITED STATES TAXATION.
We believe that Electric Fuel and our wholly-owned Israeli subsidiary EFL
will be treated as personal holding companies for purposes of the personal
holding company (PHC) rules of the Internal Revenue Code of 1986. Under the PHC
rules, a PHC is subject to a special 39.6% tax on its "undistributed PHC
income", in addition to regular income tax. We believe that Electric Fuel and
EFL have not had any material undistributed PHC income. However, no assurance
can be given that Electric Fuel and EFL will not have undistributed PHC income
in the future.
Approximately 24.1% of the stock of EFL was owned (directly or indirectly
by application of certain attribution rules) as of November 10, 2002 by four
United States citizens: Leon S. Gross, Austin W. Marxe and David M. Greenhouse,
and Robert S. Ehrlich. (Information with respect to the stockholdings of Messrs.
Marxe and Greenhouse is based on a Schedule 13G filed with the Securities and
Exchange Commission on February 11, 2002.) If more than 50% of either (i) the
voting power of our stock, or (ii) the total value of our stock, is ever
acquired or deemed to be acquired by five or fewer individuals (including, if
applicable, those individuals who currently own an aggregate of 24.1% of our
33
ELECTRIC FUEL CORPORATION
shares) who are United States citizens or residents, EFL would satisfy the
foreign personal holding company (FPHC) stock ownership test under the Internal
Revenue Code, and we could be subject to additional U.S. taxes (including PHC
tax) on any "undistributed FPHC income" of EFL. We believe that EFL has not had
any material undistributed FPHC income. However, no assurance can be given that
EFL will not become a FPHC and have undistributed FPHC income in the future.
INVESTORS SHOULD NOT PURCHASE OUR COMMON STOCK WITH THE EXPECTATION OF
RECEIVING CASH DIVIDENDS.
We currently intend to retain any future earnings for funding growth and,
as a result, do not expect to pay any cash dividends in the foreseeable future.
MARKET-RELATED RISKS
THE PRICE OF OUR COMMON STOCK IS VOLATILE.
The market price of our common stock has been volatile in the past and may
change rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price:
* Announcements by us, our competitors or our customers;
* The introduction of new or enhanced products and services by us or our
competitors;
* Changes in the perceived ability to commercialize our technology compared
to that of our competitors;
* Rumors relating to our competitors or us;
* Actual or anticipated fluctuations in our operating results; and
* General market or economic conditions.
IF OUR SHARES WERE TO BE DELISTED, OUR STOCK PRICE MIGHT DECLINE FURTHER
AND WE MIGHT BE UNABLE TO RAISE ADDITIONAL CAPITAL.
One of the continued listing standards for our stock on the Nasdaq National
Market is the maintenance of a $1.00 bid price. Our stock price has recently
traded as low as $0.67 per share and closed as low as $0.73 per share, and it is
currently trading below $1.00, and has been since October 18, 2002. If our bid
price were to remain below $1.00 for 30 consecutive business days (that is,
through November 29, 2002), Nasdaq could notify us of our failure to meet the
continued listing standards, after which we would have 90 calendar days to
correct such failure or be delisted from the Nasdaq National Market. We would
also have the opportunity to appeal this notification, although there can be no
assurances that this appeal would be resolved favorably.
There can be no assurance that our common stock will remain listed on the
Nasdaq National Market. If our common stock were to be delisted from the Nasdaq
National Market, we might apply to be listed on the Nasdaq SmallCap market;
however, there can be no assurance that we would be approved for listing on the
34
ELECTRIC FUEL CORPORATION
Nasdaq SmallCap market, which has the same $1.00 minimum bid requirement as the
Nasdaq National Market. While our stock would continue to trade on the
over-the-counter bulletin board following any delisting from the Nasdaq, any
such delisting of our common stock could have an adverse effect on the market
price of, and the efficiency of the trading market for, our common stock. Also,
if in the future we were to determine that we need to seek additional equity
capital, it could have an adverse effect on our ability to raise capital in the
public equity markets.
