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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 .
--------------
COMMISSION FILE NUMBER: 0-23336
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ELECTRIC FUEL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4302784
- --------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
632 BROADWAY, SUITE 1200, NEW YORK, NEW YORK 10012
- ----------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(646) 654-2107
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(Registrant's telephone number, including area code)
632 BROADWAY, SUITE 301, NEW YORK, NEW YORK 10012
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(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's common stock as of May 10,
2003 was 35,146,261.
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ELECTRIC FUEL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Interim Consolidated Financial Statements (Unaudited):
----------------------------------------------------------------
Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 ................................... 3-4
Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 .............. 5
Consolidated Statements of Changes in Stockholders' Equity during the Three-Month Period Ended
March 31, 2003 .................................................................................... 6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 .............. 7-8
Note to the Interim Consolidated Financial Statements ................................................. 9
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 14
----------------------------------------------------------------------------------------------
Item 3 - Quantitative and Qualitative Disclosures about Market Risk ................................... 37
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PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ............................................................. 38
-----------------------------------------
SIGNATURES ...................................................................................................... 39
Page 2
ELECTRIC FUEL CORPORATION
Item 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS (U.S. Dollars)
- --------------------------------------------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002*
ASSETS (Unaudited) (Audited)
Current Assets:
Cash and cash equivalents................................................ $ 1,862,280 $ 1,457,526
Certificates of deposit due within one year.............................. 634,101 633,339
Trade receivables, net of allowance for doubtful accounts in the
amount of $42,886 and $40,636 as of March 31, 2003 and December 31,
2002, respectively..................................................... 5,373,289 3,776,195
Other receivables........................................................ 1,466,166 1,032,311
Inventories.............................................................. 1,639,935 1,711,479
Assets of discontinued operations........................................ 28,357 349,774
---------- -----------
TOTAL CURRENT ASSETS........................................... 11,004,128 8,960,624
---------- -----------
Severance pay fund........................................................... 930,253 1,025,071
PROPERTY AND EQUIPMENT, NET.................................................. 2,415,082 2,555,249
GOODWILL..................................................................... 4,970,510 4,954,981
OTHER INTANGIBLE Assets, NET................................................. 2,255,686 2,567,457
----------- -----------
$21,575,659 $20,063,382
=========== ===========
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The accompanying notes are an integral part of the Financial Statements.
Page 3
ELECTRIC FUEL CORPORATION
CONSOLIDATED BALANCE SHEETS (U.S. Dollars)
- --------------------------------------------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002*
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables ............................................................... $ 3,308,566 $ 2,900,117
Other accounts payable and accrued expenses .................................. 1,887,114 2,009,109
Current portion of promissory note due to purchase of a subsidiary ........... 450,000 1,200,000
Short term loans ............................................................. 115,721 108,659
Liabilities of discontinued operations ....................................... 741,662 1,053,799
------------- -------------
Total current liabilities ......................................................... 6,503,063 7,271,684
LONG TERM LIABILITIES
Accrued severance pay ........................................................ 2,943,631 2,994,233
Convertible debenture ........................................................ 1,799,000 --
Promissory note due to purchase of a subsidiary .............................. 482,332 516,793
------------- -------------
Total long-term liabilities ....................................................... 5,224,963 3,511,026
MINORITY RIGHTS ................................................................... 286,399 243,172
SHAREHOLDERS' EQUITY:
Share capital -
Common stock - $0.01 par value each;
Authorized: 100,000,000 shares as of March 31, 2003 and December 31,
2002; Issued: 35,314,293 shares as of March 31, 2003 and December
31, 2002; Outstanding - 35,146,261 shares as of March 31, 2003 and
December 31, 2002 ........................................................ 357,017 357,017
Preferred shares - $0.01 par value each;
Authorized: 1,000,000 shares as of March 31, 2003 and December 31,
2002; No shares issued and outstanding as of March 31, 2003 and
December 31, 2002 ........................................................ -- --
Additional paid-in capital ................................................... 115,976,670 114,082,584
Deferred stock compensation .................................................. (12,000) (12,000)
Accumulated deficit .......................................................... (102,060,702) (100,673,619)
Treasury stock, at cost (common stock - 555,333 shares as of March 31,
2003 and December 31, 2002) ................................................ (3,537,106) (3,537,106)
Notes receivable from shareholders ........................................... (1,181,675) (1,177,589)
Accumulated other comprehensive loss ......................................... 19,029 (1,786)
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TOTAL SHAREHOLDERS' EQUITY ........................................................ 9,561,233 9,037,501
------------- -------------
$ 21,575,658 $ 20,063,382
============= =============
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The accompanying notes are an integral part of the Financial Statements.
