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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
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, NEW YORK, NEW YORK 10012
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(Address of principal executive offices) (Zip Code)
(646) 654-2107
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None Not applicable
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$0.01 PAR VALUE
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 [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 25, 2002 was approximately
$49,717,247 (based on the last sale price of such stock on such date as reported
by The Nasdaq National Market).
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date: 30,880,278 AS OF 3/25/02
Documents incorporated by reference: NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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PRELIMINARY NOTE
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This amended annual report contains historical information and
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our business, financial condition
and results of operations. The words "estimate," "project," "intend," "expect"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such
forward-looking statements. Further, we operate in an industry sector where
securities values may be volatile and may be influenced by economic and other
factors beyond our control. In the context of the forward-looking information
provided in this annual report and in other reports, please refer to the
discussions of risk factors detailed in, as well as the other information
contained in, our other filings with the Securities and Exchange Commission.
Electric Fuel(R) is a registered trademark of Electric Fuel
Corporation. Instant Power(TM), Charge without electricity(TM),
PowerCartridge(TM) and SmartCord(TM) are trademarks of Electric Fuel
Corporation. All company and product names mentioned may be trademarks or
registered trademarks of their respective holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Since February 1994, our common stock has been traded under the symbol
EFCX on the Nasdaq National Market. The following table sets forth, for the
periods indicated, the range of high and low closing prices of our common stock
on the Nasdaq National Market System:
YEAR ENDED DECEMBER 31, 2001 HIGH LOW
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Fourth Quarter.......................... $ 2.4300 $ 1.3000
Third Quarter........................... $ 2.7500 $ 1.3000
Second Quarter.......................... $ 3.9500 $ 2.3000
First Quarter........................... $ 8.0000 $ 3.5000
YEAR ENDED DECEMBER 31, 2000
Fourth Quarter.......................... $ 11.1875 $ 3.7500
Third Quarter........................... $ 15.0000 $ 6.8750
Second Quarter.......................... $ 16.1250 $ 4.5000
First Quarter........................... $ 23.8750 $ 3.0625
As of February 28, 2002 we had approximately 266 holders of record of
our common stock.
DIVIDENDS
We have never paid any cash dividends on our common stock. The Board of
Directors presently intends to retain all earnings for use in our business. Any
future determination as to payment of dividends will depend upon our financial
condition and results of operations and such other factors as the Board of
Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
In May 2001, we issued a total of 125,000 warrants to purchase shares
of our common stock at a price of $3.22 per share to a financial consultant that
provided certain consulting services to us; these warrants are exercisable by
the holder at any time after December 12, 2001 and will expire on June 12, 2006.
We issued these 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.
ITEM 7. 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(R) 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 Consolidated Financial Statements contained in Item 8 of this report,
and the notes thereto. 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,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
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
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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
On January 18, 2002 we issued and sold to Grenville Finance Ltd., for
an aggregate purchase price of $750,000, an aggregate of 441,176 shares of
common stock. On January 24, 2002 we issued and sold to Special Situations
Private Equity Fund, L.P., Special Situations Fund III, L.P., Special Situations
Technology Fund, L.P. and Special Situations Cayman Fund, L.P., for an aggregate
purchase price of $2,480,000, an aggregate of 1,600,000 shares of common stock.
Our total cash on hand immediately subsequent to these offerings was
approximately $15 million.
In March 2002, we demonstrated our zinc-air electric bus in a public
demonstration in Washington, D.C., on Capitol Hill, with the participation of
certain members of the United States Senate.
IES ACQUISITION
On August 2, 2002, we acquired substantially all the assets of I.E.S.
Electronics Industries U.S.A., Inc., 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.
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 of a total of 3,250,000
shares of our common stock, which shares are the subject of a voting agreement
on the part of IES and certain of its affiliated companies whereby IES has
agreed, for a period of the greater of five years or for so long as IES holds at
least 500,000 of our shares, to vote the shares in favor of (a) the election of
Yehuda Harats and Robert S. Ehrlich as directors, and (b) all proposals of
management (except for proposals regarding the nomination of individuals other
than Yehuda Harats or Robert S. Ehrlich to our Board) that relate to the
operation or management of our business in the ordinary course (and not against
our interest), or that relate to acquisitions, financings, stock option plans or
business development (that are not against our interest). In light of Mr.
Harats's resignation from the Board of Directors in 2002 (see "Changes in
Management," below), we do not believe that IES continues to be bound to vote
for Mr. Harats, but will continue to be bound to vote for Mr. Ehrlich.
In December 2002, the terms of IES's promissory notes were amended to
(i) extinguish the $1,000,000 note due at the end of June 2003 in exchange for
prepayment of $750,000, (ii) amend the $400,000 note due at the end of December
2003 to be a $450,000 note, and (iii) amend the convertible $400,000 note due at
the end of June 2004 to be a $450,000 note convertible at $0.75 as to $150,000,
at $0.80 as to $150,000, and at $0.85 as to $150,000.
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MDT ACQUISITION
On August 2, 2002, we purchased 51% of the issued and outstanding shares of
M.D.T. Protective Industries Ltd., a privately-held Israeli company that
specializes in using sophisticated lightweight materials and advanced
engineering processes to armor vehicles.
The consideration for the shares purchased consisted of (i) cash in the
aggregate amount of 5,814,000 New Israeli Shekels (NIS) (approximately
$1,240,000), and (ii) the issuance of an aggregate of 390,638 shares of our
common stock.
DISCONTINUATION OF RETAIL SALES OF CONSUMER BATTERY PRODUCTS
In September 2002, we made a decision in principle to discontinue 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.
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 December 2002, we came to an agreement with our former CEO
whereby we agreed to pay him $729,500 through the end of 2005 in satisfaction of
all our contractual and legal severance and other obligations to him, which was
approximately one-half of the amount we had accrued on our financial statements
in connection with such obligations.
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
all-electric transit bus demonstration 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.
SALE OF DEBENTURES
In December 2002, we issued and sold to three institutional investors (i)
an aggregate $3,500,000 principal amount of 9% Secured Convertible Debentures
due June 30, 2005; (ii) Series A Warrants to purchase an aggregate of 1,166,700
shares of our common stock at any time prior to December 31, 2007 at a price of
$0.84 per share; (iii) Series B Warrants to purchase an aggregate of 1,166,700
shares of our common stock at any time prior to December 31, 2007 at a price of
$0.89 per share; and (iv) Series C Warrants to purchase an aggregate of
1,166,700 shares of our common stock at any time prior to December 31, 2007 at a
price of $0.93 per share. The debentures are convertible at the option of the
holder into a total of 4,666,667 shares of common stock at a conversion price of
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$0.75 per share. In addition, we have issued an aggregate of 387,301 shares of
common stock in prepayment of the first nine months of interest on the
debentures.
We are required to register the shares of common stock underlying the
debentures and the warrants with the Securities and Exchange Commission in a
registration statement on Form S-3.
Under the terms of our agreement with the purchasers of our debentures,
we granted the purchasers a security interest in the assets connected with our
U.S. operations, including our IES subsidiary, as well as in our stock of IES
and our other subsidiaries. We also committed ourselves to certain customary
affirmative and negative covenants, including obligations on our part to
preserve and maintain our assets and restrictions on our ability to incur or
guarantee debt, to merge with or sell our assets to another company, and to make
significant capital expenditures without the consent of the debenture holders.
The foregoing description of our agreement with our debenture holders is
qualified in its entirety by reference to the agreements with our debenture
holders filed as exhibits to our Current Report on Form 8-K that we filed with
the SEC on January 6, 2003.
GERMAN POLICE ORDER
In January 2003, IES was awarded a $2.6 million contract to supply
simulation training systems to the largest regional division of the German
Police. The contract calls for delivery of approximately 30 separate interactive
training systems, with delivery dates ranging from April to September 2003 and
payment dates due following delivery, testing and ascertainment of appropriate
run capability of each system.
CECOM OREDRS
In December 2002, we entered into a contract with the US Army
Communications Electronic Command (CECOM) pursuant to 10 U.S.C. ss. 2304c(2),
"Unusual and Compelling Urgency," for a delivery order of advanced Zinc-Air
batteries. The contract calls for order releases during the first three calendar
quarters of 2003, with a current order ceiling of $2,543,250.
In April 2003, we announced that we had received an additional $1.6 million
order from CECOM for a delivery order of advanced Zinc-Air batteries with
deliveries anticipated to take place from September through November 2003.
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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.
During 2001, we continued to invest in strengthening our intellectual
property position. We have 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.
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.
Our Electric Vehicle Division is continuing its American all-electric
transit bus demonstration project, subcontracted by the Federal Transit
Administration (FTA). We successfully completed phase I of the FTA program in
June 2000, and are now engaged in Phase II of the program, which focuses on
conducting evaluation of the system and vehicle performance, including track
testing and limited on-road demonstrations, enhancing the all-electric
propulsion system developed in Phase I, including incorporating ultracapacitors
and associated interface controls, and testing and evaluating the zinc-air fuel
cell system.
In August 2001, we announced that we had successfully completed the
performance testing of our zinc-air electric bus. In the final performance test,
the bus was driven a record-breaking total of 110 miles, more than 100 of them
under the rigorous stop-and-go driving conditions of the Society of Automotive
Engineers' Central Business District (CBD) cycle, and with a load simulating
150% of the passenger payload for which the bus was designed. The bus was
designed to be driven for 95 miles on the CBD cycle with a 50% passenger load.
The most recent testing took place at Rome, New York, on a taxiway of the former
Griffiss Air Force Base, and included evaluation of constant-speed driving and
acceleration tests. We conducted the first public on-road demonstration drives
of our zinc-air electric bus on the streets of Las Vegas, Nevada on November 27,
2001 to conclude the first milestone of our Phase 2 agreement with the FTA to
demonstrate and evaluate the all-electric zinc-air transit bus.
Our Defense and Security Products Division is continuing with the
production of zinc-air fuel cell packs for the U.S. Army's Communications
Electronics Command (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.
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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 expenses have been based upon
meeting the contractual requirements under our agreements with various strategic
partners and, therefore, have also varied according to the timing of activities,
such as the need to provide prototype products and to establish and engineer
refueling and regeneration facilities. 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 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, 2001, 2000 and 1999. While we expect to continue to derive revenues from the
sale 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 and, therefore, both we and EFL have adopted and
are using the United States dollar as our functional currency. Further, we
believe that the operations of EFL's subsidiaries are an integral part of the
Israeli operations. 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
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
REVENUES. Revenues for the year ended December 31, 2001 totaled $4.0
million, compared to $4.1 million for 2000, a decrease of $21,000.
During 2001, we recognized revenues from the sale of consumer
batteries, lifejacket lights and portable high-power zinc-air fuel cell packs
for military use. 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 2000, was
extended in the fourth quarter of 2000. 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 approximately $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. We
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also received electric vehicle revenues during 2001 from our German consortium
(EFRB) project. In 2000, we derived revenues principally from the sale of
lifejacket lights and consumer batteries. Additionally, we also recognized
revenues from activities related to the DOT program.
In 2001, revenues were $1.9 million for the Instant Power Division
(compared to $2.6 million in 2000, a decrease of $625,000, or 27%), $894,000 for
the Electric Vehicle Division (compared to $310,000 in 2000, an increase of
$584,000, or 188%) and $1.2 million for the Defense and Security Products
Division (formerly known as the Defense and Safety Products Division) (compared
to $1.2 million in 2000, unchanged.
Revenues in the Instant Power Division during 2001 decreased compared
to 2000 primarily because a single large order that we received from one
customer (Wal-Mart) during 2000 was not repeated in 2001, thereby resulting in
fewer products sold. An additional factor in the decrease in revenues was our
reduction in the price at which we sold our products during 2001, which resulted
in lower revenues from the products we did sell.
The increase in revenues from the Electric Vehicle Division in 2001 was
the result of our having received the German consortium (EFRB) project,
described above. This project generated revenues of $471,000 in 2001.
COST OF REVENUES AND GROSS LOSS. Cost of revenues totaled $7.1 million
during 2001, compared to $4.2 million in 2000, an increase of $2.9 million, or
69%. This increase was the result of several factors (in descending order of
importance), as follows:
o The increase in our Electric Vehicle revenues in 2001 - from
$310,000 to $894,000 - also resulted in an increase in cost of
goods sold of $721,000;
o Products that we had sold that were still subject to possible
return continued to be carried as inventory. Once it was clear
that these products would not be returned, we decreased the
inventory, resulting in an increase in cost of revenues of
approximately $615,000.
o We took an inventory write-off as a result of a decision to
discontinue production and sale of most disposable battery
products in response to low consumer demand for those products,
accounting for an increase in cost of revenues of approximately
$440,000;
o When we lowered the retail prices of our products, we recognized
losses on those of our products that we carried in inventory due
to the principle of presenting inventory at the lower of cost or
market value, accounting for an increase in cost of revenues of
approximately $400,000;
o We concentrated on production of chargers, which were more popular
than disposable batteries but which have higher production costs
and hence a higher gross loss than do the disposable batteries
that we emphasized in 2000, accounting for an increase in cost of
revenues of approximately $300,000;
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o Some of our equipment began to be depreciable beginning in the
second half of 2001, which resulted in an increase in our cost of
revenues during 2001 of the amount of the depreciation, which was
approximately $200,000;
We are continuing to hold for possible sale the inventory that we wrote
off, but we are not assigning any value to it on our balance sheet. If we are
unable to sell it within a reasonable time, we will dispose of it.
The above factors were offset to a small extent by higher revenues in
the Electric Vehicle Division.
Gross loss was $3.0 million during 2001, compared to $135,000 during
2000, an increase of $2.9 million. This loss was the direct result of all
factors presented above, most notably the decrease in sales prices in the
Instant Power Division.
RESEARCH AND DEVELOPMENT EXPENSES, NET. Research and development
expenses less royalty-bearing grants for 2001 were $3.5 million, compared to
$4.6 million in 2000, a decrease of $1.1 million, or 24%, primarily as a result
of our move from a company primarily engaged in research and development to a
company engaged in production, and secondarily as a result of the end of our
BIRD funding in 2000. An additional factor was the fact that in 2000 we had
classified some of our initial production start-up costs as research and
development, since we were working on developing production capability, and
these expenses were not repeated in 2001.
Research and development expenses were reduced by $705,000 during 2001
as a result of recognition of grants from the Office of the Chief Scientist of
the Ministry of Industry and Trade. Our 2001 research and development grant
applications have been approved by the Research Committee of the Office of the
Chief Scientist of the Ministry of Industry and Trade. As a result,
royalty-bearing grants of $705,000 from the Chief Scientist were recognized
during 2001 (compared to $763,000 in 2000, a decrease of $58,000, or 8%) to
offset research and development expenses. In addition, $0 of royalty bearing
grants from the BIRD Foundation were recognized during 2001 (compared to
$195,000 in 2000). Research and development expenses and cost of operations
related to Instant Power and Security applications are expected to continue to
increase for 2002, as we intensify our efforts in these new areas.
Direct expenses for our three divisions for the fiscal year ended
December 31, 2001 were $13.8 million for the Instant Power Division ($10.2
million in 2000, an increase of $3.6 million, or 35%), $907,000 for the Electric
Vehicle Division ($473,000 in 2000, an increase of $434,000, or 92%), and $1.4
million for the Defense and Security Products Division ($1.1 million in 2000, an
increase of $268,000, or 24%). The increase of expenses in the Electric Vehicle
Division and the Instant Power Division was the result of progress that was made
in phase II of the FTA program and the German program, and an increased number
of units produced in our Instant Power Division.