In addition, if we fail to maintain Nasdaq listing for our securities, and
no other exclusion from the definition of a "penny stock" under the Exchange Act
is available, then any broker engaging in a transaction in our securities would
be required to provide any customer with a risk disclosure document, disclosure
of market quotations, if any, disclosure of the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market values of our securities held in the customer's
account. The bid and offer quotation and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer's confirmation. If brokers become subject to the "penny stock" rules
when engaging in transactions in our securities, they would become less willing
to engage in transactions, thereby making it more difficult for our stockholders
to dispose of their shares.
WE ARE SUBJECT TO SIGNIFICANT INFLUENCE BY SOME STOCKHOLDERS THAT MAY HAVE
THE EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL.
As of November 10, 2002, our directors, executive officers and principal
stockholders and their affiliates (specifically, Leon S. Gross (10.6%), IES
Electronics Industries Ltd. (9.4%), Austin W. Marxe and David M. Greenhouse
(9.0%), Yehuda Harats (6.3%) and Robert S. Ehrlich (4.5%)) collectively
beneficially owned approximately 39.8% of the outstanding shares of our common
stock, including options and warrants exercisable within 60 days of November 10,
2002. As a result, these stockholders are able to exercise significant influence
over matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. (Information with respect to
the stockholdings of Messrs. Marxe and Greenhouse is based on a Schedule 13G
filed with the Securities and Exchange Commission on February 11, 2002, and
information with respect to the stockholdings of IES Electronics Industries Ltd.
is based on a Schedule 13D filed with the Securities and Exchange Commission on
August 12, 2002, as amended on October 28, 2002.) This concentration of
ownership may also have the effect of delaying, preventing or discouraging a
change in control of Electric Fuel.
Pursuant to a voting rights agreement dated September 30, 1996 and as
amended December 10, 1997 and December 28, 1999, between Leon S. Gross, Robert
S. Ehrlich, Yehuda Harats and us, Lawrence M. Miller, Mr. Gross's advisor, is
entitled to be nominated to serve on our board of directors so long as Mr.
Gross, his heirs or assigns retain at least 1,375,000 shares of common stock. In
addition, under the voting rights agreement, Mr. Gross and Messrs. Ehrlich and
Harats agreed to vote and take all necessary action so that Messrs. Ehrlich,
Harats and Miller shall serve as members of the board of directors until the
earlier of December 28, 2004 or our fifth annual meeting of stockholders after
December 28, 1999. Mr. Harats resigned as a director in late 2002.
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ELECTRIC FUEL CORPORATION
A SUBSTANTIAL NUMBER OF OUR SHARES ARE AVAILABLE FOR SALE IN THE PUBLIC
MARKET AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE.
Sales of a substantial number of shares of common stock into the public
market, or the perception that those sales could occur, could adversely affect
our stock price or could impair our ability to obtain capital through an
offering of equity securities. As of November 10, 2002, we had 34,749,835 shares
of common stock issued and outstanding. Of these shares, 27,223,357 are freely
transferable without restriction under the Securities Act of 1933 and 7,526,478
may be sold subject to the volume restrictions, manner-of-sale provisions and
other conditions of Rule 144 under the Securities Act of 1933.
In connection with a stock purchase agreement dated September 30, 1996
between Leon S. Gross and us, we also entered into a registration rights
agreement with Mr. Gross dated September 30, 1996, setting forth registration
rights with respect to the shares of common stock issued to Mr. Gross in
connection with the offering. These rights include the right to make two demands
for the registration of the shares of our common stock owned by Mr. Gross. In
addition, Mr. Gross was granted unlimited rights to "piggyback" on registration
statements that we file for the sale of our common stock. Mr. Gross presently
owns 3,662,870 shares, of which 1,568,462 have never been registered.
In addition, pursuant to the terms of their employment agreements with us,
both Yehuda Harats and Robert S. Ehrlich have a right to demand registration of
their shares. Mr. Harats presently owns 1,461,372 shares, of which 435,404
shares have never been registered, and Mr. Ehrlich presently owns 688,166
shares, of which 453,933 shares have never been registered.