Page 4
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (U.S. Dollars)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
Revenues ......................................................... $ 4,033,453 $ 570,545
Cost of revenues ................................................. 2,633,719 383,628
------------ ------------
Gross profit ..................................................... 1,399,734 186,917
Research and development ......................................... 358,039 100,500
Selling and marketing expenses ................................... 703,987 56,940
General and administrative expenses .............................. 1,012,756 1,248,451
Amortization of intangible assets and in-process ................. 311,771 --
------------ ------------
2,386,552 1,405,892
------------ ------------
Operating loss ................................................... (986,818) (1,218,975)
Financial (expenses) income, net ................................. (261,075) 64,163
------------ ------------
Loss before minority interest in profit of a subsidiary .......... (1,247,893) (1,154,811)
Minority interest in profit of a subsidiary ...................... (43,228) --
------------ ------------
Net loss from continuing operations .............................. (1,291,121) (1,154,811)
Net loss from discontinued operations ............................ (95,962) (2,159,398)
------------ ------------
Net loss for the period .......................................... $ (1,387,083) $ (3,314,209)
============ ============
Basic and diluted net loss per share from continuing operations .. $ (0.04) $ (0.04)
============ ============
Basic and diluted net loss per share from discontinued operations $ (0.00) $ (0.07)
============ ============
Combined basic and diluted net loss per share .................... $ (0.04) $ (0.11)
============ ============
Weighted average number of shares used in computing basic and
diluted net loss per share .................................... 34,758,960 30,149,210
============ ============
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The accompanying notes are an integral part of the Financial Statements.
Page 5
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (U.S. DOLLARS)
- --------------------------------------------------------------------------------
COMMON STOCK
--------------------------- ADDITIONAL DEFERRED
PAID-IN STOCK ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------------- ------------- ------------- --------------
BALANCE AT JANUARY 1, 2003 - .... 35,314,293 $ 357,017 $ 114,082,584 $ (12,000) $(100,673,619)
AUDITED
CHANGES DURING THE THREE-MONTH
PERIOD ENDED MARCH 31, 2003
Compensation related to
beneficial conversion
feature of convertible
debentures ................. 1,290,000
Compensation related to
issuance of warrants to
holders of convertible
debenture .................. 600,000
Interest accrued on notes
receivable from shareholders 4,086
Loss ......................... (1,387,083)
------------- ------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 2003
UNAUDITED ..................... 35,314,293 $ 357,017 $ 115,976,670 $ (12,000) $(102,060,702)
============= ============= ============= ============= =============
NOTES
RECEIVABLE ADJUSTMENTS
TREASURY FROM DUE TO CHANGES IN
STOCK SHAREHOLDERS EXCHANGE RATES TOTAL
------------- ------------- ---------------- -------------
BALANCE AT JANUARY 1, 2003 -
AUDITED ....................... $ (3,537,106) $ (1,177,589) $ (1,786) $ 9,037,501
CHANGES DURING THE THREE-MONTH
PERIOD ENDED MARCH 31, 2003
Compensation related to
beneficial conversion
feature of convertible
debentures
Compensation related to
issuance of warrants to .... $ 1,290,000
holders of convertible
debenture
Interest accrued on notes
receivable from shareholders $ 600,000
Loss.......................... (4,086) --
20,815 $ (1,366,268)
------------- ------------- ------------- -------------
BALANCE AT MARCH 31, 2003
UNAUDITED ..................... $ (3,537,106) $ (1,181,675) $ 19,029 $ 9,561,233
============== ============== ============= =============
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The accompanying notes are an integral part of the Financial Statements
Page 6
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (U.S. DOLLARS)
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THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss for the period ............................................................... (1,387,083) (3,314,209)
Net loss for the period from discontinued operations .................................. 95,962 2,159,398
Adjustments required to reconcile net loss to net cash used in operating
activities:
Depreciation ........................................................................ 180,591 139,500
Amortization of intangible assets ................................................... 311,771 --
Amortization of deferred financial expenses ......................................... 78,750 --
Amortization of compensation related to warrants issued to the holders
of convertible debentures ......................................................... 189,000 --
Stock-based compensation due to shares granted to suppliers ......................... -- 185,450