Net costs of fixed assets (net of accumulated depreciation) at December
31, 2001 in the Instant Power, Electric Vehicle and Defense and Security
Products Divisions were $5.0 million, $666,000 and $322,000, respectively.
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SELLING EXPENSES. Selling expenses for the year ended December 31, 2001
were $6.3 million, compared to $4.2 million in 2000, an increase of $2.1
million, or 50%, primarily attributable to increased sales and marketing
expenses in the Instant Power Division, especially in the United States and the
United Kingdom. We expect further increases in selling expenses, particularly
with respect to marketing expenses, as we continue to market our products to
consumers and expand the applications for our technology.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for 2001 were $4.8 million compared to $3.6 million in 2000, an
increase of $1.2 million, or 31%. This increase in expenses was the result of
the following factors (in descending order of importance):
o Increases in management salaries and in accruals related to our senior
employees, accounting for approximately $400,000 of the increase in
general and administrative expenses;
o Increase in accruals for doubtful debts, accounting for approximately
$300,000 of the increase in general and administrative expenses; and
o Non-cash write-down of notes receivable from certain stockholders
reflecting a diminution in the market value of securities
collateralizing such notes, accounting for approximately $200,000 of
the increase in general and administrative expenses.
The reason we increased our accruals for doubtful debts is because a
greater portion of our accounts receivable was aged over six months.
FINANCIAL INCOME. Financial income, net of interest expenses and
exchange differentials, totaled approximately $263,000 in 2001 compared to
$544,000 in 2000, a decrease of $281,000, or 52%, 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 conducted in May and
November 2000, which was only partially offset by income from the proceeds of
private placements of our securities conducted in May, November and December
2001, as well as a decrease in interest income from certain shareholder loans.
INCOME TAXES. We and our Israeli subsidiary EFL incurred net operating
losses or had earnings arising from tax-exempt income during 2001 and 2000 and,
accordingly, we were not required to make any provision for income taxes. Taxes
in these entities incurred in 2001 and 2000 are primarily composed of United
States federal alternative minimum taxes.
NET LOSS. Due to the factors cited above, we reported a net loss of
$17.3 million in 2001, compared to a net loss of $12.0 million in 2000, an
increase of $5.3 million, or 44%.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Revenues. Revenues for the year ended December 31, 2000 totaled $4.1
million, compared to $2.7 million for 1999, an increase of $1.4 million, or 52%.
This increase was the result of an increase in revenues from the Instant Power
Division that resulted from increased marketing of our Instant Power batteries
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for cellular phones, an increase that was only partly offset by the completion
of phase I of the FTA program and the concomitant drop-off in revenues in the
Electric Vehicle Division attributable to that program.
During 2000, we recognized revenues from the sale of lifejacket lights
and sale of consumer batteries. 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
2000, 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 approximately $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 1999, we derived revenues principally from the sale of lifejacket
lights and consumer batteries. Additionally, we also recognized revenues from
activities related to the DOT program.
In 2000, revenues were $2.6 million for the Instant Power Division
(compared to $0.3 million in 1999, an increase of $2.3 million, or 905%), $0.3
million for the Electric Vehicle Division (compared to $1.2 million in 1999, a
decrease of $0.9 million, or 75%), and $1.2 million for the Defense and Safety
Division (compared to $1.0 million in 1999, an increase of $0.2 million, or
19%).
Research and development expenses and cost of revenues. Research and
development expenses and cost of revenues totaled $8.8 million during 2000,
compared with $6.6 million during 1999 an increase of $2.2 million, or 33%. This
increase was primarily the result of an increase in operations and engineering
costs related to new product development, and the ramping up of our automated
production line. In 1999, we believed that, given our stage of development, it
was not yet meaningful to distinguish between research and development expenses
and cost of revenues. We did distinguish between research and development
expenses and cost of revenues in 2000. In addition to the increase in the
overall research and development expenses in 2000, the internal division of
expenses also changed between 1999 and 2000. This was principally attributable
to a reduction of expenses related to Electric Vehicle battery development. This
overall reduction was partially offset by significant increases in the costs
associated with consumer product development and the production of increased
quantities of lifejacket lights in the Defense and Safety Division.
Research and development expenses were reduced by $1.0 million during
2000 as a result of recognition of grants from the Office of the Chief Scientist
of the Ministry of Industry and Trade and the BIRD Foundation. Our 2000 research
and development grant applications have been approved by the Research Committee
of the Office of the Chief Scientist of the Ministry of Industry and Trade. As a
result, royalty-bearing grants of $763,000 from the Chief Scientist were
recognized during 2000 (compared to $926,000 in 1999, a decrease of $233,000, or
18%) to offset research and development expenses. In addition, $195,000 of
royalty bearing grants from the BIRD Foundation were recognized during 2000
(compared to $277,000 in 1999, a decrease of $82,000, or 30%). Research and
development expenses and cost of operations related to Instant Power and Defense
and Safety applications are expected to continue to increase for 2001, as we
intensify our efforts in these new areas.
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Direct expenses for our three divisions for the fiscal year ended 2000
were $10.2 million for the Instant Power Division ($3.0 million in 1999, an
increase of $7.2 million, or 240%), $0.5 million for the Electric Vehicle
Division ($2.7 million in 1999, a decrease of $2.2 million, or 81%), and $1.1
million for the Defense and Safety Division ($1.2 million in 1999, a decrease of
$0.1 million, or 8%). The shift in expenses from the Electric Vehicle Division
to the Instant Power Division was the result of the completion of phase I of the
FTA program and the increased marketing of our Instant Power batteries for
cellular phones, as discussed above.
Net costs of fixed assets (net of accumulated depreciation) at December
31, 2000 in the Instant Power, Electric Vehicle and Defense and Safety Divisions
were $4.5 million, $0.9 million and $0.4 million, respectively.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 2000 were $7.8 million,
compared to $3.2 million in 1999, an increase of $4.6 million, or 144%. This
increase was primarily attributable to increased sales and marketing expenses in
the Instant Power Division during 2000. We expect additional increases in
selling, general and administrative expenses during 2001, particularly relating
to marketing expenses in consumer battery applications, as we continue to expand
the applications for our technology.
Financial income. Financial income, net of interest expense, exchange
differentials, bank charges, and other fees, totaled approximately $544,000 in
2000, compared to $190,000 in 1999, an increase of $354,000, or 186%, due
primarily to higher balances of invested funds as a result of the deposit of the
proceeds of private placements of our securities conducted in 2000.
Income taxes. We and our Israeli subsidiary EFL incurred net operating
losses or had earnings arising from tax-exempt income during the years ended
December 31, 2000 and 1999 and, accordingly, we were not required to make any
provision for income taxes. Taxes in these entities incurred in 2000 and 1999
are primarily composed of United States federal alternative minimum taxes.
Net losses. Due to the factors cited above, we reported a net loss of
$12.0 million in 2000, compared with a net loss of $6.9 million in 1999, an
increase of $5.1 million, or 74%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had cash and cash equivalents of
approximately $12.7 million, compared with $11.6 million as of December 31,
2000, an increase of $1.1 million, or 9%. The increase in cash was primarily the
result of the private placements of our securities described below.
We used available funds in 2001 primarily for continued research and
development expenditures, and other working capital needs. We increased our
investment in fixed assets by $1.3 million during the year ended December 31,
2001, primarily in the Instant Power Division. Our fixed assets amounted to $6.7
million as at year end.
Our Israeli subsidiary EFL presently has a line of credit with the
First International Bank of Israel Ltd. (FIBI) of up to $750,000, secured by
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such security as we and the bank shall agree upon from time to time. This credit
facility imposes financial and other covenants on EFC and EFL. As of December
31, 2001, the bank had issued letters of credit and bank guarantees totaling
approximately $36,000.
During 2001, certain of our employees exercised options under our
registered employee stock option plan. The proceeds to us from the exercised
options are approximately $206,000.
On November 21, 2001 we issued and sold to Orsay Services Inc., for an
aggregate purchase price of $2,000,000, an aggregate of 1,503,759 shares of
common stock.
On December 5, 2001 we issued and sold to Vertical Ventures
International, for an aggregate purchase price of $2,000,000, an aggregate of
1,190,476 shares of common stock.
We have no long term debt outstanding, and we are using our cash
reserves and revenues from operations primarily to continue development of
chargers and batteries for consumer electronic devices, as well as to
participate in the FTA Electric Vehicle program. Furthermore, in the third
quarter of 2000, we established a commercial production line and we are
preparing for market penetration of our new Instant Power zinc-air chargers and
batteries for several models of cellular telephones and PDAs.
Approximately 25.5% of the stock of our Israeli-based subsidiary EFL is
deemed to be beneficially owned (directly, indirectly or by application of
certain attribution rules) 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, as amended on February 13, 2003.) If at any time in the future, more than
50% of either (i) the voting power of our stock, or (ii) the total value of our
stock, is held or deemed to be held by five or fewer individuals (including, if
applicable, those individuals who currently own an aggregate of 25.5% of our
stock) who are United States citizens or residents, EFL would satisfy the
foreign personal holding company stock ownership test under the Internal Revenue
Code and we could be subject to additional U.S. taxes on any undistributed
foreign personal holding company income of EFL. For 2001, EFL had no income
which would qualify as undistributed foreign personal holding company income.
However, no assurance can be given that in the future EFL will not have income
that qualifies as undistributed foreign personal holding company income.
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. We are seeking additional funding, including through the issuance
of equity or debt securities. However, there can be no assurance that we will
obtain any such additional funding. If additional funding is not secured, we
intend to further modify, reduce, defer or eliminate certain of our anticipated
future commitments and/or programs, in order to continue future operations.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Historically, the majority of our revenues have been in U.S. dollars.
The United States dollar cost of our operations in Israel, with regard to
expenses incurred in NIS, is influenced by the extent to which an increase in
the rate of inflation in Israel is not offset by the devaluation of the NIS in
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relation to the dollar. In the past two years, inflation in Israel has been more
than fully compensated by the devaluation of the NIS and, accordingly, the
dollar cost of our NIS expenses has decreased. Even if the recent trend is
reversed (as was the case in previous years), we do not believe that continuing
inflation in Israel or delays in the devaluation of the NIS are likely to have a
material adverse effect on us, except to the extent that such circumstances have
an impact on Israel's economy as a whole. In the years ended December 31, 2001,
2000 and 1999, the annual rates of inflation in Israel were 1.3%, 0.0% and 1.3%,
respectively, compared to the devaluation of the NIS against the dollar during
such periods of 9.3%, (2.7)% and 0.0%, respectively.
EFFECTIVE CORPORATE TAX RATE
Our production facilities in Israel have been granted "Approved
Enterprise" status under the Israel Law for Encouragement of Capital
Investments, 5719-1959, and consequently are eligible for certain tax benefits
for seven to ten years after they first generate taxable income (provided the
maximum period as prescribed by law has not elapsed). Under this law, a company
may either accept government grants and receive a reduced tax rate, or forego
government grants and receive an alternate package of tax benefits that includes
a complete exemption from certain taxes. We have elected to receive a grant of
funds together with a reduced tax rate for the aforementioned period.
EFL's effective corporate tax rate may be affected by the
classification of certain items of income as being "approved income" for
purposes of the Approved Enterprise law, and hence subject to a lower tax rate
(25% to 10%, depending on the extent of foreign ownership of EFL - presently
15%) than is imposed on other forms of income under Israeli law (presently 36%).
The effective tax upon income we distribute to our stockholders would be
increased as a result of the withholding tax imposed upon dividends distributed
by EFL to EFC, resulting in an overall effective corporate tax rate of
approximately 28% for income arising from EFL's Approved Enterprises and 44%
regarding other income.
EFC and EFL have incurred net operating losses or had earnings arising
from tax-exempt income during the years ended December 31, 2001, 2000 and 1999
and accordingly no provision for income taxes was required. Taxes in these
entities paid in 2001, 2000 and 1999 are primarily composed of United States
federal alternative minimum taxes.
As of December 31, 2001, we had U.S. net operating loss carry forwards
of approximately $7.0 million that are available to offset future taxable
income, expiring primarily in 2015, and foreign net operating loss carry
forwards of approximately $75.0 million, which are available indefinitely to
offset future taxable income.
RISK FACTORS
The following factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Report and presented elsewhere by management from time to time.
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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 equity and debt 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 products that we and our subsidiaries
manufacture. We incurred significant operating losses since our inception.
Additionally, as of December 31, 2002, we had an accumulated deficit of
approximately $100.7 million. 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.
OUR EXISTING INDEBTEDNESS MAY ADVERSELY AFFECT OUR ABILITY TO OBTAIN
ADDITIONAL FUNDS AND MAY INCREASE OUR VULNERABILITY TO ECONOMIC OR BUSINESS
DOWNTURNS.
Our indebtedness, including the aggregate principal amount of the
debentures sold by us in December 2002, aggregated approximately $5.3 million as
of December 31, 2002. Accordingly, we are subject to the risks associated with
indebtedness, including:
o we must dedicate a portion of our cash flows from operations to pay
debt service costs and, as a result, we have less funds available for
operations, future acquisitions of consumer receivable portfolios, and
other purposes;
o it may be more difficult and expensive to obtain additional funds
through financings, if available at all;
o we are more vulnerable to economic downturns and fluctuations in
interest rates, less able to withstand competitive pressures and less
flexible in reacting to changes in our industry and general economic
conditions; and
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o if we default under any of our existing debt instruments or if our
creditors demand payment of a portion or all of our indebtedness, we
may not have sufficient funds to make such payments.
The occurrence of any of these events could materially adversely affect
our results of operations and financial condition and adversely affect our stock
price.
The agreements governing the terms of our debentures contain numerous
affirmative and negative covenants that limit the discretion of our management
with respect to certain business matters and place restrictions on us, including
obligations on our part to preserve and maintain our assets and restrictions on
our ability to incur or guarantee debt, to merge with or sell our assets to
another company, and to make significant capital expenditures without the
consent of the debenture holders. Our ability to comply with these and other
provisions of such agreements may be affected by changes in economic or business
conditions or other events beyond our control.
FAILURE TO COMPLY WITH THE TERMS OF OUR DEBENTURES COULD RESULT IN A
DEFAULT THAT COULD HAVE MATERIALLY ADVERSE CONSEQUENCE FOR US.
A failure to comply with the obligations contained in our
debenture agreements, including a failure to have our registration statement
registering the shares underlying our debentures and the warrants issued as part
of the debenture financing declared effective by the SEC on or before January 1,
2004, could result in an event of default under such agreements which could
result in an acceleration of the debentures and the acceleration of debt under
other instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If the indebtedness under the debentures or other
indebtedness were to be accelerated, there can be no assurance that our assets
would be sufficient to repay in full such indebtedness. The foregoing
description of our agreement with our debenture holders is qualified in its
entirety by reference to the agreements with our debenture holders filed as
exhibits to our Current Report on Form 8-K that we filed with the SEC on January
6, 2003.
WE HAVE PLEDGED A SUBSTANTIAL PORTION OF OUR ASSETS TO SECURE OUR
BORROWINGS.
The debentures are secured by a substantial portion of our assets. If
we default under the indebtedness secured by our assets, those assets would be
available to the secured creditor to satisfy our obligations to the secured
creditor, which could materially adversely affect our results of operations and
financial condition and adversely affect our stock price.
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.
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
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.
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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 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
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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
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
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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, and most of MDT's customers have been in
the public sector in Israel. 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.
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.
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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.
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, 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 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
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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.