EXERCISE OF OUR WARRANTS AND OPTIONS COULD ADVERSELY AFFECT OUR STOCK PRICE
AND WILL BE DILUTIVE.
As of November 10, 2002, there were outstanding warrants to purchase a
total of 4,421,138 shares of common stock at a weighted average exercise price
of $3.26 per share, and options to purchase a total of 5,396,611 shares of
common stock at a weighted average exercise price of $2.36 per share, of which
4,748,938 were vested and exercisable within 60 days of the date of this report,
at a weighted average exercise price of $2.37 per share. Holders of our options
and warrants will probably exercise them only at a time when the price of our
common stock is higher than the exercise price of the options or warrants.
Accordingly, we may be required to issue shares of our common stock at a price
substantially lower than the market price of our stock. This could adversely
affect our stock price. In addition, if and when these shares are issued, the
percentage of our common stock that existing stockholders own will be diluted.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN
PROVISIONS THAT COULD DISCOURAGE A TAKEOVER.
Provisions of our amended and restated certificate of incorporation may
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. These
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock. These provisions:
36
ELECTRIC FUEL CORPORATION
* divide our board of directors into three classes serving staggered
three-year terms;
* only permit removal of directors by stockholders "for cause," and
require the affirmative vote of at least 85% of the outstanding common
stock to so remove; and
* allow us to issue preferred stock without any vote or further action
by the stockholders.
The classification system of electing directors and the removal provision
may tend to discourage a third-party from making a tender offer or otherwise
attempting to obtain control of us and may maintain the incumbency of our board
of directors, as the classification of the board of directors increases the
difficulty of replacing a majority of the directors. These provisions may have
the effect of deferring hostile takeovers, delaying changes in our control or
management, or may make it more difficult for stockholders to take certain
corporate actions. The amendment of any of these provisions would require
approval by holders of at least 85% of the outstanding common stock.
ISRAEL-RELATED RISKS
A SIGNIFICANT PORTION OF OUR OPERATIONS TAKES PLACE IN ISRAEL.
The offices and facilities of our two of our principal subsidiaries, EFL
and MDT, are located in Israel (in Beit Shemesh and Lod, respectively, both of
which are within Israel's pre-1967 borders). We conduct research and development
activities through EFL, and most of our senior management is located at EFL's
facilities. Although we expect that most of our sales will be made to customers
outside Israel, we are nonetheless directly affected by economic, political and
military conditions in that country. Accordingly, any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could have a material adverse effect on our
operations. Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel.
Historically, Arab states have boycotted any direct trade with Israel and
to varying degrees have imposed a secondary boycott on any company carrying on
trade with or doing business in Israel. Although in October 1994, the states
comprising the Gulf Cooperation Council (Saudi Arabia, the United Arab Emirates,
Kuwait, Dubai, Bahrain and Oman) announced that they would no longer adhere to
the secondary boycott against Israel, and Israel has entered into certain
agreements with Egypt, Jordan, the Palestine Liberation Organization and the
Palestinian Authority, Israel has not entered into any peace arrangement with
Syria or Lebanon. Moreover, since September 2000, there has been a significant
deterioration in Israel's relationship with the Palestinian Authority, and a
significant increase in terror and violence. Efforts to resolve the problem have
failed to result in an agreeable solution. Continued hostilities between the
Palestinian community and Israel and any failure to settle the conflict may have
a material adverse effect on our business and us. Moreover, the current
political and security situation in the region has already had an adverse effect
on the economy of Israel, which in turn may have an adverse effect on us.
Many of our employees are currently obligated to perform annual reserve
duty in the Israel Defense Forces and are subject to being called for active
military duty at any time. No assessment can be made of the full impact of such
requirements on us in the future, particularly if emergency circumstances occur,
and no prediction can be made as to the effect on us of any expansion of these
obligations. However, further deterioration of hostilities with the Palestinian
community into a full-scale conflict might require more widespread military
reserve service by some of our employees, which could have a material adverse
effect on our business.