Profit to minority .................................................................. 43,227 --
Write-off of inventory .............................................................. 20,000 --
Impairment of fixed assets .......................................................... 62,332 --
Interest income accrued on promissory notes due to purchase of
subsidiary ........................................................................ (34,461) --
Interest accrued on certificates of deposit due within one year ..................... (762) --
Capital gain from sale of property and equipment .................................... (1,576) (4,257)
Write-off of notes receivable from stockholders ..................................... -- 255,275
Accrued severance pay, net .......................................................... 44,216 111,135
Changes in operating asset and liability items:
Decrease (increase) in trade receivables ............................................ (1,597,094) (46,834)
Decrease (increase) in accounts receivable .......................................... (422,262) 3,955
(Increase) decrease in inventories .................................................. 51,544 12,359
Increase (decrease) in trade payables ............................................... 408,449 (323,420)
Increase (decrease) in accounts payable and accruals ................................ (120,060) (85,149)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING OPERATIONS ...................... (2,077,456) (906,797)
(RECONCILED FROM CONTINUING OPERATIONS)
NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS
(RECONCILED FROM DISCONTINUED OPERATIONS) .......................................... (171,737) (1,889,831)
----------- -----------
Net cash used in operating activities ................................................. (2,249,193) (2,796,628)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of promissory note related to purchase of subsidiary ...................... (750,000) --
Purchase of fixed assets ............................................................ (138,622) (121,249)
Loans granted to stockholders ....................................................... -- (4,528)
Proceeds from sale of property and equipment ........................................ 5,402 4,257
Decrease in demo inventories, net ................................................... 32,040 --
Net cash used in discontinued operations ............................................ -- (195,310)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................................................. (851,180) (316,830)
----------- -----------
FORWARD .................................................................................. $(3,100,373) (3,113,458)
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The accompanying notes are an integral part of the Financial Statements.
Page 7
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (U.S. DOLLARS)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
2003 2002
------------- ------------
FORWARD .................................................................................... $ (3,100,373) $(3,113,458)
------------ ------------
Cash flows from financing activities:
Increase in short-term credit from banks .............................................. 7,062 --
Proceeds from issuance of share capital, net .......................................... -- 3,230,000
Proceeds from exercise of options and warrants ........................................ -- 21,450
Payment of interest and principal on notes receivable from shareholders ............... -- 43,308
Payment on capital lease obligation ................................................... (1,935) --
Issuance of convertible debenture ..................................................... 3,500,000 --
------------ ------------
Net cash provided by financing activities .................................................. 3,505,127 3,294,758
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS ...................................................... 404,754 181,300
BALANCE OF CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD ........................ 1,457,526 12,671,754
------------ ------------
BALANCE OF CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD .............................. $ 1,862,280 $ 12,853,054
============ ============
SUPPLEMENTARY INFORMATION ON NON-CASH TRANSACTIONS:
Issuance of share capital (including additional paid-in capital) in respect
of notes receivable from stockholders ................................................... $ -- $ 144,875
============ ============
Exercise of options and warrants against notes receivable .................................. $ -- $ 79,845
============ ============
Compensation related to issuance of warrants in connection with convertible
debenture and beneficial conversion feature of convertible debentures ...................... $ 1,890,000 $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION - CASH (PAID) RECEIVED
DURING THE PERIOD FOR:
Interest .......................................................................... $ (7,384) $ 73,492
============ ============
The accompanying notes are an integral part of the Financial Statements.