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
2003. We do not have key-man life insurance on Mr. Ehrlich.
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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 2000, 2001 and 2002, without
taking account of revenues derived from discontinued operations, 45%, 29% and
56%, 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 22.9% of the stock of EFL was deemed to be beneficially
owned (directly or indirectly by application of certain attribution rules) as of
December 31, 2002 by four United States citizens: Leon S. Gross, Austin W. Marxe
and David M. Greenhouse, and Robert S. Ehrlich (see "Item 12. Security Ownership
of Certain Beneficial Owners and Management") (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, as amended on
February 13, 2003). 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 22.9% of our 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.
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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: o Announcements by us, our
competitors or our customers;
o The introduction of new or enhanced products and services by us or our
competitors;
o Changes in the perceived ability to commercialize our technology
compared to that of our competitors;
o Rumors relating to our competitors or us;
o Actual or anticipated fluctuations in our operating results; and
o 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
generally been trading below $1.00 since October 18, 2002. On December 6, 2002,
Nasdaq notified us of our failure to meet the continued listing standards, and
informed us that unless our stock closes for ten consecutive trading days with a
bid price in excess of $1.00 prior to March 6, 2003 (subsequently extended, as a
result of an amendment to Nasdaq's listing regulations, to June 4, 2003), Nasdaq
would notify us of its intent to delist our stock from the Nasdaq National
Market. Should Nasdaq notify us of its intent to delist our stock, we would 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 Nasdaq SmallCap market, which has the same $1.00 minimum bid and other
similar requirements as the Nasdaq National Market. If we were to move to the
Nasdaq SmallCap market, current Nasdaq regulations would give us the opportunity
to obtain an additional 180-day grace period and an additional 90-day grace
period after that if we meet certain net income, shareholders' equity or market
capitalization criteria. 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.
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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 February 28, 2003, our directors, executive officers and
principal stockholders and their affiliates (including, Leon S. Gross (11.6%),
Austin W. Marxe and David M. Greenhouse (8.0%), IES Electronics Industries Ltd.
(6.2%), and Robert S. Ehrlich (4.3%)) collectively are deemed beneficially to
own approximately 29.0% of the outstanding shares of our common stock (see "Item
12. Security Ownership of Certain Beneficial Owners and Management"), including
options and warrants exercisable within 60 days of February 28, 2003
(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, as amended on February 13, 2003, 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 and January 9, 2003). 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. 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, as
amended, 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
beneficial ownership of 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 2002; however, we believe that Mr.
Harats must continue to comply with the terms of this agreement.
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 February 281, 2003, we had 35,146,261
shares of common stock issued and outstanding. Of these shares, 27,610,658, are
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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 3,547,870 shares, of which 1,538,462 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. Of the shares owned by Mr. Harats, 435,404 shares have never
been registered, and of the 688,166 shares owned by Mr. Ehrlich, 453,933 shares
have never been registered.
EXERCISE OF OUR WARRANTS, OPTIONS AND CONVERTIBLE DEBT COULD ADVERSELY
AFFECT OUR STOCK PRICE AND WILL BE DILUTIVE.
As of February 28, 2003, there were outstanding warrants to purchase a
total of 9,421,238 shares of our common stock at a weighted average exercise
price of $1.87 per share, options to purchase a total of 5,715,955 shares of our
common stock at a weighted average exercise price of $2.16 per share, of which
5,131,032 were vested and exercisable within 60 days of such date, at a weighted
average exercise price of $2.15 per share, and outstanding debentures and
promissory notes convertible into a total of 6,032,721 shares of our common
stock at a weighted average conversion price of $0.65 per share. Holders of our
options, warrants and convertible debt will probably exercise or convert them
only at a time when the price of our common stock is higher than their
respective exercise or conversion prices. 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:
o divide our board of directors into three classes serving staggered
three-year terms;
o 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
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o 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, AND WE COULD
BE ADVERSELY AFFECTED BY THE ECONOMIC, POLITICAL AND MILITARY CONDITIONS IN THAT
REGION.
The offices and facilities of 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,
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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.
SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES ON US AND OUR
OFFICERS MAY BE DIFFICULT TO OBTAIN.
We are organized under the laws of the State of Delaware and will be
subject to service of process in the United States. However, approximately 49%
of our assets are located outside the United States. In addition, two of our
directors and all of our executive officers are residents of Israel and all or a
substantial portion of the assets of such directors and executive officers are
located outside the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, in original actions instituted in Israel. However, subject to certain
time limitations and other conditions, Israeli courts may enforce final
judgments of United States courts for liquidated amounts in civil matters,
including judgments based upon the civil liability provisions of the Securities
Act and the Exchange Act. As a result, it may not be possible for investors to
enforce or effect service of process upon these directors and executive officers
or to judgments of U.S. courts predicated upon the civil liability provisions of
U.S. laws against our assets, as well as the assets of these directors and
executive officers. In addition, awards of punitive damages in actions brought
in the U.S. or elsewhere may be unenforceable in Israel.
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 (that is, 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.
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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 the end of 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,
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.
Additionally, current regulations require that, in the case of the approved
transfer of manufacturing rights out of Israel, the maximum amount to be repaid
through royalty payments would be increased to between 120% and 300% of the
amount granted, depending on the extent of the manufacturing to be conducted
outside of Israel, and that an increased royalty rate of up to 5% would be
applied. 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.
SOME OF OUR AGREEMENTS ARE GOVERNED BY ISRAELI LAW.
Israeli law governs both our agreement with IES and our agreement with
MDT, as well as certain other agreements, such as our lease agreements on our
subsidiaries' premises in Israel. While Israeli law differs in certain respects
from American law, we do not believe that these differences materially adversely
affect our rights or remedies under these agreements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
Report of Independent Auditors.................................................. F-2
Consolidated Balance Sheets..................................................... F-3
Consolidated Statements of Operations........................................... F-5
Statements of Changes in Shareholders' Equity................................... F-6
Consolidated Statements of Cash Flows........................................... F-8
Notes to Consolidated Financial Statements...................................... F-10
SUPPLEMENTARY FINANCIAL DATA
----------------------------
Quarterly Financial Data (unaudited) for the two years ended December 31, 2001.. F-29
-29-
PART III
ITEM 11. EXECUTIVE COMPENSATION
The Compensation Committee of our Board of Directors for 2001 consisted
of Dr. Eastman, Mr. Rosenfeld and Mr. Miller. The Committee's responsibilities
include recommending the annual compensation arrangements for our Chief
Executive Officer and our Chief Financial Officer and reviewing the annual
compensation arrangements for principal officers and significant employees, all
by reference to the parameters set by any agreements we may have with such
persons. No member of this Committee was an officer or employee of ours during
2001. The members of the Committee are familiar with various forms and types of
remuneration from reports of other public corporations and their own business
experience. All Committee members are "disinterested persons" as that term is
used in Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
REPORT OF THE COMPENSATION COMMITTEE
OBJECTIVES AND PHILOSOPHY
We maintain compensation and incentive programs designed to
motivate, retain and attract management and utilize various combinations of
base salary, bonuses payable upon the achievement of specified goals,
discretionary bonuses and stock options. It is our current policy to
establish, structure and administer compensation plans and arrangements so
that the deductibility of such compensation will not be limited under
Section 162(m) of the Internal Revenue Code. Our Chief Executive Officer,
Yehuda Harats, and our Chief Financial Officer, Robert S. Ehrlich, are
parties to employment agreements with us. Our former Executive Vice
President of Technical Operations, Dr. Joshua Degani, who left our employ
on September 4, 2001, was also party to an employment agreement.
EXECUTIVE OFFICER COMPENSATION
Each of the employment agreements with Messrs. Harats and Ehrlich
provides that if the results we actually attain in a given year are at
least 80% of the amount we budgeted at the beginning of the year, we will
pay a bonus to each of Messrs. Ehrlich and Harats, on a sliding scale, in
an amount equal to a minimum of 35% of their annual base salaries then in
effect, up to a maximum of 90% of their annual base salaries then in effect
if the results we actually attain for the year in question are 120% or more
of the amount we budgeted at the beginning of the year. For the year ended
December 31, 2001, we accrued, but did not pay, a bonus for Messrs. Ehrlich
and Harats for 2001 at the 35% level. During 2001, we paid each of Messrs.
Harats and Ehrlich $50,000 on account of their 2000 bonuses. The remainder
of their 2000 bonuses was paid in the beginning of 2002.
Beginning in May 2001, we instituted a options-for-salary program
designed to conserve our cash and to offer incentives to employees to
remain with us despite lowered cash compensation. Under this program,
certain of our more senior employees agreed to permanently waive a portion
of their salaries in exchange for options to purchase shares of our common
stock. These options were granted in October 2001, based on the lowest
closing price of our common stock during such month ($1.30), at a ratio of
options to purchase 2.5 shares of our stock for each dollar in salary
waived. Thus, in exchange for waiver of $151,739 in salary, our employees
received a total of 379,347 options. Social benefits (such as pension) and
contractual bonuses continued to be calculated based on salary prior to
reduction.
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Mr. Harats participated in this options-for-salary program
throughout 2001 to the extent of approximately 21% of his monthly salary,
and hence received 12,500 options per month, or a total of 100,000 options.
Mr. Ehrlich participated in this program to the extent of 20% of his
monthly salary throughout 2001 (which he raised to approximately 37% of his
monthly salary in 2002), and hence received 10,000 options per month, or a
total of 80,000 options. Dr. Degani participated in this program for a
period of two months to the extent of 15% of his monthly salary, and hence
received 10,000 options per month, or a total of 9,000 options.
As of December 31, 2001, Messrs. Harats's and Ehrlich's total
options, including the options referred to in the immediately preceding
paragraph, represented approximately 4.0% and 4.0%, respectively, of our
outstanding stock, which the Compensation Committee believes are
appropriate levels of options for them in view of their equity position
(including options exercisable within 60 days) in Electric Fuel which, as
of December 31, 2001, represented approximately 6.7% and 4.5%,
respectively, of our outstanding stock. As of when Dr. Degani's employment
with us terminated on September 4, 2001, Dr. Degani's total options,
including the options referred to in the immediately preceding paragraph,
represented less than 1% of our fully-diluted outstanding stock, which the
Compensation Committee believes was an appropriate level of options
considering his position with us.
Dr. Degani was not awarded a cash bonus for 2001. Upon Dr.
Degani's leaving our employ in September 2001, we paid him, in addition to
the severance pay to which he was entitled under Israeli law, a severance
payment of $36,000 that we were obligated to pay him under the terms of his
employment agreement with us.
COMPENSATION OF OTHER EMPLOYEES
With respect to employees other than the Named Executive Officers,
compensation is determined not by formula, but based on the achievement of
qualitative and/or quantitative objectives established in advance of each
year by the Chief Executive Officer and Chief Financial Officer, who then,
pursuant to authority delegated by the Compensation Committee, determine
remuneration of our employees based on such objectives.
We seek to promote, including through our compensation plans, an
environment that encourages employees to focus on our continuing long-term
growth. Employee compensation is generally comprised of a combination of
cash compensation and grants of options under our stock option plans. Stock
options are awarded annually in connection with annual bonuses and,
occasionally, during the year on a discretionary basis. Stock options are
intended to offer an incentive for superior performance while basing
employee compensation on the achievement of higher share value, and to
foster the retention of key personnel through the use of schedules which
vest options over time if the person remains employed by us. There is no
set formula for the award of options to individual employees. Factors
considered in making option awards to the employees other than the Named
Executive Officers in 2001 included prior grants to the employees, the
importance of retaining the employees services, the amount of cash bonuses
received by the employees, the employees potential to contribute to our
success and the employees' past contributions to us. Additionally, almost
all of our more senior employees participated in our options-for-salary
program (described above) of agreeing to permanently waive a portion of
their salaries in exchange for options to purchase shares of our common
stock. Most of these employees participated in this program to the extent
of 15% of their monthly salaries, resulting in the grant of 379,347 options
to senior employees (including executive officers) during 2001.
-31-
SUBMITTED BY THE COMPENSATION COMMITTEE
Dr. Jay M. Eastman
Lawrence M. Miller
Jack E. Rosenfeld
CASH AND OTHER COMPENSATION
The following table shows the compensation that we paid (or accrued),
in connection with services rendered for 2001, 2000 and 1999, to our Chief
Executive Officer and the other highest paid executive officers (of which there
were two) who were compensated at a rate of more than $100,000 in salary and
bonuses during the year ended December 31, 2001 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE(1)
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ ----------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ---------------------------------- -------- ------------ ---------------- ------------- -------------- --------------
Yehuda Harats 2001 $ 248,681 $ 99,750(2)$ 19,145(3) 616,000(4)$ 580,911(5)
President, Chief Executive 2000 $ 245,560 $ 82,380 $ 8,083 400,000 $ 170,804
Officer and director 1999 $ 141,710 $ 80,011 $ 8,055 100,000 $ 78,060
Robert S. Ehrlich 2001 $ 211,644 $ 84,000(2)$ 17,201(3) 521,000(6)$369,754(7)
Chairman of the Board and Chief 2000 $ 245,574 $ 82,380 $ 7,146 400,000 $ 247,185
Financial Officer 1999 $ 137,466 $ 80,011 $ 6,094 47,500 $ 173,384
Dr. Joshua Degani* 2001 $ 99,183 $ 0(2)$ 4,400(3) 9,000(8)$ 74,050(9)
Executive Vice President and 2000 $ 130,417 $ 25,000 $ 6,120 35,000 $ 31,214
Chief Operating Officer 1999 $ 110,259 $ 17,500 $ 5,063 35,000 $ 34,825
* Dr. Degani's employment with us terminated on September 4, 2001.
(1) We paid the amounts reported for each named executive officer in U.S.
dollars and/or New Israeli Shekels (NIS). We have translated amounts paid
in NIS into U.S. dollars at the exchange rate of NIS into U.S. dollars at
the time of payment or accrual.
(2) We did not pay any cash bonuses for fiscal year 2001 that were paid out in
2001. However, we accrued for Messrs. Ehrlich and Harats $84,000 and
$99,750, respectively, in satisfaction of the bonuses they were entitled to
according to their contracts. During 2001, we paid each of Messrs. Harats
and Ehrlich $50,000 of their respective bonuses for 2000 and we paid the
balance in 2002. Additionally, during 2001 we paid Dr. Degani the remaining
$12,500 of his bonus for 2000.
(3) Represents the costs of taxes paid by the Named Executive Officer and
reimbursed by us in accordance with Israeli tax regulations.
(4) Of this amount, 100,000 options were in exchange for a total of $40,000 in
salary waived by Mr. Harats pursuant to the options-for-salary program
instituted by us beginning in May 2001.
-32-
(5) Of this amount, $263,994 represents our accrual for severance pay that
would be payable to Mr. Harats upon a "change of control" of EFC or upon
the occurrence of certain other events; $67,074 represents our accrual for
sick leave and vacation redeemable by Mr. Harats; $44,307 represents the
increase of the accrual for severance pay that would be payable to Mr.
Harats under the laws of the State of Israel if we were to terminate his
employment; $62,617 consists of our payments and accruals to a pension fund
that provides a savings plan, insurance and severance pay benefits and an
education fund (as is customary in Israel); and $142,240 represents benefit
imputed to Mr. Harats upon the purchase by us of certain treasury shares.
Additionally, $679 represents other benefits that we paid to Mr. Harats in
2001.
(6) Of this amount, 80,000 options were in exchange for a total of $32,000 in
salary waived by Mr. Ehrlich pursuant to the options-for-salary program
instituted by us beginning in May 2001.
(7) Of this amount, $172,360 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" of EFC or upon
the occurrence of certain other events; $50,548 represents the increase of
the accrual for sick leave and vacation redeemable by Mr. Ehrlich; $6,892
represents the increase of our accrual for severance pay that would be
payable to Mr. Ehrlich under the laws of the State of Israel if we were to
terminate his employment; $52,841 represents our payments and accruals to
pension and education funds; and $86,434 represents benefit imputed to Mr.