37
ELECTRIC FUEL CORPORATION
ANY FAILURE TO OBTAIN THE TAX BENEFITS FROM THE STATE OF ISRAEL THAT WE
EXPECT TO RECEIVE COULD NEGATIVELY IMPACT OUR PLANS AND PROSPECTS.
We benefit from various Israeli government programs, grants and tax
benefits, particularly as a result of the "approved enterprise" status of a
substantial portion of our existing facilities and the receipt of grants from
the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade.
To be eligible for some of these programs, grants and tax benefits, we must
continue to meet certain conditions, including producing in Israel and making
specified investments in fixed assets. If we fail to meet such conditions in the
future, we could be required to refund grants already received, adjusted for
inflation and interest. From time to time, the government of Israel has
discussed reducing or eliminating the benefits available under approved
enterprise programs. We cannot assure you that these programs and tax benefits
will be continued in the future at their current levels or at all. The
Government of Israel has announced that programs receiving approved enterprise
status in 1996 and thereafter will be entitled to a lower level of government
grants than was previously available. The termination or reduction of certain
programs and tax benefits (particularly benefits available to us as a result of
the approved enterprise status of a substantial portion of our existing
facilities and approved programs and as a recipient of grants from the office of
the Chief Scientist) could have a material adverse effect on our business,
results of operations and financial condition. In addition, EFL has granted a
floating lien (i.e., a lien that applies not only to assets owned at the time
but also to after-acquired assets) over all of EFL's assets as a security to the
State of Israel to secure its obligations under the approved enterprise
programs.
OUR GRANTS FROM THE ISRAELI GOVERNMENT IMPOSE CERTAIN RESTRICTIONS ON US.
Since 1992, our Israeli subsidiary, EFL, has received funding from the
Office of the Chief Scientist of the Israel Ministry of Industry and Trade
relating to the development of our zinc-air battery products, such as our
electric vehicle and our batteries and chargers for consumer products. Between
1998 and 2000, we have also received funds from the Israeli-U.S. Bi-National
Industrial Research and Development (BIRD) Foundation Through 2002, we have
received an aggregate of $9.9 million from grants from the Chief Scientist and
$772,000 from grants from BIRD, and we may receive future grants, the amounts of
which would be determined at the time of application. The funding from the Chief
Scientist prohibits the transfer or license of know-how and the manufacture of
resulting products outside of Israel without the permission of the Chief
Scientist. Although we believe that the Chief Scientist does not unreasonably
withhold this permission if the request is based upon commercially justified
circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, the matter is solely within the discretion of the Chief
Scientist, and we cannot be sure that such consent, if requested, would be
granted upon terms satisfactory to us or granted at all. Without such consent,
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ELECTRIC FUEL CORPORATION
we would be unable to manufacture any products developed by this research
outside of Israel, even if it would be less expensive for us to do so. These
restrictions could adversely affect our potential revenues and net income from
the sale of such products.
EXCHANGE RATE FLUCTUATIONS BETWEEN THE U.S. DOLLAR AND THE ISRAELI NIS MAY
NEGATIVELY AFFECT OUR EARNINGS.
Although a substantial majority of our revenues and a substantial
portion of our expenses are denominated in U.S. dollars, a significant portion
of our costs, including personnel and facilities-related expenses, is incurred
in New Israeli Shekels (NIS). Inflation in Israel will have the effect of
increasing the dollar cost of our operations in Israel, unless it is offset on a
timely basis by a devaluation of the NIS relative to the dollar.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of interest rate changes and foreign currency
fluctuations due to our international sales, production and funding
requirements.
Our research, development and production activities are primarily carried
out by our wholly-owned subsidiary EFL, at its facility in Beit Shemesh, Israel,
and we market some of our products in Israel; accordingly we have sales and
expenses in New Israeli Shekels. However, the majority of our sales are made
outside Israel in U.S. dollars, and a substantial portion of our costs are
incurred in U.S. dollars or in New Israeli Shekels linked to the U.S. dollar.