Page 8
NOTE TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
GENERAL
The interim consolidated financial statements of Electric Fuel Corporation
reflect all adjustments, consisting only of normal recurring accruals, which
are, in the opinion of our management, necessary for a fair statement of results
for the periods presented. Operating revenues and expenses for any interim
period are not necessarily indicative of results for a full year.
For the purpose of these interim consolidated financial statements, certain
information and disclosures normally included in financial statements have been
condensed or omitted. These unaudited statements should be read in conjunction
with our audited consolidated financial statements and notes thereto for the
year ended December 31, 2002.
NOTE 1: BASIS OF PRESENTATION
a. Company:
Electric Fuel Corporation ("EFC," "Electric Fuel," or the "Company") and its
subsidiaries are engaged in the design, development and commercialization of its
proprietary zinc-air battery technology for defense and security products,
military applications and electric vehicles. The Company is primarily operating
through Electric Fuel Ltd. ("EFL") a wholly-owned subsidiary based in Beit
Shemesh, Israel, through IES Interactive Training Systems, Inc., a wholly-owned
subsidiary based in Littleton, Colorado, and through M.D.T. Protective
Industries, Ltd., a majority-owned subsidiary based in Lod, Israel. The
Company's production is primarily located in Auburn, Alabama, and its research
and development are primarily located in Israel.
b. Accounting:
The accompanying condensed interim consolidated financial statements have been
prepared by Electric-Fuel Corporation in accordance with generally accepted
accounting principles in the United States pursuant to the rules and regulations
of the Securities and Exchange Commission, and include the accounts of
Electric-Fuel Corporation and its subsidiaries collectively. Certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States,
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company, the unaudited financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the financial position at March 31, 2003 and the operating
results and cash flows for the three months ended March 31, 2003 and 2002. These
financial statements and notes should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto, included in the
Company's annual report on Form 10-K, as amended, filed with the Securities and
Exchange Commission.
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2003.
c. 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 Cer-
9
ELECTRIC FUEL CORPORATI0N
tain 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. Under Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), pro-forma information regarding net income and
income per share is required, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123.
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.
The fair value for the options to employees was estimated at the date of grant,
using the Black-Scholes Option Valuation Model, with the following
weighted-average assumptions: risk-free interest rates of 3.5%, 3.5-4.5%, and
6.5% for 2002, 2001 and 2000, respectively; a dividend yield of 0.0% for each of
those years; a volatility factor of the expected market price of the Common
Stock of 0.64 for 2002, 0.82 for 2001 and 0.95% for 2000; and a weighted-average
expected life of the option of 10 years for 2002, 2001 and 2000.
The following table illustrates the effect on net income and earnings per share,
assuming that the Company had applied the fair value recognition provision of
SFAS No. 123 on its stock-based employee compensation:
THREE MONTHS ENDED MARCH 31,
2003 2002
-------------- ------------
Net loss as reported $ (1,387,083) $(3,314,209)
Add: Stock-based compensation expenses
included in reported net loss (551,397) (637,561)
-------------- -----------
Pro forma net loss $ (1,938,480) $(3,951,770)
============== ===========
Loss per share:
Basic and diluted, as reported $ (0.04) $ (0.11)
============== ===========
Diluted, pro form $ (0.06) $ (0.13)
============== ===========
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is determined
using the average cost method. The Company periodically evaluates the quantities
on hand relative to current and historical selling prices and historical and
projected sales volume. Based on these evaluations, provisions are made in each
period to write down inventory to its net realizable value. Inventories are
composed of the following:
MARCH 31, 2003 DECEMBER 31, 2002
----------------- -----------------
(Unaudited) (Audited)
Raw materials ................... $ 943,314 $ 893,666
Work-in-progress ................ 249,126 296,692
Finished goods .................. 447,495 521,121
---------- ----------
$1,639,935 $1,711,479
========== ==========
10
ELECTRIC FUEL CORPORATION
Inventory is presented net of inventory for retail sales pf consumer battery
products, which is presented in Assets of Discontinued Operations. In the third
quarter of 2002 the Company wrote off inventory for retail sales of consumer
battery products in the amount of $2.45 million due to discontinuation of this
segment.