Ehrlich upon the purchase by us of certain treasury shares. Additionally,
$679 represents other benefits that we paid to Mr. Ehrlich in 2001.
(8) All of such options were in exchange for a total of $3,600 in salary waived
by Dr. Degani pursuant to the options-for-salary program instituted by us
beginning in May 2001.
(9) Of this amount, $11,287 represents payments to Dr. Degani for unused
vacation; $17,155 represents our payments and accruals to pension and
education funds; and $8,936 and $36,000 represent statutory and contractual
severance amounts, respectively, paid to Dr. Degani upon Dr. Degani's
leaving our employ in September 2001. Additionally, $672 represents other
benefits that we paid to Dr. Degani in 2001.
STOCK OPTIONS
The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 2001.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS OF ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(1)
OPTIONS IN FISCAL BASE PRCE EXPIRATION ------------------------------
NAME GRANTED YEAR ($/SH) DATE 5% ($) 10% ($)
------- ----------- ------------- ----------- ---------- ------------- -------------
Yehuda Harats.......... 100,000 6.2% $1.43 08/24/11 89,932 227,905
66,000 4.1% $1.43 08/24/11 59,355 150,417
350,000 21.7% $1.43 10/23/11 314,762 797,668
100,000(2) 6.2% $1.30 10/31/11 81,756 207,187
Robert S. Ehrlich...... 100,000 6.2% $1.43 08/24/11 89,932 227,905
66,000 4.1% $1.43 08/24/11 59,355 150,417
275,000 17.0% $1.43 10/23/11 247,313 626,739
80,000(2) 4.9% $1.30 10/31/11 65,405 165,749
Joshua Degani.......... 9,000(2) 0.6% $2.34 06/30/11 13,245 33,564
---------------------------------
(1)The potential realizable value illustrates value that might be realized upon
exercise of the options immediately prior to the expiration of their terms,
assuming the specified compounded rates of appreciation of the market price
per share from the date of grant to the end of the option term. Actual
gains, if any, on stock option exercise are dependent upon a number of
factors, including the future performance of the common stock and the timing
of option exercises, as well as the executive officer's continued employment
through the vesting period. The gains shown are net of the option exercise
price, but do not include deductions for taxes and other expenses payable
-33-
upon the exercise of the option or for sale of underlying shares of common
stock. The 5% and 10% rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future increases in the price of our stock. There can be no
assurance that the amounts reflected in this table will be achieved, and
unless the market price of our common stock appreciates over the option
term, no value will be realized from the option grants made to the executive
officers.
(2)Granted in exchange for a waiver of salary under our options-for-salary
program.
The table below sets forth information for the Named Executive Officers
with respect to aggregated option exercises during fiscal 2001 and fiscal 2001
year-end option values.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL-YEAR-END(1)
ACQUIRED ON VALUE ------------------------------ ---------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------- ------------- ------------------ -------------- --------------- ---------------- ----------------
Yehuda Harats........ 7,500 $ 7,125.00 668,001 462,666 $ 105,783.41 $ 77,396.59
Robert S. Ehrlich..... 7,500 $ 7,125.00 750,651 396,916 $ 79,659.66 $ 61,407.84
Joshua Degani......... 0 - 9,000 0 $ 3,240.00 -
- -----------------------------------
(1) Options that are "in-the-money" are options for which the fair market value
of the underlying securities exceeds the exercise or base price of the
option.
EMPLOYMENT CONTRACTS
In October 2002, we announced that Yehuda Harats, the president and CEO
and a member of our Board, 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 are
required to pay him certain amounts due to him by law and under the terms of his
employment agreement. In December 2002, we came to an agreement with Mr. Harats
whereby we agreed to pay him $729,500 through the end of 2005 in satisfaction of
all our contractual and legal severance and other obligations to him, which was
approximately one-half of the amount we had accrued on our financial statements
in connection with such obligations.
Each of Messrs. Ehrlich and Harats are parties to similar employment
agreements with us effective as of January 1, 2000. The terms of each of these
employment agreements expire on December 31, 2002, but are extended
automatically for additional terms of two years each unless either the executive
or we terminate the agreement sooner. Additionally, we have the right, on at
least 90 days' notice to the executive, unilaterally to extend the initial term
of the executive's agreement for a period of one year (i.e., until December 31,
2003); if we exercise this right, the automatic two-year extensions would begin
from December 31, 2003 instead of December 31, 2002.
The employment agreements provide for a base salary of $20,000 per
month for each of Messrs. Ehrlich and Harats, as adjusted annually for Israeli
inflation and devaluation of the Israeli shekel against the U.S. dollar, if any.
Additionally, the board may at its discretion raise the executive's base salary.
As of January 31, 2001, the board raised Mr. Harats's base salary to $23,750 per
month effective January 1, 2001. In January 2002, the board raised Mr. Ehrlich's
-34-
base salary to $23,750 per month effective January 1, 2002; Mr. Ehrlich has
elected to waive this increase in his salary and to receive options instead,
under our salary for options program.
Each employment agreement provides that if the results we actually
attain in a given year are at least 80% of the amount we budgeted at the
beginning of the year, we will pay a bonus to each of Messrs. Ehrlich and
Harats, on a sliding scale, in an amount equal to a minimum of 35% of their
annual base salaries then in effect, up to a maximum of 90% of their annual base
salaries then in effect if the results we actually attain for the year in
question are 120% or more of the amount we budgeted at the beginning of the
year.
The employment agreements also contain various benefits customary in
Israel for senior executives (please see "Item 1. Business - Employees," above),
tax and financial planning expenses and an automobile, and contain
confidentiality and non-competition covenants. Pursuant to the employment
agreements, we granted each of Messrs. Ehrlich and Harats demand and "piggyback"
registration rights covering shares of our common stock held by them.
We can terminate the employment agreements in the event of death or
disability or for "Cause" (defined as conviction of certain crimes, willful
failure to carry out directives of our board of directors or gross negligence or
willful misconduct). Messrs. Ehrlich and Harats each have the right to terminate
their employment upon a change in our control or for "Good Reason," which is
defined to include adverse changes in employment status or compensation, our
insolvency, material breaches and certain other events. Additionally, Messrs.
Ehrlich and Harats may retire (after age 68) or terminate their respective
agreements for any reason upon 150 days' notice. Upon termination of employment,
the employment agreements provide for payment of all accrued and unpaid
compensation, and (unless we have terminated the agreement for Cause or the
executive has terminated the agreement without Good Reason and without giving us
150 days' notice of termination) bonuses due for the year in which employment is
terminated and severance pay in the amount of three years' base salary (or, in
the case of termination by an executive on 150 days' notice, a lump sum payment
of $520,000). Furthermore, certain benefits will continue and all outstanding
options will be fully vested.
Other employees have entered into individual employment agreements with
us. These agreements govern the basic terms of the individual's employment, such
as salary, vacation, overtime pay, severance arrangements and pension plans.
Subject to Israeli law, which restricts a company's right to relocate an
employee to a work site farther than sixty kilometers from his or her regular
work site, we have retained the right to transfer certain employees to other
locations and/or positions provided that such transfers do not result in a
decrease in salary or benefits. All of these agreements also contain provisions
governing the confidentiality of information and ownership of intellectual
property learned or created during the course of the employee's tenure with us.
Under the terms of these provisions, employees must keep confidential all
information regarding our operations (other than information which is already
publicly available) received or learned by the employee during the course of
employment. This provision remains in force for five years after the employee
has left our service. Further, intellectual property created during the course
of the employment relationship belongs to us.
-35-
A number of the individual employment agreements, but not all, contain
non-competition provisions which restrict the employee's rights to compete
against us or work for an enterprise which competes against us. Such provisions
remain in force for a period of two years after the employee has left our
service.
Under the laws of Israel, an employee of ours who has been dismissed
from service, died in service, retired from service upon attaining retirement
age, or left due to poor health, maternity or certain other reasons, is entitled
to severance pay at the rate of one month's salary for each year of service. We
currently fund this obligation by making monthly payments to approved private
provident funds and by its accrual for severance pay in the consolidated
financial statements. See Note 2q of the Notes to the Consolidated Financial
Statements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our board of directors for the 2001
fiscal year consisted of Dr. Jay M. Eastman, Jack E. Rosenfeld and Lawrence M.
Miller. None of the members have served as our officers or employees.
Robert S. Ehrlich, our Chairman and Chief Financial Officer, serves as
Chairman and a director of PSCX, for which Dr. Eastman serves as director and
member of the Executive and Strategic Planning Committees and Mr. Rosenfeld
serves as director and member of the Executive Compensation Committees.
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in our
cumulative total shareholder return on our common stock with the cumulative
total return on the Nasdaq Market Index (Broad Market Index) and a
self-constructed peer group index over the past five years, from December 31,
1996 through December 31, 2001. The cumulative total shareholder return is based
on $100 invested in our common stock and in the respective indices on December
31, 1996. The stock prices on the performance graph are not necessarily
indicative of future price performance.
-36-
CUMULATIVE TOTAL RETURN THROUGH DECEMBER 31, 2001
AMONG ELECTRIC FUEL CORPORATION,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
[GRAPHIC CHART OMITTED]
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- -------- -------- --------
ELECTRIC FUEL 100.00 51.79 39.29 50.00 66.96 23.71
PEER GROUP(1) 100.00 107.95 88.29 178.74 99.22 44.91
BROAD MARKET 100.00 121.64 169.84 315.20 191.36 151.07
- -------------------------------------
(1) The Peer Group Index is comprised of the following companies: AER Energy
Resources, Inc., Battery Technologies Inc., Electrosource, Inc., Ultralife
Batteries, Inc. and Valence Technology, Inc. The returns of each company
have been weighted according to their respective stock market
capitalization for purposes of arriving at a peer group average.
-37-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this amended report:
(1) Financial Statements - See Index to Financial Statements on page 29
above.
(2) Financial Statements Schedules - All schedules are omitted because of
the absence of conditions under which they are required or because the
required information is presented in the financial statements or
related notes thereto.
(3) Exhibits - The following Exhibits are filed herewith: EXHIBIT NUMBER
DESCRIPTION
23 Consent of Kost Forer & Gabbay
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
-38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, on May 8,
2003.
ELECTRIC FUEL CORPORATION
By: /s/ Robert S. Ehrlich
-------------------------------------
Name: Robert S. Ehrlich
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amended report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
----------- ------- ------
Chairman, President, Chief Executive
/S/ ROBERT S. EHRLICH Officer and Director May 8 , 2003
-------------------------------------- (Principal Executive Officer) -----
Robert S. Ehrlich
/S/ AVIHAI SHEN Vice President - Finance May 8 , 2003
-------------------------------------- (Principal Financial Officer) -----
Avihai Shen
/S/ DANNY WALDNER Controller (Principal Accounting Officer) May 8 , 2003
-------------------------------------- -----
Danny Waldner
/S/ STEVEN ESSES Executive Vice President, Chief Operating Officer May 8 , 2003
-------------------------------------- and Director -----
Steven Esses
/S/ JAY M. EASTMAN Director May 8 , 2003
-------------------------------------- -----
Dr. Jay M. Eastman
/S/ LAWRENCE M. MILLER Director
---------------------------------------
Lawrence M. Miller May 8 , 2003
-----
/S/ JACK E. ROSENFELD Director May 8 , 2003
-------------------------------------- -----
Jack E. Rosenfeld
Director May , 2003
--------------------------------------- ----
Bert W. Wasserman
-39-
CERTIFICATIONS
- -------------------------------------------------------------------------------
I, Robert S. Ehrlich, certify that:
1. I have reviewed this amended annual report on Form 10-K/A of Electric
Fuel Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
annual 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: May 5, 2003
/S/ ROBERT S. EHRLICH
----------------------------------------------
Robert S. Ehrlich, Chairman, President and CEO
(Principal Executive Officer)
CERTIFICATIONS
- -------------------------------------------------------------------------------
I, Avihai Shen, certify that:
1. I have reviewed this amended annual report on Form 10-K/A of Electric
Fuel Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
annual 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: May 5, 2003
/S/ AVIHAI SHEN
--------------------------------------
Avihai Shen, Vice President - Finance
(Principal Financial Officer)
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001
IN U.S. DOLLARS
INDEX
Page
--------
Report of Independent Auditors 2
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations 5
Statements of Changes in Shareholders' Equity 6 - 7
Consolidated Statements of Cash Flows 8 - 9
Notes to Consolidated Financial Statements 10 - 34
F-1
ERNST & YOUNG KOST FORER & GABBAY Phone 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
ELECTRIC FUEL CORPORATION
We have audited the accompanying consolidated balance sheets of
Electric Fuel Corporation (the "Company") and its subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/s/ Kost Forer & Gabbay
Tel Aviv, Israel KOST FORER & GABBAY
January 29, 2002 A Member of Ernst & Young Global
(except for Note 1 and Note 10d.2,
for which the date is February 20,
2003)
F-2
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------------
2001 2000
----------------- ------------------
U.S. DOLLARS
-----------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $12,671,754 $11,596,225
Trade receivables (net of allowance for doubtful accounts in the
amounts of $245,934 and $107,388 as of December 31, 2001 and 2000,
respectively and allowance for returns in the amounts of $239,000
and $0 as of December 31, 2001 and 2000, respectively) 1,230,259 2,212,434
Other accounts receivable and prepaid expenses (Note 3) 714,946 2,418,715
Inventories (Note 4) 3,472,197 3,208,948
----------------- ------------------
Total current assets 18,089,156 19,436,322
----------------- ------------------
LOANS TO SHAREHOLDERS (Note 5) 501,288 778,677
----------------- ------------------
SEVERANCE PAY FUND 1,078,131 995,283
----------------- ------------------
PROPERTY AND EQUIPMENT, NET (Note 6) 6,739,665 6,446,064
----------------- ------------------
$26,408,240 $27,656,346
================= ==================
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------------------
2001 2000
------------------- -------------------
U.S. DOLLARS
-------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables $1,824,957 $ 3,242,460
Other accounts payable and accrued expenses (Note 8) 1,730,799 1,544,975
------------------- -------------------
Total current liabilities 3,555,756 4,787,435
------------------- -------------------
ACCRUED SEVERANCE PAY 3,444,427 2,790,542
------------------- -------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)
SHAREHOLDERS' EQUITY (Note 10):
Share capital -
Common stock - $0.01 par value each;
Authorized: 100,000,000 shares as of December 31, 2001 and 2000;
Issued: 29,059,469 shares and 21,422,691 shares as of December 31,
2001 and 2000, respectively; Outstanding - 28,504,136 shares and
21,417,358 shares as of December 31, 2001 and 2000, respectively 290,596 214,227
Preferred shares - $ 0.01 par value each;
Authorized: 1,000,000 shares as of December 31, 2001 and 2000; No
shares issued and outstanding as of December 31, 2001 and 2000 - -
Additional paid-in capital 105,686,909 89,091,790
Accumulated deficit (82,169,261 (64,882,473)
Deferred stock compensation (18,000) (17,240)
Treasury stock, at cost (common stock - 555,333 shares and 5,333 shares
as of December 31, 2001 and 2000, respectively) (3,537,106) (37,731)
Notes receivable from shareholders (845,081) (4,290,204)
------------------- -------------------
Total shareholders' equity 19,408,057 20,078,369
------------------- -------------------
$26,408,240 $27,656,346
=================== ===================
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- ------------------
U.S. DOLLARS
---------------------------------------------------------------
Revenues from products $ 3,138,843 $ 3,743,121 $ 1,464,227
Revenues from services 894,045 310,441 1,229,771
------------------- ------------------- ------------------
Total revenues 4,032,888 4,053,562 2,693,998
------------------- ------------------- ------------------
Operating costs and expenses Cost of revenues
(including $441,875, $0 and $0
write-off of inventory for the year 2001, 2000 and
1999, respectively) 7,053,602 4,188,442 **)
Research and development, net (Note 12a) 3,512,084 4,588,137 6,631,075
Selling and marketing expenses 6,255,703 4,160,902 760,359
General and administrative expenses 4,760,866 3,641,220 2,402,284
------------------- ------------------- ------------------
Total operating costs and expenses 21,528,555 16,578,701 9,793,718
------------------- ------------------- ------------------
Operating loss (17,549,367) (12,525,139) (7,099,720)
Financial income, net (Note 12b) 262,579 544,181 190,049
------------------- ------------------- ------------------
Loss before taxes on income (17,286,788) (11,980,958) (6,909,671)
Taxes on income (Note 11) - - 6,017
------------------- ------------------- ------------------
Net loss $ (17,286,788) $ (11,980,958) $ (6,915,688)
=================== =================== ==================
Deemed dividend to certain shareholders of common stock *) $ (1,196,667) - -
=================== =================== ==================
Net loss attributable to shareholders of common stock *) $ (18,483,455) $ (11,980,958) $ (6,915,688)
=================== =================== ==================
Basic and diluted net loss per share *) $ (0.76) $ (0.62) $ (0.48)
=================== =================== ==================
Weighted average number of shares used in computing
basic and diluted net loss per share 24,200,184 19,243,446 14,334,277
=================== =================== ==================
*) As restated. See Note 1.