Therefore, our functional currency is the U.S. dollar. Although we have a line
of credit that may be affected by interest rate changes, given our level of
borrowing, we do not believe the market risk from interest rate changes is
material.
ITEM 4. CONTROLS AND PROCEDURES.
Within 90 days prior to the date of this report, an evaluation was
performed under the supervision and with the participation of our management,
including the CEO and CFO, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-14 promulgated under
the Securities Exchange Act of 1934. Based on that evaluation, our management,
including the CEO and CFO, concluded that our disclosure controls and procedures
were effective in timely alerting them to material information relating to us
(including our consolidated subsidiaries) and required to be included in our
periodic SEC filings. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
39
ELECTRIC FUEL CORPORATION
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In August 2002, in connection with the acquisition of the assets of IES
described in "Part I - Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Subsequent Developments - IES
Acquisition," above, we issued a total of 3,250,000 shares of our common stock,
$.01 par value per share, to the shareholder of IES. IES received registration
rights in connection with the issuance of these shares.
In August 2002, in connection with the acquisition of the stock of MDT
described in "Part I - Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Subsequent Developments - MDT
Acquisition," above, we issued a total of 390,638 shares of our common stock to
the shareholders of MDT. MDT received registration rights in connection with the
issuance of these shares.
In August 2002, we issued a total of 13,000 shares of our common stock -
6,500 shares each - to Avihai Shen, our Vice President - Finance, and to Yaakov
Har-Oz, our Vice President and General Counsel, as employee stock bonuses.
In August 2002, we issued 50,000 shares of our common stock to Ceba
Limited, our United Kingdom distributor, as a consultant's stock bonus.
We issued all of the above securities in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act as transactions by
an issuer not involving a public offering. The issuance of these securities was
without the use of an underwriter, and the shares of common stock currently bear
restrictive legends permitting transfer thereof only upon registration or an
exemption under the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as exhibits to this report:
EXHIBIT NUMBER DESCRIPTION
---------------- -----------
10.1 Asset Purchase Agreement dated August 2, 2002 (filed as
Exhibit 2 to our Current Report on Form 8-K filed on August
12, 2002, and incorporated by reference herein)
10.2 Share Purchase Agreement dated August 2, 2002 [English
translation] (filed as Exhibit 99.2 to our Current Report on
Form 8-K filed on August 12, 2002, and incorporated by
reference herein)
99.1 Written Statement of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Written Statement of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) The following reports on Form 8-K were filed during the third quarter of
2002:
40
ELECTRIC FUEL CORPORATION
DATE FILED DESCRIPTION
------------ -----------
August 12, 2002 Acquisition of Assets of I.E.S. Electronics Industries
U.S.A., Inc. and Acquisition of Majority Interest in
M.D.T. Protective Industries Ltd.
October 11, 2002 Form 8-K/A amending the above to include, inter alia, pro
forma financial statements
41
ELECTRIC FUEL CORPORATION
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRIC FUEL CORPORATION
By: /s/ Robert S. Ehrlich
---------------------------------
Name: Robert S. Ehrlich
Title: Chairman, President and CEO
/s/ Avihai Shen
------------------------------------
Name: Avihai Shen
Title: Vice President - Finance
(Principal Financial Officer)
Dated: November 14, 2002
42
ELECTRIC FUEL CORPORATION
CERTIFICATIONS
================================================================================
I, Robert S. Ehrlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Electric Fuel
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert S. Ehrlich
------------------------
Robert S. Ehrlich, Chairman, President and CEO
(Principal Executive Officer)
43
CERTIFICATIONS
I, Avihai Shen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Electric Fuel
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Avihai Shen
-------------------------------------------
Avihai Shen, Vice President - Finance
(Principal Financial Officer)
44
ELECTRIC FUEL CORPORATION
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- ---------------- -----------
Written Statement of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Written Statement of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
45