NOTE 3: IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" which addresses significant issues regarding the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 requires
that costs associated with exit or disposal activities be recognized when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is effective for all exit or disposal activities initiated
after December 31, 2002. The adoption of SFAS No. 146 does not have a material
impact on the Company's results of operations or financial position.
In November 2002, the EITF published Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables," or EITF Issue No. 00-21, which
addresses how to determine whether a revenue arrangement involving multiple
deliverables contains more than one unit of accounting for the purposes of
revenue recognition and how the revenue arrangement consideration should be
measured and allocated to the separate units of accounting. EITF Issue No. 00-21
applies to all revenue arrangements that we enter into after June 30, 2003. The
Company does not expect the adoption of EITF Issue No. 00-21 to have a material
impact on our financial condition or results of operations.
In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No., or FIN, 46, "Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin, or ARB, No. 51." FIN 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
parties involved. Variable interest entities that effectively disperse risk will
not be consolidated unless a single party holds an interest or combination of
interests that effectively recombines risks that were previously dispersed. FIN
46 also requires enhanced disclosure requirements related to variable interest
entities. FIN 46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before February
1, 2003.
NOTE 4: SEGMENTS INFORMATION
a. General:
The Company and its subsidiaries operate primarily in two business segments and
follow the requirements of SFAS No. 131.
The Company previously managed its business in three reportable segments
organized on the basis of differences in its related products and services. With
the discontinuance of Consumer Batteries segment and acquiring two subsidiaries
during 2002, two reportable segments remain:
11
ELECTRIC FUEL CORPORATION
Electric Fuel Batteries, and Defense and Security Products. As a result the
Company reclassified information previously reported in order to comply with new
segment reporting.
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.
b. The following is information about reported segment gains, losses and assets
for the three months ended March 31, 2003 and 2002:
DEFENSE
ELECTRIC AND SAFETY
FUEL BATTERIES PRODUCTS TOTAL
--------------- ------------ ------------
THREE MONTHS ENDED MARCH 31, U.S. DOLLARS
- --------------------------------- ----------------------------------------------
2003:
Revenues from outside customers $ 828,645 $ 3,204,808 $ 4,033,453
2002:
Revenues from outside customers $ 570,545 $ - $ 570,545
c. Revenues from major customers:
2003 2002
----------------- -----------------
%
--------------------------------------
Electric Fuel Batteries:
Customer A 14% 39%
Customer B 1% 35%
Defense and Safety Products:
Customer C 24% -
Customer D 28% -
NOTE 5: CONVERTIBLE DEBENTURES
Pursuant to the terms of a Securities Purchase Agreement (the "SPA") dated
December 31, 2002, the Company issued and sold to a group of institutional
investors 9% secured convertible debentures due June 30, 2005 ("Debentures") in
an aggregate principal amount of $3.5 million. The Debentures were convertible
at any time prior to June 30, 2005 at a conversion price of $0.75 per share. In
April 2003, this conversion price was amended to $0.64 per share, and the
Debentures are hence now convertible into a maximum of 5,468,750 shares of
common stock.
As part of the SPA , the Company issued to the purchasers of its Debentures an
aggregate of 3,500,100 warrants, exercisable at prices ranging from $0.84 to
$0.93. In April 2003, the Company amended the warrants to adjust their exercise
prices to $0.64.