**) See Note 2.h.
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL DEFERRED OTHER
COMMON SHARES PAID-IN ACCUMULATED STOCK COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION INCOME (LOSS)
----------- ----------- ------------ --------------- -------------- ---------------
U.S. dollars
------------------------------------------------------------------------
Balance as of January 1, 1999 14,303,387 $ 143,034 $57,398,814 $(44,553,027) - $ (1,943)
Comprehensive loss:
Net realized losses on
available-for-sale
securities - - - - - 1,943
Net loss - - - (6,915,688) - -
Issuance of shares to
investors, net 1,425,000 14,250 2,712,001 - - -
Purchase of treasury stock
- - - *)(1,432,800) - -
Accrued interest on notes
receivable from shareholders - - - - - -
----------- ----------- ------------ -------------- --------------- ---------------
Total comprehensive loss
Balance as of December 31,
1999 15,728,387 157,284 60,110,815 (52,901,515) - -
Payment of interest and
principal on notes
receivable from shareholders - - - - - -
Issuance of shares to
investors, net 2,477,952 24,780 18,249,373 - - -
Issuance of shares to service
providers 35,000 350 524,650 - - -
Exercise of options 1,880,156 18,802 6,936,355 - - -
Exercise of warrants 1,301,196 13,011 2,437,295 - - -
Deferred stock compensation - - 37,924 - (37,924) -
Stock compensation related to
options repriced - - 26,250 - -
Amortization of deferred
stock compensation - - - - 20,684 -
Stock compensation related to
options issued to
consultants - - 769,128 - - -
Accrued interest on notes
receivable from shareholders - - - - - -
Comprehensive loss
Net loss - - - (11,980,958) - -
----------- ----------- ------------ -------------- --------------- ---------------
Total comprehensive loss
=================================
Balance as of December 31,
2000 21,422,691 $ 214,227 $89,091,790 $(64,882,473) $ (17,240) $ -
=========== =========== ============ ============== =============== ===============
*) As revised. See Note 10.d.2.
NOTES
TOTAL RECEIVABLE TOTAL
TREASURY COMPREHENSIVE FROM SHAREHOLDERS'
STOCK LOSS SHAREHOLDERS EQUITY
----------- ---------------- -------------- --------------
Balance as of January 1, 1999 $ (1,806,481) $(598,885) $10,581,512
Comprehensive loss:
Net realized losses on
available-for-sale
securities - $ 1,943 - 1,943
Net loss - (6,915,688) - (6,915,688)
----------------
Issuance of shares to
investors, net - - (2,100,000) 626,251
----------------
Purchase of treasury stock
*) 1,768,750 - (335,950)
Accrued interest on notes
receivable from shareholders - (51,659) (51,659)
-------------- -------------- --------------
Total comprehensive loss $ (6,913,745)
================================ ================
Balance as of December 31,
1999 (37,731) (3,086,494) 4,242,359
Payment of interest and
principal on notes
receivable from shareholders - 2,705,052 2,705,052
Issuance of shares to
investors, net - - 18,274,153
Issuance of shares to service
providers - - - 525,000
Exercise of options - - (3,723,456) 3,231,701
Exercise of warrants - - 2,450,306
Deferred stock compensation - - -
Stock compensation related to
options repriced - - 26,250
Amortization of deferred
stock compensation - - 20,684
Stock compensation related to
options issued to
consultants - - 769,128
Accrued interest on notes
receivable from shareholders - (185,306) (185,306)
Comprehensive loss
Net loss - (11,980,958) - (11,980,958)
-------------- ---------------- -------------- --------------
Total comprehensive loss $ (11,980,958)
================
Balance as of December 31,
2000 $ (37,731) $(4,290,204) $20,078,369
============== ============== ==============
*) As revised. See Note 10.d.2.
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
----------- ------------ ------------ --------------
Balance as of January 1, 2001 21,422,691 $ 214,227 $89,091,790 $64,882,473)
Repurchase of common shares
form shareholders and
repayment of the related
interest and principal of
notes from shareholders - - 228,674 -
Issuance of shares to investors,
net 6,740,359 67,405 14,325,941 -
Retirement of shares (3,000) (30) (17,970) -
Issuance of shares to service
providers 346,121 3,461 536,916 -
Exercise of options 219,965 2,900 511,389 -
Exercise of warrants 333,333 3,333 836,667 -
Deferred stock compensation - - 18,000 -
Amortization of deferred stock
compensation - - (6,193) -
Stock compensation related to
options issued to
consultants - - 139,291 -
Stock compensation related to
options to consultants
repriced - - 21,704 -
Comprehensive loss:
Net loss - - - (17,286,788)
----------- ------------ ------------ --------------
Total comprehensive loss
Balance as of December 31, 2001
29,059,469 $ 290,596 $105,686,909 $(82,169,261)
=========== ============ ============ ==============
NOTES
DEFERRED TOTAL RECEIVABLE TOTAL
STOCK TREASURY COMPREHENSIVE FROM SHAREHOLDERS'
COMPENSATION STOCK LOSS SHAREHOLDERS EQUITY
-------------- -------------- --------------- ----------------- ------------------
Balance as of January 1, 2001 $ (17,240) $ (37,731) $ (4,290,204) $ 20,078,369
Repurchase of common shares
form shareholders and
repayment of the related
interest and principal of
notes from shareholders - (3,499,375) 3,470,431 199,730
Issuance of shares to investors,
net - - - 14,393,346
Retirement of shares - - 18,000 -
Issuance of shares to service
providers - - - 540,377
Exercise of options - - (43,308) 470,981
Exercise of warrants - - - - 840,000
Deferred stock compensation 18,000 - - -
Amortization of deferred stock
compensation 17,240 - - 11,047
Stock compensation related to
options issued to
consultants - - - 139,291
Stock compensation related to
options to consultants
repriced - - - 21,704
Comprehensive loss:
Net loss - - (17,286,788) - (17,286,788)
-------------- -------------- -------------- ------------------ -----------------
Total comprehensive loss $(17,286,788)
==============
Balance as of December 31, 2001 $ (18,000) $ (3,537,106) $ (845,081) $19,408,057
============== ============== ================== =================
The accompanying notes are an integral part of the
consolidated financial statements.
F7
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- ------------------
U.S. DOLLARS
-----------------------------------------------------------
Cash flows from operating activities:
Net loss $ (17,286,788) $ (11,980,958) $ (6,915,688)
Adjustments required to reconcile net loss to net cash
used in operating activities:
Depreciation 980,008 753,910 710,759
Net realized losses on available-for-sale marketable
securities - - 1,943
Accrued severance pay, net 571,037 249,195 (298,056)
Amortization of deferred stock compensation 17,240 20,684 -
Impairment of loans to shareholders 206,005 - -
Compensation expenses related to repurchase of treasury
stock 228,674 - -
Write-off of inventories 441,875 - -
Amortization of compensation related to options issued
to consultants and repriced options issued to
employees and consultants 160,995 765,378 -
Compensation expenses related to shares issued to
service providers 660,377 405,000 -
Accrued interest on notes receivable from shareholders 36,940 (230,924) (51,659)
Decrease (increase) in trade receivables 982,175 (1,714,357) 115,390
Decrease (increase) in other accounts receivable and
prepaid expenses 1,583,769 (1,348,325) 348,666
Increase in inventories (705,124) (2,163,468) (670,937)
Increase (decrease) in trade payables (1,229,609) 989,055 803,074
Increase (decrease) in other accounts payable and
accrued expenses 185,824 267,961 397,241
Decrease in deferred revenues - - (136,549)
Other 120 (6,330) (4,704)
----------------- ----------------- ------------------
Net cash used in operating activities (13,166,482) (13,963,179) (5,700,520)
----------------- ----------------- ------------------
The accompanying notes are an integral part of the consolidated
financial statements.
F-8
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
U.S. DOLLARS
---------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (1,275,303) (2,858,512) (1,473,444)
Payment to suppliers for purchase of property and
equipment from previous year (227,230) - -
Loans granted to shareholders - (958,156) -
Repayment of loans granted to shareholders - 225,097 -
Proceeds from sale of property and equipment 40,217 57,867 34,643
Proceeds from sale of available-for-sale marketable
securities - - 3,702,411
----------------- ----------------- -----------------
Net cash provided by (used in) investing activities (1,462,316) (3,533,704) 2,263,610
----------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of shares, net 14,393,346 18,150,404 750,000
Proceeds from exercise of options 470,981 3,231,701 -
Proceeds from exercise of warrants 840,000 2,450,306 -
Payment of interest and principal on notes receivable
from shareholders - 2,705,052 -
----------------- ----------------- -----------------
Net cash provided by financing activities 15,704,327 26,537,463 750,000
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 1,075,529 9,040,580 (2,686,910)
Cash and cash equivalents at the beginning of the year 11,596,225 2,555,645 5,242,555
----------------- ----------------- -----------------
Cash and cash equivalents at the end of the year $ 12,671,754 $ 11,596,225 $ 2,555,645
================= ================= =================
Supplementary information on non-cash transactions:
Purchase of property and equipment against trade payables $ 39,336 $ 227,230 $ -
================= ================= =================
Purchase of treasury stock in respect of notes receivable from
shareholders $ 3,499,375 $ - $ -
================= ================= =================
Issuance of shares (including additional paid-in capital)
against notes receivable. $ - $ - $2,435,950
================= ================= =================
Retirement of shares issued under notes receivables $ 18,000 $ - $ -
================= ================= =================
Issuance of shares to consultants in respect of prepaid
expenses $ - $ 120,000 $ -
================= ================= =================
Exercise of options against notes receivable $ 43,308 $ 3,723,456 $ -
================= ================= =================
Liabilities in respect of share issuance expenses $ - $ - $ 123,749
================= ================= =================
Supplemental disclosure of cash flows activities: Cash paid during the year for:
Interest $ 19,106 $ 25,537 $ 38,202
================= ================= =================
The accompanying notes are an integral part of the consolidated
financial statements.
F-9
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1:- GENERAL
a.
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 portable consumer electronic devices
such as cellular telephones products, as well as for electric vehicles and
defense applications. The Company is primarily operating through Electric Fuel
Ltd. ("EFL") a wholly-owned Israeli based subsidiary. The Company's production
and research and development operations are primarily located in Israel.
In November 2000, the Company established a wholly-owned subsidiary in the U.K
("EFL U.K."). The Company has two wholly-owned non-operating subsidiaries, in
Germany ("GmbH") and in the Netherlands ("BV"), as well as two subsidiaries in
the United States: Electric Fuel Transportation Corp. (Delaware) and Instant
Power Corporation (Delaware).
The Company conducted a comprehensive review on the re-pricing of warrants
granted during 2000 to its investors and investment banker. As a result of that
review, the Company reconsidered the calculation and the related assumptions
related to the deemed dividend derived from this transaction, which was
immaterial initially and should have resulted and currently recorded the deemed
dividend in the amount of $1,196,667 (see Note 10e.2), a non-cash item. The
accompanying consolidated financial statements for the year ended December 31,
2001 were restated to record this deemed dividend, which increased the loss
applicable to common shareholders to $18,483,455 and the calculation of basic
and diluted net loss per share to $0.76 for the year ended December 31, 2001.
This restatement does not affect the balance sheet, the changes in shareholders'
equity or the cash flow statements.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
b. Financial statements in U.S. dollars:
A majority of the revenues of the Company and its subsidiaries is generated in
U.S. dollars. In addition, a substantial portion of the Company's and its
subsidiaries costs are incurred in U.S. dollars ("dollar"). Company's management
believes, that the dollar is the primary currency of the economic environment in
which the Company and its subsidiaries operate. Thus, the functional and
reporting currency of the Company and its subsidiaries is the dollar.
Accordingly, monetary accounts maintained in currencies other than the U.S.
dollar are remeasured into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS No.
52"). All transaction, gains and losses from the remeasured monetary balance
sheet items are reflected in the consolidated statements of operations as
financial income or expenses, as appropriate.
F-10
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily
convertible to cash with original maturities of three months or less.
e. Inventories:
Inventories are stated 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 and for market prices lower than
cost. The Company periodically evaluates the quantities on hand relative to
current and historical selling prices and historical and projected sales volume.
Based on this evaluation, provisions are made in each period to write inventory
down to its market prices. In 2001, the Company wrote off $441,875 of
slow-moving and obsolete inventory, which has been included in cost of revenues.
Cost is determined as follows:
Raw and packaging materials - by the average cost method.
Work in progress - represents the cost of manufacturing with the addition of
allocable indirect manufacturing cost. Finished products - on the basis of
direct manufacturing costs with the addition of allocable indirect manufacturing
costs.
f. Property and equipment:
Property and equipment are stated at cost net of accumulated depreciation and
investment grants (no investment grants were granted during 2001, 2000 and
1999).
Depreciation is calculated by the straight-line method over the estimated useful
lives of the assets, at the following annual rates:
%
------------------------------
Computers and related equipment 33
Motor vehicles 15
Office furniture and equipment 6 - 10
Machinery, equipment and installation 10 - 25 (mainly 10)
Leasehold improvements Over the term of the lease
The Company and its subsidiaries periodically assess the recoverability of the
carrying amount of property and equipment and provide for any possible
impairment loss based upon the difference between the carrying amount and fair
value of such assets in accordance with Statement of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). For each of the three
years ended December 31, 2001 the Company did not record any impairment losses
on long-lived assets.
F-11
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. Revenue recognition:
The Company and its subsidiaries generate revenues mainly from sale of zinc-air
battery products for portable consumer electronic devices such as cellular
telephones products, as well as for defense applications. To a lesser extent,
revenues are generated from development services and long-term arrangements
subcontracted by the U.S Government. The Company sells its products to large
retail companies as well as through resellers.
Revenues from products are recognized in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements ("SAB No. 101")
when the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the seller's price to the buyer is fixed or
determinable, no further obligation remains and collectibility is reasonably
assured. In situations where the Company sells its products to large retail
companies, where returns are expected to be accepted revenues are recognized on
cash basis.