In determining whether the Debentures include a beneficial conversion option in
accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Continently Adjustable Conversion Ratios," and
EITF 00-27, the total proceeds were allocated to the Debentures and the
detachable warrants based on their related fair values. The fair value of these
12
ELECTRIC FUEL CORPORATION
warrants was determined using Black-Scholes pricing model, assuming a risk-free
interest rate of 3.5%, a volatility factor 64%, dividend yields of 0% and a
contractual life of five years.
In connection with these Debentures, the Company will record financial expenses
of approximately $600,000 and in connection with the warrants, the Company will
record financial expenses of approximately $1,290,000. The total of $1,890,000
will be amortized ratably over the life of the Debentures until June 30, 2005.
The Debentures are presented in the balance sheet as follows:
MARCH 31,2003
----------------
Unaudited
Principle amount................................................ $ 3,500,000
Compensation related to issuance of warrants and debenture...... (1,890,000)
Financial expenses related to amortization of compensation...... 189,000
----------------
Total debentures, net........................................... $ 1,799,000
================
Note 6: CONTINGENCIES
The Company has received a letter from the Israel Investment Center alleging,
without any specifics, that the Company has not abided by the terms of certain
of the Company's grants from them. The Company believes that it has fully
complied with all the terms of its grants, and it has set an appointment with
the Israel Investment Center to discuss the contents of their letter.
13
ELECTRIC FUEL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve inherent risks and uncertainties. When used in this discussion, the
words "believes," "anticipated," "expects," "estimates" and similar expressions
are intended to identify such forward-looking statements. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth elsewhere in this report. Please
see "Risk Factors," below, and in our other filings with the Securities and
Exchange Commission.
Electric Fuel(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 interim financial statements and notes thereto appearing elsewhere in
this Quarterly Report. We have rounded amounts reported here to the nearest
thousand, unless such amounts are more than 1.0 million, in which event we have
rounded such amounts to the nearest hundred thousand.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate our estimates and judgments, including those
related to revenue recognition, allowance for bad debts, and impairment of
intangible assets. 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 generate revenues primarily from sales of multimedia and interactive
digital training systems and use-of-force simulators specifically targeted for
law enforcement and firearms train-
14
ELECTRIC FUEL CORPORATION
ing and from service contracts related to such sales, from providing lightweight
armoring services of vehicles, and, to a lesser extent, from sale of zinc-air
battery products for defense applications and from development services and
long-term arrangements subcontracted by the U.S government. 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. We
do not grant a right of return to our customers. 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.
Revenues from development services are recognized using contract
accounting on a percentage of completion method, based on completion of
agreed-upon milestones and in accordance with the "Output Method" or based on
the time and material basis. Provisions for estimated losses on uncompleted
contracts are recognized in the period in which the likelihood of such losses is
determined.
INVENTORIES
We state our inventories at the lower of cost or market value.
Inventory write-offs and write-down provisions are provided to cover risks
arising from slow-moving items or technological obsolescence. Our reserves for
excess and obsolete inventory are primarily based upon forecasted demand for our
products, and any change to the reserves arising from forecast revisions would
be reflected in cost of sales in the period the revision is made.
GOODWILL
Goodwill represents the excess of cost over the fair value of the net
assets of businesses acquired.
As required by applicable accounting rules, we test goodwill for
impairment at least annually and between annual tests in certain circumstances,
and we write down goodwill when impaired, rather than amortizing it as previous
accounting standards required. Goodwill is tested for impairment by comparing
the fair value with its carrying value. Fair value is determined using
discounted cash flows, market multiples and market capitalization. Significant
estimates used in the methodologies include estimates of future cash flows,
future short-term and long-term growth rates, weighted average cost of capital
and estimates of market multiples for the reportable units.
The determination of the value of goodwill requires management to make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or the related
assumptions change in the future, we could be required to record impairment
charges. Any material change in our valuation of assets in the future and any
consequent adjustment for impairment could have a material adverse impact on our
future reported financial results.