The Company generally does not grant a right of return to its customers. When
returns are expected and estimated, the Company defers revenue until the
probability of such returns expires, at which time revenue is recognized
provided that all other revenue recognition criteria are met. The Company
maintains provision for product returns, based on its experience in accordance
with Statement of Financial Accounting Standard No. 48, "Revenue Recognition
When Right of Return Exists" ("SFAS No. 48"). The provision has been deducted
from revenues and amounted to $239,000, $0, and $0 for the years ended December
31, 2001, 2000 and 1999, respectively.
The Company maintains consigned inventory at customer locations for certain
products. For these products, revenue is recognized at the time the products are
sold to a final customer and all other SAB No. 101 criteria are met.
Revenues from long-term agreements, subcontracted by the U.S. government, are
recorded on a cost-sharing basis, when services are rendered and products
delivered, as prescribed on the related agreements. Provision on estimated
losses are recognized in the period in which the likelihood of such losses is
determined. As of December 31, 2001, no such estimated losses were identified..
Deferred revenues includes unearned amounts received from customers, but not
recognized as revenues.
Revenues from development services are recognized based on Statement of Position
No. 81-1 "Accounting for Performance of Construction - Type and Certain
Production - Type Contracts" ("SOP 81-1"),using contract accounting on a
percentage of completion method, based on completion of agreed-upon milestones
and in accordance with the "Output Method." Provisions for estimated losses on
uncompleted contracts are recognized in the period in which the likelihood of
such losses is determined. As of December 31, 2001, no such estimated losses
were identified.
h. Cost of revenues:
In 1999, the Company's cost of revenues were included in research and
development costs, since the Company's production was integrated with the
product development process, it was impossible to segregate the cost of revenues
from the research and development expenses, since these expenses were
interrelated by their nature.
i. Research and development cost:
Research and development costs, net of grants received, are charged to the
statements of operations as incurred.
j. Royalty-bearing grants:
F-12
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Royalty-bearing grants from the Office of the Chief Scientist ("OCS") of the
Israeli Ministry of Industry and Trade and from the Israel-U.S. Bi-national
Industrial Research and Development Foundation ("BIRD-F") for funding approved
research and development projects are recognized at the time the Company is
entitled to such grants on the basis of the costs incurred, and included as a
deduction of research and development costs.
k. Income taxes:
The Company and its subsidiaries account for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). This Statement prescribes the use of the liability
method, whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
and its subsidiaries provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
l. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its subsidiaries
to concentrations of credit risk consist principally of cash and cash
equivalents, trade receivables and long-term loans to shareholders. Cash and
cash equivalents are invested in U.S. dollar deposits with major Israeli, U.S.
and U.K. banks. Such deposits in the U.S. may be in excess of insured limits and
are not insured in other jurisdictions. Management believes that the financial
institutions that hold the Company's investments are financially sound and,
accordingly, minimal credit risk exists with respect to these investments.
The trade receivables of the Company and its subsidiaries are mainly derived
from sales to customers located primarily in the United States and Europe.
Management believes that credit risks are moderated by the diversity of its end
customers and geographic sales areas. The Company performs ongoing credit
evaluations of its customers' financial condition. An allowance for doubtful
accounts is determined with respect to those accounts that the Company has
determined to be doubtful of collection.
The Company has provided long-term loans to its shareholders, amounting to
$501,288 and $778,677 as of December 31, 2001 and 2000, respectively. The
long-term loans are secured by the Company's shares and if the value of the
Company's shares decreases, the Company would incur material losses.
The Company and its subsidiaries had no off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
m. Basic and diluted net loss per share:
Basic net loss per share is computed based on the weighted average number of
shares of common stock outstanding during each year. Diluted net loss per share
is computed based on the weighted average number of shares of common stock
outstanding during each year, plus dilutive potential shares of common stock
considered outstanding during the year, in accordance with Statement of
Financial Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
All outstanding stock options and warrants have been excluded from the
calculation of the diluted net loss per common share because all such securities
are anti-dilutive for all periods presented. The total weighted average number
of shares related to the outstanding options and warrants excluded from the
calculations of diluted net loss per share was 3,170,334, 2,812,725 and
2,820,679 for the years ended December 31, 2001, 2000 and 1999, respectively.
F-13
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
n. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") and Interpretation No.
44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No.
44") in accounting for its employee stock option plans. Under APB No. 25, when
the exercise price of the Company's share options is less than the market price
of the underlying shares on the date of grant, compensation expense is
recognized. The pro forma disclosures required by Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123"), are provided in Note 10.f.
The Company applies SFAS No. 123 and Emerging Issue Task Force No. 96-18
"Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18")
with respect to options issued to non-employees. SFAS No. 123 requires use of an
option valuation model to measure the fair value of the options at the grant
date.
o. Fair value of financial instruments:
The following methods and assumptions were used by the Company and its
subsidiaries in estimating their fair value disclosures for financial
instruments:
The carrying amounts of cash and cash equivalents, trade receivable and trade
payable approximate their fair value due to the short-term maturity of such
instruments.
The carrying amount of the Company's long-term loans to shareholders
approximates their fair value. The fair value was estimated using the fair
market value of the secured Company's shares.
p. Severance pay:
The Company's liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment, or a portion
thereof. The Company's liability for all of its employees is fully provided by
monthly deposits with severance pay funds, insurance policies and by an accrual.
The value of these policies is recorded as an asset in the Company's balance
sheet.
In addition and according to certain employment agreements, the Company is
obligated to provide for a special severance pay in addition to amounts due to
certain employees pursuant to Israeli severance pay law. The Company has made a
provision for this special severance pay in accordance with Statement of
Financial Accounting Standard No. 106, "Employer's Accounting for Post
Retirement Benefits Other than Pensions" ("SFAS No. 106"). As of December 31,
2001 and 2000, the accumulated severance pay in that regard amounted to
$1,975,535 and $1,586,372, respectively.
The deposited funds include profits accumulated up to the balance sheet date.
The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor agreements. The value of the
deposited funds is based on the cash surrendered value of these policies and
includes immaterial profits.
Severance expenses for the years ended December 31, 2001, 2000 and 1999,
amounted to approximately $653,885, $430,943 and $203,690, respectively.
F-14
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
q. Advertising costs:
The Company and its subsidiaries expense advertising costs as incurred.
Advertising expense for the years ended December 31, 2001, 2000 and 1999, was
approximately $1,676,280, $1,453,025 and $364,957, respectively.
r. 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 No. 141") and Statement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS No. 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 No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. The Company does not expect any effect of this standard on
the earnings or financial position of the Company.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged.
The provisions of SFAS No. 144 are not expected to have a material effect on the
Company's financial position or operating results.
s. Reclassification:
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the presentation used in 2001 (see also Note
10.d.2).
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
------------------------------------
2001 2000
----------------- -----------------
U.S. dollars
------------------------------------
Government authorities $ 425,593 $ 1,726,282
U.S. government - 45,749
Employees 16, 862 162,518
Prepaid expenses 241,150 299,082
Other 31,341 185,084
----------------- -----------------
$714,946 $ 2,418,715
================= =================
F-15
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4:- INVENTORIES
Raw and packaging materials $1,097,492 $ 1,581,048
Work in progress 356,152 457,319
Finished products 2,018,553 1,170,581
------------------ ------------------
$3,472,197 $ 3,208,948
================== ==================
NOTE 5:- LOANS TO SHAREHOLDERS
In February and May 2000, two officers of the Company exercised options to
purchase a total of 263,330 and 550,000, respectively, shares of the Company's
common stock (see Note 10.d.3). In connection with such exercises, the Company
granted loans secured by the Company's shares to those two officers to cover
their related tax liabilities. The loans were in the form of non-recourse
promissory note in the total amount of $958,156, bearing interest at a rate
equal to 4% over the then-current percentage increase in the Israeli Consumer
Price Index ("CPI") between the date of the loan and the date of the annual
interest calculation. During the year 2000 and 2001 one of the shareholders
repaid a portion of his non-recourse note at the amount of $225,097 and $38,639,
respectively (see Note 10.d.3). During the year 2001, the Company has impaired
those loans and has written off the amount of $206,005 due to decline of the
fair market value of its shares.
NOTE 6:- PROPERTY AND EQUIPMENT, NET
a. Composition of property and equipment is as follows:
December 31,
------------------------------------
2001 2000
----------------- ----------------
U.S. dollars
-----------------------------------
Cost:
Computers and related equipment $786,158 $ 636,997
Motor vehicles 336,216 389,019
Office furniture and equipment 313,760 311,885
Machinery, equipment and installations 9,396,636 8,502,762
Leasehold improvements 888,841 732,291
---------------- ---------------
11,721,611 10,572,954
---------------- ---------------
Accumulated depreciation:
Computers and related equipment 566,290 445,209
Motor vehicles 62,523 139,024
Office furniture and equipment 180,498 162,530
Machinery, equipment and installations 3,526,145 2,826,656
Leasehold improvements 646,490 553,471
---------------- ---------------
4,981,946 4,126,890
---------------- ---------------
Depreciated cost $ 6,739,665 $ 6,446,064
================ ===============
b. Depreciation expense amounted to $980,008, $753,910 and $710,759, for the
years ended December 31, 2001, 2000 and 1999, respectively.
As for liens, see Note 9d.
F-16
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7:- SHORT-TERM BANK CREDIT
The Company has an unused line of credit of up to $750,000, secured by such
security as the Company and the bank shall agree upon from time to time.
NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
-----------------------------------
2001 2000
--------------- -----------------
U.S. dollars
-----------------------------------
Employees and payroll accruals $ 884,262 $(* 591,992
Accrued vacation pay 419,679 388,350
Accrued expenses 221,653 (* 220,282
Advances from customers 98,070 -
Royalties to Office of the Chief Scientist 46,955 62,000
Other 60,180 282,351
--------------- ----------------
$1,730,799 $ 1,544,975
=============== ================
*) Reclassified
F-17
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments:
1. Under EFL's research and development agreements with the Office
of the Chief Scientist ("OCS"), and pursuant to applicable laws, EFL is required
to pay royalties at the rate of 3%-3.5% of net sales of products developed with
funds provided by the OCS, up to an amount equal to 100% of research and
development grants received from the OCS (linked to the U.S. dollars. Amounts
due in respect of projects approved after year 1999 also bear interest of the
Libor rate).
EFL is obligated to pay royalties only on sales of products in
respect of which OCS participated in their development. Should the project fail,
EFL will not be obligated to pay any royalties.
Royalties paid or accrued for the years ended December 31, 2001,
2000 and 1999, to the OCS amounted to $ 75,791, $ 70,637 and $ 69,169,
respectively.
As of December 31, 2001, total contingent liability to pay to OCS
(at 100%) was outstanding at the amount of approximately $ 9,764,000.
2. EFL, in cooperation with a U.S. participant, has received
approval from the BIRD-F for 50% funding of a project for the development of a
hybrid propulsion system for transit buses. The maximum approved cost of the
project is approximately $1.8 million, and the Company's share in the project
costs is anticipated to amount to approximately $1.1 million, which will be
reimbursed by BIRD-F at the aforementioned rate of 50%.
Royalties at rates of 2.5%-5% of sales are payable up to a maximum of 150% of
the grant received, linked to the U.S. Consumer Price Index. Accelerated
royalties are due under certain circumstances.
EFL is obligated to pay royalties only on sales of products in
respect of which BIRD-F participated in their development. Should the project
fail, EFL will not be obligated to pay any royalties.
Royalties paid or accrued to the BIRD-F amounted at $0 for each
of the three years ended December 31, 2001.
As of December 31, 2001, total contingent liability to pay to
BIRD-F (at 150%) was outstanding at the amount of approximately $772,000.
b. Lease commitments:
The Company and its subsidiaries rent their facilities under various operating
lease agreements, which expire on various dates, the latest of which is in 2005.
The minimum rental payments under non-cancelable operating leases are as
follows:
Year ended
December 31,
--------------------
U.S. dollars
--------------------
2002 438,761
2003 396,388
2004 214,199
2005 174,612
--------------------
1,223,960
====================
F-18
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
Total rent expenses for the years ended December 31, 2001, 2000 and 1999, were
approximately $456,701, $261,000 and $345,000, respectively.
Rental payments are primarily payable in Israeli currency, linked to the Israeli
Consumer Price Index ("CPI").
c. Guarantees:
The Company obtained bank guarantees in the amount of $36,076, mainly in respect
of lease agreements.
F-19
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
d. Liens:
As security for compliance with the terms related to the investment grants from
the state of Israel, EFL has registered floating liens on all of its assets, in
favor of the State of Israel.
NOTE 10:- SHAREHOLDERS' EQUITY
a. Shareholders' rights:
The Company's shares confer upon the holders the right to receive notice to
participate and vote in the general meetings of the Company and right to receive
dividends, if and when declared.
b. Issuance of common stock to investors:
1. On December 28, 1999, the Company entered into an agreement with a group of
private investors, including Mr. Leon S. Gross, a director of Electric Fuel
Corporation and one of the existing shareholders. Pursuant to the agreement, the
Company issued 1,425,000 shares of common stock for total purchase price of $
2,850,000, of which an amount of $2,100,000 was paid through an exchange of
non-recourse promissory notes. These non-recourse notes were repaid during the
year 2000. (See also Note 10e.1)
2. On January 5, 2000, the Company entered into a Common Stock Purchase
Agreement with a group of private investors. Pursuant to this agreement, on
January 10, 2000, the Company issued 385,000 shares of common stock to the
investors for a total purchase price of $962,500.
3. On May 17, 2000, the Company entered into an agreement with an investor,
pursuant to which the Company issued 1,000,000 shares of common stock to the
investor, at a price of $10.00 per share, for a total purchase price of
$10,000,000. In addition, on November 16, 2000, the Company subsequently issued
an additional 92,952 shares of common stock pursuant to the anti-dilution
calculation stated in the share purchase agreement with the investor.
4. On November 17, 2000, the Company entered into an agreement with a venture
capital fund, pursuant to which the Company issued 1,000,000 shares of common
stock to the investor, at a price of $8.375 per share, for a total purchase
price of $8,375,000. (See also Note 10.e.2.)
5. In May 2001, the Company issued a total of 4,045,454 shares of its common
stock to a group of institutional investors at a price of $2.75 per share, or a
total purchase price of $11,125,000. (See also Notes 10.e.2 and 10.e.3.)
6. On November 21, 2001, the Company issued a total of 1,503,759 shares of its
common stock at a purchase price of $1.33 per share, or a total purchase price
of $2,000,000, to a single institutional investor.
7. On December 5, 2001, the Company issued a total of 1,190,476 shares of its
common stock at a purchase price of $1.68 per share, or a total purchase price
of $2,000,000, to a single institutional investor.
F-20
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
c. Issuance of common stock to service providers:
1. In June 2000, 35,000 shares of common stock were issued at no consideration
to a consultant for providing business development and marketing services in the
United Kingdom At the issuance date, the fair value of these shares was
determined both by the value of the shares issued as reflected by fair market
price at the issuance date and by the value of the services provided and
amounted to $525,000 in accordance with EITF 96-18. In accordance with EITF
00-18, "Accounting Recognition for Certain Transactions Involving Equity
Instruments Granted to Other Than Employees" ("EITF 00-18"), the Company
recorded this compensation expenses of $405,000 during the year 2000 and
$120,000 during the year 2001 and included these amounts in marketing expenses.
2. On June 17, 2001 the Company issued a consultant a total of 8,550 shares of
its common stock in compensation for services rendered by such consultant for
the Company for preparation of certain video point-of-purchase and sales
demonstration materials. At the issuance date the fair value of these shares was
determined both by the value of the shares issued as reflected by fair market
price at the issuance date and by the value of the services provided and
amounted to $15,488 in accordance with EITF 96-18. In accordance with EITF
00-18, the Company recorded this compensation expense as marketing expenses in
the amount of $15,488.