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ELECTRIC FUEL CORPORATION
As a result of MDT and IES acquisitions, we recorded goodwill in the
amount of $5.0 million as of March 31, 2003.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in accordance with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of the carrying amount of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less selling costs. As of March 31, 2003, no
impairment losses have been identified.
The determination of the value of such long-lived and intangible assets
requires management to make assumptions regarding estimated future cash flows
and other factors to determine the fair value of the respective assets. If these
estimates or the related assumptions change in the future, we could be required
to record impairment charges. Any material change in our valuation of assets in
the future and any consequent adjustment for impairment could have a material
adverse impact on our future reported financial results.
As a result of MDT and IES acquisitions, we recorded intangible assets
in the amount of $2.3 million as of March 31, 2003.
BUSINESS COMBINATIONS
We have accounted for the combination with IES and MDT utilizing the
purchase method of accounting. The combination required management to estimate
the fair value of the assets acquired and liabilities assumed. These estimates
have been based on our business plans for the entity acquired. Should the actual
use of assets or resolution of obligations differ from our estimates, revisions
to the estimated fair values would be required. If a change in estimate occurs
after one year following the acquisition, the change would be recorded in our
statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS No. 146
requires that costs associated with exit or disposal activities be recognized
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is effective for all exit or disposal activities
initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146
to have a material impact on our results of operations or financial position.
In November 2002, the EITF published Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables," or EITF Issue No. 00-21, which
addresses how to deter-
16
ELECTRIC FUEL CORPORATION
mine whether a revenue arrangement involving multiple deliverables contains more
than one unit of accounting for the purposes of revenue recognition and how the
revenue arrangement consideration should be measured and allocated to the
separate units of accounting. EITF Issue No. 00-21 applies to all revenue
arrangements that we enter into after June 30, 2003. The Company does not expect
the adoption of EITF Issue No. 00-21 to have a material impact on our financial
condition or results of operations.
In January 2003, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No., or FIN, 46, "Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin, or ARB, No. 51."
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risk will not be consolidated unless a single party holds
an interest or combination of interests that effectively recombines risks that
were previously dispersed. FIN 46 also requires enhanced disclosure requirements
related to variable interest entities. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003.
RECENT DEVELOPMENTS
CECOM ORDER
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 placed from September through November 2003.
GENERAL
During the first quarter of 2003, we continued the process of
integrating our two new subsidiaries, IES and MDT, and we continued our focus on
increasing our activities in the defense and security sectors, following the
expansion of our battery development and procurement contracts with the US
Army's Communications Electronics Command (CECOM) and other defense-related
agencies. We also concentrated intensive efforts on various cost-cutting
strategies, including downsizing staff in areas showing lower productivity.
Our line of existing battery 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.
Our Electric Fuel Batteries 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
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ELECTRIC FUEL CORPORATION
a new generation of lightweight, 30 ampere-hours cells developed by us for both
military and future commercial products with high energy requirements.
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.
Under the terms of the contract, we will produce and supply the
BA-8180/U Zinc-Air Nonrechargeable Battery. BA-8180/U is the new Army
designation for Electric Fuel's Model FC Advanced Zinc-Air Power Pack, as it was
previously known during its development phase. In addition, we will supply three
types of electrical interface adapters for the BA-8180/U, including
equipment-specific adapters for the AN/PRC-119 SINCGARS and SINCGARS ASIP
tactical radio sets, and a generic interface for items of equipment that were
designed to interface with a BA-5590 or equivalent battery. Each of the three
interfaces was also assigned a national stock number (NSN) by CECOM. The
BA-8180/U was assigned an NSN in August 2002.
The BA-8180/U is a 12/24 volt, 800 watt-hour battery pack approximately
the size and weight of a notebook computer. The battery is based on a new
generation of lightweight, 30 ampere-hours cells that we developed over the last
five years with partial funding by CECOM. In extensive field testing, the
BA-8180/U battery typically provided 4 to 6 times the run time of a BA-5590, a
primary lithium battery pack widely used in the military.