3. On September 17, 2001 the Company issued to selling and marketing consultants
a total of 337,571 shares of its common stock in compensation for distribution
services rendered by such consultant. At the issuance date the fair value of
these shares was determined both by the value of the shares issued as reflected
by fair market price at the issuance date and by the value of the services
provided and amounted to $524,889 in accordance with EITF 96-18 and in
accordance with EITF 00-18. The Company recorded this compensation expense as
marketing expenses in the amount of $524,889.
d. Issuance of notes receivable
1. Non-recourse notes receivable from employee-shareholders arising from the
purchase of 1,500,000 of the Company's shares, matured in 1998. The notes were
renewed as recourse notes, due on December 31, 2007, bearing interest at a rate
of 1% over the then-current federal funds rate of 5.5% or linked to the Israeli
CPI, whichever is higher. In April 1998, the terms of the recourse notes were
amended such that the Company would have recourse only to certain termination
compensation due to the employee-shareholders (which exceeds the amounts
outstanding under the notes), or if terminated for cause, the
employee-shareholders would continue to be personally liable.
Additionally, the Company agreed to purchase Company shares from the
employee-shareholders, at prevailing market prices, up to the full amount
outstanding under the notes and to grant new options at exercise prices equal to
prevailing market prices, in the amount that the shares were sold by the
employee-shareholders.
In March 2000, the employee-shareholders exercised certain stock options (see
Note 10.f). The proceeds in the amount of $605,052 from the sale of the shares
were allocated to the repayment of the loan referred to above. As of December
31, 2001, there was no outstanding balance on this loan. As for additional note
repayment at that date, see Note 10.b.1.
2. On December 3, 1999, two officers of the Company purchased 250,000 shares of
common stock, which had already been issued, out of the Company's treasury stock
F-21
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
at the closing price of the common stock on December 2, 1999. The total purchase
price of $335,950 was financed by the Company by a non-recourse note secured by
the purchased shares bearing interest at 2%, with interest calculated and
charged in advance based on a term of ten years.
The Company has accounted for the re-purchase of these shares out of treasury
stock in accordance with Accounting Principles Board Opinion No. 6 "Status of
Accounting Research Bulletins" ("APB 6"). The shares re-purchased were included
in treasury stock at their cost price of $1,768,750. The Company initially
recorded the excess of purchase price over stated value against additional paid
in capital. As a result of the financial statements review performed by the
United States Securities and Exchange Commission, the Company reconsidered the
classification of the loss generated from this re-issuance of such shares and
the excess of purchase price over stated value at the amount of $1,432,800 has
been reclassified in its entirety to accumulated deficit.
3. In February 2000 and in May 2000, certain officers of the Company exercised
options to purchase a total of 263,330 and 550,000, respectively, shares of the
Company's common stock, paying the exercise price in form of ten-year
non-recourse promissory notes in an aggregate amount of $658,326 and $3,040,250,
respectively. The notes are secured by the shares issued upon exercise of such
options, bearing non-recourse interest at a rate equal to the federal fund rate
+ 1%. (See Note 5)
The Company has accounted for these promissory notes as a variable stock award
pursuant to the provisions of Emerging Issues Task Force issue 95-16,
"Accounting for Stock Compensation Arrangements with Employer Loan Features
under APB Opinion 25" ("EITF 95-16"). The Company did not record any
compensation due to the decrease in the market value of the Company's shares
during the years 2001 and 2000.
In February 2001, the Board of Directors of the Company, upon the recommendation
of its Compensation Committee and with the agreement of the officers involved,
purchased a total of 550,000 of the shares, which had already been issued, in
exchange for repayment of the non-recourse notes from the officers in the amount
of $3,470,431. $3,183,530 out of this amount relates to 550,000 shares from May
2000. The remaining amount of $248,262 represents repayment of other notes,
including $38,639 of loans to shareholders described in Note 5. As a result of
this transaction, the Company recorded treasury stock in the amount of
$3,499,375. An amount of $228,674 was recorded as additional paid-in-capital as
it reflected a compensation expense related to this re-purchase.
e. Warrants:
1. As part of the investment agreement in December 1999 (see Note 10.b.1), the
Company issued warrants to purchase up to an additional 950,000 and 475,000
shares of the Company's common stock to the investors at the exercise price of
$1.25 and $4.50 per share, respectively. Pursuant to the terms of these
warrants, a total of 251,196 shares of common stock were issued to such warrant
holders in 2000 on a cashless exercise basis. As of December 31, 2000, 1,050,000
warrants had been exercised, in addition to the warrants issued on a cashless
basis.
2. As part of the investment agreement in November 2000 (see Note 10.b.4), the
Company issued warrants to purchase an additional 1,000,000 shares of common
stock to the investor, with exercise prices of $11.31 for 333,333 of these
warrants and $12.56 per share for 666,667 of these warrants. In addition, the
Company issued warrants to purchase 150,000 shares of common stock, with
exercise prices of $9.63 for 50,000 of these warrants and $12.56 per share for
100,000 of these warrants to an investment banker involved in this agreement.
Out of these warrants issued to the investor, 666,667 warrants expire on
November 17, 2005 and 333,333 warrants expire on August 17, 2001.
F-22
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
As part of the transaction in May 2001 (see Note 10 b.5), the Company repriced
these warrants in the following manner:
- Of the 1,000,000 warrants granted to the investor, the exercise
price of 666,667 warrants was reduced from $12.56 to $3.50 and of
333,333 warrants was reduced from $11.31 to $2.52. In addition,
the 333,333 warrants that were to expire on August 17, 2001, were
immediately exercised for a total consideration of $840,000.
- Moreover, the Company issued to this investor an additional
warrant to purchase 250,000 shares of common stock at an exercise
price of $3.08 per share, to expire on May 3, 2006.
- Of the 150,000 warrants granted to the investment banker the
exercise price of 100,000 warrants was reduced from $12.56 to
$3.08 and of 50,000 warrants was reduced from $9.63 to $3.08. In
addition, the 50,000 warrants that were to expire on August 17,
2001 were extended to November 17, 2005.
As a result of the aforesaid modifications, including the repricing of the
warrants to the investors and to the investment banker and the additional grant
of warrants to the investor, the Company has recorded a deemed dividend in the
amount of $1,196,667, to reflect the additional benefit created for these
certain investors. The fair value of the repriced warrants was calculated as a
difference measured between (1) the fair value of the modified warrant
determined in accordance with the provisions of SFAS No. 123, and (2) the value
of the old warrant immediately before its terms are modified, determined based
on the shorter of (a) its remaining expected life or (b) the expected life of
the modified option. The deemed dividend increased the loss applicable to common
stockholders in the calculation of basic and diluted net loss per share for the
year ended December 31, 2001, without any effect on total shareholder's equity.
3. As part of the investment agreement in May 2001 (see Note 10.b.5), the
Company issued to the investors a total of 2,696,971 warrants to purchase shares
of common stock at a price of $3.22 per share; these warrants are exercisable by
the holder at any time after November 8, 2001 and will expire on May 8, 2006.
The Company also issued to a financial consultant that provided investment
banking services concurrently with this transaction a total of 125,000 warrants
to purchase shares of common stock at a price of $3.22 per share; these warrants
are exercisable by the holder at any time and will expire on June 12, 2006. In
addition the Company paid approximately $562,000 in cash, which was recorded as
deduction from additional paid in capital.
f. Stock option plans:
1. Options to employees and others (except consultants)
a. The Company has adopted the following stock option plans, whereby options may
be granted for purchase of shares of the Company's common stock. Under the terms
of the employee plans, the Board of Directors or the designated committee grants
options and determines the vesting period and the exercise terms.
1) 1991 Employee Option Plan - 2,115,600 shares reserved for issuance, of which
33,692 are available for future grants to employees as of December 31, 2001.
F-23
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
2) 1993 Employee Option Plan - as amended, 4,200,000 shares reserved for
issuance, of which 300,526 are available for future grants to employees as of
December 31, 2001.
3) 1998 Employee Option Plan - as amended, 4,750,000 shares reserved for
issuance, of which 2,846,388 are available for future grants to employees and
consultants as of December 31, 2001.
4) 1995 Non-Employee Director Plan - 1,000,000 shares reserved for issuance, of
which 680,000 are available for future grants to directors as of December 31,
2001.
b. Under these plans, options generally expire no later than 10 years from the
date of grant. Each option can be exercised to purchase one share, conferring
the same rights as the other common shares. Options that are cancelled or
forfeited before expiration become available for future grants. The options
generally vest over a three-year period (33.3% per annum).
c. A summary of the status of the Company's plans and other share options
(except for options granted to consultants) granted as of December 31, 2001,
2000 and 1999, and changes during the years ended on those dates, is presented
below:
2001 2000 1999
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
AMOUNT PRICE AMOUNT PRICE AMOUNT PRICE
------------ ------------ -------------- ----------- ------------ ------------
$ $ $
------------ ------------ ------------
Options outstanding at
beginning of year 2,624,225 $ 3.82 2,820,679 $ 3.44 2,964,255 $ 3.70
Changes during year:
Granted (1) (3) 2,172,314 $ 1.55 1,598,233 $ 4.58 496,475 $ 1.56
Exercised(4) (2) (159,965) $ 1.31 (1,715,628) $ 3.84 - -
Forfeited or cancelled (396,346) $ 4.11 (79,059) $ 4.93 (640,051) $ 3.25
Repriced (2):
Old exercise price - - (310,000) $ 4.95 - -
New exercise price - - 310,000 $ 4.95 - -
------------ ------------ -------------- ------------ ------------- ------------
Options outstanding at
end of year 4,240,228 $ 2.74 2,624,225 $ 3.82 2,820,679 $ 3.44
============ ============ ============== ============ ============= ============
Options exercisable at
end of year 2,643,987 $ 2.75 1,078,332 $ 3.81 2,082,390 $ 3.91
============ ============ ============== ============ ============= ============
(1) Includes 1,189,749, 870,000 and 182,500 options granted to related parties
in 2001, 2000 and 1999, respectively.
(2) On May 25, 2000, the Company repriced downwards 150,000 options from $6.60
per share to $4.95. The Company also repriced upward 160,000 options held by the
same options holder from $3.375 per share to $4.95. The options holder
immediately exercised those options. In accordance with FIN 44 the downward
repricing resulted in a variable plan accounting, however, due to the immediate
exercise the Company recorded a compensation expense in the amount of $ 26,250
at that date only.
(3) The Company recorded deferred stock compensation for options issued with an
exercise price below the fair value of the common stock in the amount of $18,000
and $37,924 as of December 31, 2001 and 2000, respectively. Deferred stock
F-24
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
compensation is amortized and recorded as compensation expenses ratably over the
vesting period of the option. The stock compensation expense that has been
charged in the consolidated statements of operations in respect of options to
employees in 2001, 2000 and 1999, was $17,240, $20,684 and $0, respectively.
(4) In December 2001, the Company exercised 33,314 options for which the
exercise price was not paid at the exercise date. The Company recorded the owed
amount of $43,308 as "Note receivable from shareholders" in the statement of
shareholders' equity. In accordance with EITF 95-16, since the original option
grant did not permit the exercise of the options through loans, and due to the
Company's history of granting non-recourse loans, this postponement in payments
of the exercise price resulted in a variable plan accounting. However, the
Company did not record any compensation due to the decrease in the market value
of the Company's shares during 2001.
d. The options outstanding as of December 31, 2001 have been
separated into ranges of exercise price, as follows:
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
--------------------------------------------- --------------------------------------------------------------
AMOUNT OUTSTANDING WEIGHTED WEIGHTED AMOUNT EXERCISABLE
RANGE OF AT DECEMBER 31, AVERAGE REMAINING AVERAGE EXERCISE AT DECEMBER 31, WEIGHTED AVERAGE
EXERCISE PRICES 2001 CONTRACTUAL LIFE PRICE 2001 EXERCISE PRICE
- ------------------- --------------------- --------------------- -------------------- ------------------- -------------------
$ YEARS $ $
- ------------------- --------------------- -------------------- -------------------
0.3-2 2,268,819 9.01 1.38 1,389,764 1.35
3-4 463,909 4.79 2.99 406,961 2.99
4-6 1,437,500 8.40 4.58 787,262 4.68
6-8 60,000 3.02 7.43 50,000 7.53
8- 10,000 5.75 9.06 10,000 9.06
--------------------- --------------------- -------------------- ------------------- -------------------
4,240,228 8.25 2.74 2,643,987 2.75
===================== ===================== ==================== =================== ====================
e. Pro forma information under SFAS No. 123:
Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123 (for grants issued after December 1994), and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant, using the Black-Scholes Option Valuation Model, with the
following weighted-average assumptions
2001 2000 1999
--------------- --------------- ----------------
Dividend yield 0% 0% 0%
Expected volatility 82% 95% 120%
Risk-free interest 3.5-4.5% 6.5% 5.5%
Expected life of up to 3 years 10 years 10 years
Weighted-average fair values and exercise prices of options on dates of grant
are as follows:
F-25
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
EQUALS MARKET PRICE EXCEEDS MARKET PRICE LESS THAN MARKET PRICE
-------------------------------- --------------------------------- ---------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------- ---------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
--------- ---------- --------- --------- --------- ---------- ---------- --------- ---------
Weighted average $ 1.579 $ 4.580 $ 1.560 $ 1.466 $ 7.125 - $ 1.30 $ 5.270 -
exercise prices
Weighted average
fair value on
grant date $ 0.50 $ 4.120 $ 1.320 $ 0.56 $ 3.760 - $ 0.79 $ 6.600 -
Pro forma results:
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
AS PRO- AS PRO- AS PRO-
REPORTED FORMA REPORTED FORMA REPORTED FORMA
------------- -------------- -------------- -------------- -------------- -------------
U.S. DOLLARS
-----------------------------------------------------------------------------------------
Net loss
attributable to
shareholders of
common stock $(18,4823,455) $ (21,372,601) $ (11,980,958) $ (14,006,038) $ (6,915,688) $ (8,367,584)
============= ============== ============== ============== ============== =============
Basic and diluted )
net loss per share $ (0.76) $ (0.88) $ (0.62) $ (0.73) $ (0.48) $ (0.58
============= ============== ============== ============== ============== =============
2. Options issued to consultants:
a. The Company's outstanding options to consultants as of December 31, 2001, are as follows:
2001 2000 1999
-------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
AMOUNT PRICE AMOUNT PRICE AMOUNT PRICE
------------- ----------- -------------- ----------- ------------ --------------
$ $ $
------------ ------------ ------------
Options outstanding at 175,786 $ 6.57 141,814 $ 3.09 27,286 $ 6.26
beginning of year
Changes during year:
Granted (1) 130,000 $ 6.02 198,500 $ 5.86 114,528 $ 2.33
Exercised (60,000) $ 5.13 (164,528) $ 2.72 - -
Repriced (2):
Old exercise price (56,821) $ 9.44 - $ - - -
New exercise price 56,821 $ 4.78 - $ - - -
------------- -------------- ------------
Options outstanding at 9
end of year 245,786 $ 5.55 175,786 $ 6.56 141,814 $ 3.0
============= ============ ============== ============ ============ =============
Options exercisable at 9
end of year 125,786 $ 6.42 149,044 $ 6.80 141,814 $ 3.0
============= ============ ============== ============ ============ =============
(1) 120,000 options out of 130,000 options granted in 2001 to the Company's
selling and marketing consultants are subject to the achievement of the targets
specified in the agreements with these consultants. The measurement date for
these options has not yet occurred as these targets have not been met, in
accordance with EITF 96-18. When the targets will be achieved the Company would
record appropriate compensation upon the fair value at the same date at which
the targets will be achieved.
(2) During the year 2001 the Company repriced 56,821 options to its service
providers. The fair value of repriced warrants was calculated as a difference
measured between (1) the fair value of the modified warrants determined in
accordance with the provisions of SFAS 123, and (2) the value of the old warrant
F-26
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)
immediately before its terms were modified, determined based on the shorter of
(a) its remaining expected life or (b) the expected life of the modified option.
As a result of the repricing, the Company has recorded an additional
compensation at the amount of $21,704, and included this amount in marketing
expenses
b. The Company had accounted for its options to consultants under the fair value
method of SFAS No. 123 and EITF 96-18. The fair value for these options was
estimated using a Black-Scholes option-pricing model with the following
weighted-average assumptions:
2001 2000 1999
--------------- --------------- ----------------
Dividend yield 0% 0% 0%
Expected volatility 82% 95% 120%
Risk-free interest 3.5-4.5% 6.5% 5.5%
Contractual life of up to 10 years 5 years 10 years
c. In connection with the grant of stock options to consultants, the Company
recorded stock compensation expenses totaling $139,291 and $796,128 for the
years ended December 31, 2001 and 2000 respectively, and included these amounts
in marketing expenses.
3. Dividends:
In the event that cash dividends are declared in the future, such dividends will
be paid in U.S. dollars. The Company does not intend to pay cash dividends in
the foreseeable future.
4. Treasury Stock:
Treasury stock is the Company's common stock that has been issued and
subsequently reacquired. The acquisition of common stock is accounted for under
the cost method, and presented as reduction of stockholders' equity.
NOTE 11:- INCOME TAXES
a. Taxation of U.S. parent company (EFC):
As of December 31, 2001, EFC has operating loss carryforwards for U.S. federal
income tax purposes of approximately $7 million, which are available to offset
future taxable income, if any, expiring in 2015. Utilization of U.S net
operating losses may be subject to substantial annual limitations due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating loses before utilization.
b. Israeli subsidiary (EFL):
1. Tax benefits under the Law for the Encouragement of Capital Investments, 1959
(the "Investments Law"):
EFL's manufacturing facility has been granted "Approved Enterprise" status under
the Investments Law, and is entitled to investment grants from the State of
Israel of 38% on property and equipment located in Jerusalem, and 10% on
property and equipment located in its plant in Beit Shemesh, and to reduced tax
rates on income arising from the "Approved Enterprise," as detailed below.
F-27
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11:- INCOME TAXES (CONT.)
The approved investment program is in the amount of approximately $500,000. EFL
effectively operated the program during 1993, and is entitled to the tax
benefits available under the Investments Law. EFL is entitled to additional tax
benefits as a "foreign investment company," as defined by the Investments Law.
In 1995, EFL received approval for a second "Approved Enterprise" program for
investment in property and equipment, in the amount of approximately $6,000,000,
and approval for grants at the abovementioned rates, for these approved property
and equipment.
In 2000, EFL received approval for a third "Approved Enterprise" program for
investment in property and equipment, in the amount of approximately $4,500,000,
and approval for grants at the abovementioned rates, for these approved property
and equipment.
The entitlement to the above benefits is conditional upon the Company's
fulfilling the conditions stipulated by the Investments Law, regulations
published thereunder and the instruments of approval for the specific
investments in "approved enterprises." In the event of failure to comply with
these conditions, the benefits may be canceled and the Company may be required
to refund the amount of the benefits, in whole or in part, including interest.
As of December 31, 2001, according to the Company's management, the Company
fulfilled all conditions.
The main tax benefits available to EFL are:
a) Reduced tax rates:
During the period of benefits (seven to ten years), commencing in the first year
in which EFL earns taxable income from the "Approved Enterprise," a reduced
corporate tax rate of between 10% and 25% (depending on the percentage of
foreign ownership, based on present ownership percentages of 15%) will apply,
instead of the regular tax rates (see 4, below).
The period of tax benefits, detailed above, is subject to limits of 12 years
from the commencement of production, or 14 years from the approval date,
whichever is earlier. Hence, the first program will expire in the year 2004 and
the second in the year 2008. The commencement of production according to the
third program has not been determined yet by the investment center and so there
is no ability to determine the period of the tax benefits according to this
program. The benefits have not yet been utilized since the Company has no
taxable income, since its incorporation.
b) Accelerated depreciation:
EFL is entitled to claim accelerated depreciation in respect of machinery and
equipment used by the "Approved Enterprise" for the first five years of
operation of these assets.
2. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985
Results for tax purposes are measured in real terms of earnings in NIS after
certain adjustments for increases in the Consumer Price Index. As explained in
Note 2b, the financial statements are presented in U.S. dollars. The difference
between the annual change in the Israeli consumer price index and in the
NIS/dollar exchange rate causes a difference between taxable income and the
income before taxes shown in the financial statements. In accordance with
paragraph 9(f) of SFAS No. 109, EFL has not provided deferred income taxes on
this difference between the reporting currency and the tax bases of assets and
liabilities.
F-28
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11:- INCOME TAXES (CONT.)
3. Tax benefits under the Law for the Encouragement of Industry (Taxation),
1969:
EFL is an "industrial company," as defined by this law and, as such, is entitled
to certain tax benefits, mainly accelerated depreciation, as prescribed by
regulations published under the inflationary adjustments law, the right to claim
public issuance expenses and amortization of know-how, patents and certain other
intangible property rights as deductions for tax purposes.
4. Tax rates applicable to income from other sources:
Income from sources other than the "Approved Enterprise," is taxed at the
regular rate of 36%.
5. Tax rates applicable to income distributed as dividends by EFL:
The effective taxes on income distributed by EFL to its parent company, EFC,
would increase as a result of the Israeli withholding tax imposed upon such
dividend distributions. The overall effective tax rate on such distribution
would be 28%, in respect to income arising from EFL's "Approved Enterprise," and
44% in respect of other income. EFL does not have any earnings available for
distribution as dividend, nor does it intend to distribute any dividends in the
foreseeable future.
6. Tax loss carryforwards:
As of December 31, 2001, EFL has operating loss carryforwards for Israeli tax
purposes of approximately $75 million, which are available, indefinitely, to
offset future taxable income.
c. European subsidiaries:
Income of the European subsidiaries, which is derived from intercompany
transactions, is based on the tax laws in their countries of domicile.
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets resulting from tax loss carryforward are as
follows:
DECEMBER 31,
-----------------------------------
2001 2000
---------------- ---------------
U.S. DOLLARS
-----------------------------------
Operating loss carryforward $ 12,162,581 $ 8,261,110
Reserve and allowance 477,522 726,640
---------------- ---------------
Net deferred tax asset before valuation allowance 12,640,103 8,987,750
Valuation allowance (12,640,103) (8,987,750)
---------------- ---------------
$ - $ -
================ ===============
F-29
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11:- INCOME TAXES (CONT.)
The Company and its subsidiaries provided valuation allowances in
respect of deferred tax assets resulting from tax loss carryforwards and other
temporary differences. Management currently believes that it is more likely than
not that the deferred tax regarding the loss carryforwards and other temporary
differences will not be realized. The change in the valuation allowance as of
December 31, 2001 was $3,652,353.
e. Loss before taxes on income:
Year ended December 31
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
U.S. dollars
---------------------------------------------------------------
Domestic $ (5,828,828) $(2,021,661) $ (232,205)
Foreign (11,457,960) (9,959,297) (6,677,466)
------------------- ------------------- -------------------
$(17,286,788) $ (11,980,958) $ (6,909,671)
=================== =================== ===================
NOTE 12:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development expenses, net (in 1999 included also COGS):
YEAR ENDED DECEMBER 31
----------------------------------------------
2001 2000 1999
--------------- --------------- --------------
U.S. DOLLARS
----------------------------------------------
Research and development costs $ 4,199,891 $ 5,546,519 $ 7,834,051
Less royalty-bearing grants 687,807 958,382 1,202,976
--------------- --------------- --------------
$ 3,512,084 $ 4,588,137 $ 6,631,075
=============== =============== ==============
b. Financial income, net:
Financial expenses:
Interest, bank charges and fees $ (49,246) $ (67,480) $ (71,074)
Foreign currency
translation differences (16,003) (219,043) (32,661)
--------------- --------------- ---------------
(65,249) (286,523) (103,735)
--------------- --------------- ---------------
Financial income:
Interest 327,828 830,704 293,784
--------------- --------------- ---------------
Total $262,579 $ 544,181 $ 190,049
=============== =============== ===============
F-30
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 13:- RELATED PARTY DISCLOSURES
Year ended December 31,
----------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
U.S.dollars
----------------------------------------------------------
Transactions:
General and administrative expenses $ 32,850 $ 28,800 $15,750
================= ================= =================
Financial income (expenses), net from notes
receivable and loan holders (see Notes 5
and 10.d.3) $(36,940) $ 230,924 $51,659
================= ================= =================
NOTE 14:- SEGMENT INFORMATION
a. General:
The Company and its subsidiaries operate primarily in three business segments
(see Note 1 for a brief description of the Company's business) 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 currently operates in three business segments: Electric Vehicles,
Consumer Batteries and Defense and Safety Products.
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies. The
Company evaluates performance based upon two primary factors, one is the
segment's operating income and the other is based on the segment's contribution
to the Company's future strategic growth.
F-31
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14:- SEGMENT INFORMATION (CONT.)
b. The following is information about reported segment gains, losses and assets:
DEFENSE
ELECTRIC AND SAFETY CONSUMER ALL
VEHICLES PRODUCTS BATTERIES OTHER TOTAL
-------- -------- --------- ----- -----
U.S. DOLLARS
-----------------------------------------------------------------------------------
2001:
Revenues from outside customers $ 894,045 $ 1,199,587 $ 1,939,256 $ - $ 4,032,888
Depreciation expense (242,678) (61,760) (449,995) (225,575) (980,008)
Direct expenses (1) (907,286) (1,388,215) (13,816,934) (4,489,812) (20,602,247)
--------------- ----------------- ----------------- ---------------- ---------------
Segment gross loss $ (255,919) $ (250,388) $ (12,327,673) $ (4,715,387) (17,549,367)
=============== ================= ================= ================
Financial income, net 262,579
---------------
Net loss $(17,286,788)
===============
Segment assets (2) $ 665,736 $ 645,378 $ 8,180,795 $ 719,953 $ 10,211,862
============= ================= ================= ================ ===============
Expenditures for segment assets $ - $ 21,376 $ 969,278 $ 323,985 $ 1,314,639
============= ================= ================= ================ ===============
2000:
Revenues from outside customers $ 310,441 $1,168,054 $ 2,563,621 $ 11,446 $ 4,053,562
Depreciation expense (249,796) (60,612) (239,668) (203,834) (753,910)
Direct expenses (1) (472,770) (1,120,020) (10,246,938) (3,985,063) (15,824,791)
------------- ----------------- ----------------- ---------------- ---------------
Segment gross loss $ (412,125) $ (12,578) $ (7,922,985) $ (4,177,451) (12,525,139)
============= ================= ================= ================
Financial income, net 544,181
---------------
Net loss $ (11,980,958)
===============
Segment assets (2) $ 908,414 $ 556,863 $ 7,527,160 $ 662,575 $ 9,655,012
================ ============== ================= ================ ===============
Expenditures for segment assets $ - $ 7,671 $ 2,767,083 $ 310,988 $ 3,085,742
================ ============== ================= ================ ===============
1999:
Revenues from outside customers $ 1,229,854 $ 979,123 $ 254,991 $ 230,030 $ 2,693,998
Depreciation expense (234,550) (85,291) (149,259) (241,659) (710,759)
Direct expenses (1) (2,659,478) (1,242,652) (3,007,398) (2,173,431) (9,082,959)
---------------- -------------- ----------------- ---------------- ---------------
Segment gross loss $ (1,664,174) $ (348,820) $ (2,901,666) $ (2,185,060) (7,099,720)
================ ============== ================= ================
Taxes on income (6,017)
Financial income, net 190,049
---------------
Net loss $ (6,915,688)
===============
Segment assets $ 1,129,771 $ 360,553 $ 1,516,519 $ 1,158,926 $ 4,165,769
================ ============== ================= ================ ===============
Expenditures for segment assets $ 221,808 $ 80,657 $ 942,450 $ 228,529 $ 1,473,444
================ ============== ================= ================ ===============
(1) Including sales and marketing, general and administrative expenses.
(2) Including property and equipment and inventory.
F-32
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14:- SEGMENT INFORMATION (CONT.)
c. Summary information about geographic areas:
The following presents total revenues according to end customers location for
the years ended December 31, 2001, 2000 and 1999, and long-lived assets as of
December 31, 2001, 2000 and 1999:
2001 2000 1999
----------------------------- --------------------------------- -------------------------------
Total Long-lived Total Long-lived Total Long-lived
revenues assets revenues assets revenues assets
------------- ------------- ---------------- --------------- -------------- ---------------
U.S. dollars
-------------------------------------------------------------------------------------------------
U.S.A. $ 2,055,773 $ 99,606 $ 2,664,105 $ 62,914 $ 2,282,643 $ 36,038
Germany 602,700 - 51,988 - 71,198 -
England 556,581 - 211,349 - 59,400 -
Other 817,834 $ 6,640,059 (* 1,126,120 (* 6,383,150 (* 280,757 (* 4,129,731
------------- ------------- ---------------- --------------- -------------- ---------------
$ 4,032,888 $6,739,665 $ 4,053,562 $ 6,446,064 $ 2,693,998 $ 4,165,769
============= ============= ================ =============== ============== ===============
* Reclassified
d. Revenues from major customers:
2001 2000 1999
----------------- ----------------- -----------------
%
-----------------------------------------------------------
Electric vehicles:
Customer A 12% - -
Customer B 10% 6% 45%
Defense and safety products:
Customer C 7% 7% 13%
Consumer batteries
Customer D - 36% -
NOTE 15:- SUBSEQUENT EVENTS
On January 18, 2002, the Company issued a total of 441,176 shares of its common
stock at a purchase price of $1.70 per share, or a total purchase price of
$750,000, to an investor.
On January 24, 2002, the Company issued a total of 1,600,000 shares of its
common stock at a purchase price of $1.55 per share, or a total purchase price
of $2,480,000, to a group of investors.
- - - - - - - -
F-33
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE TWO YEARS ENDED DECEMBER 31, 2001
- --------------------------------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------------------
2001 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------ --------------------------------------------------------------------
Net revenue................................. $ 725,959 $ 1,034,218 $ 1,214,115 $ 1,058,595
Gross loss.................................. $ (235,826) $ (1,219,621) $ (818,719) $ (761,855)
Net loss.................................... $ (3,424,964) $ (4,590,840) $ (4,410,556) $ (4,860,438)
Net loss per share - basic and diluted...... $ (0.16) $ (0.19) $ (0.19) $ (0.18)
Shares used in per share calculation........ 21,802,499 23,562,099 23,612,097 26,648,319
2000
------------------------------
Net revenue................................. $ 652,946 $ 632,541 $ 566,367 $ 2,201,708
Gross loss.................................. $ (1,423,902) $ (1,230,490) $ (1,211,023) $ (857,602)
Net loss.................................... $ (2,473,739) $ (2,860,494) $ (2,753,504) $ (3,893,221)
Net loss per share - basic and diluted...... $ (0.14) $ (0.15) $ (0.14) $ (0.19)
Shares used in per share calculation........ 17,166,343 18,935,208 20,231,991 20,843,030
F-34