Additionally, the Electric Fuel Batteries Division is continuing with
the introduction of the new emergency lights for the marine life jackets market.
Our Electric Fuel Batteries Division is also continuing its American
all-electric transit bus demonstration project, subcontracted by the Federal
Transit Administration (FTA). We successfully completed Phase I in June 2000 and
Phase II of the FTA program in July 2002, and have recently received approval of
subcontracting fees from the FTA to begin Phase III of the program, which will
focus on an evaluation of the performance of Zinc-Air battery propulsion systems
for transit buses; the installation of new advanced ultra capacitors; and the
implementation of an advanced control system for auxiliaries.
During the first quarter of 2003, 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.
We have experienced significant fluctuations in the sources and amounts
of our revenues and expenses, and we believe that the following comparisons of
results of operations for the periods presented do not necessarily provide a
meaningful indication of our development. Our research and development expenses
have been offset, to a limited extent, by the periodic receipt of research
grants from Israel's Office of the Chief Scientist. We expect that, because of
these and
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ELECTRIC FUEL CORPORATION
other factors, including our acquisitions of IES and MDT, our discontinuation of
certain of our operations, and general economic conditions and delays due to
legislation and regulatory and other processes and the development of competing
technologies, future results of operations may not necessarily be meaningfully
compared with those of current and prior periods. Thus, we believe that
period-to-period comparisons of its past results of operations should not
necessarily be relied upon as indications of future performance.
We have received a letter from the Israel Investment Center alleging,
without any specifics, that we have not abided by the terms of certain of our
grants from them. We believe that we have fully complied with all the terms of
our grants, and we have set an appointment with the Israel Investment Center to
discuss the contents of their letter.
We incurred significant operating losses for the years ended December
31, 2000, 2001 and 2002 and the first three months of 2003. While we expect to
continue to derive revenues from the sale of defense and security 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. 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.
The majority of financial transactions of MDT is in New Israel Shekels
("NIS") and a substantial portion of MDT's costs is incurred in NIS. Management
believes that the NIS is the functional currency of MDT. Accordingly, the
financial statements of MDT have been translated into U.S. dollars. All balance
sheet accounts have been translated using the exchange rates in effect at the
balance sheet date. Statement of operations amounts has been translated using
the average exchange rate for the period. The resulting translation adjustments
are reported as a component of accumulated other comprehensive loss in
shareholders' equity.
RESULTS OF OPERATIONS
PRELIMINARY NOTE
Results for the three months ended March 31, 2003 include the results
of IES and MDT for such period as a result of our acquisitions of these
companies early in the third quarter of 2002. The results of IES and MDT were
not included in our operating results for the three months ended March 31, 2002.
Accordingly, the following period-to-period comparisons should not necessarily
be relied upon as indications of future performance.
In addition, results are net of the operations of the retail consumer
battery products, which operations were discontinued in the third quarter of
2002.
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ELECTRIC FUEL CORPORATION
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002.
REVENUES. Revenues from continuing operations for the three months
ended March 31, 2003 totaled $4.0 million, compared to $571,000 million for the
comparable period in 2002, an increase of $3.5 million, or 607%. This increase
was primarily the result of the inclusion of IES and MDT in our results in 2003.
During the first quarter of 2003, we recognized revenues from the sale
of interactive use-of-force training systems (through our IES subsidiary), from
providing armoring services under vehicle armoring contracts (through our MDT
subsidiary), and from the sale of lifejacket lights, as well as under contracts
with the U.S. Army's CECOM for deliveries of batteries and for design and
procurement of production tooling and equipment. We also recognized revenues
from subcontracting fees received in connection with Phase III of the United
States Department of Transportation (DOT) program, which began October 2002. 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 III was $2 million,
50% of which was 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 2002, we derived revenues principally from the
sale of lifejacket lights, under contracts with the U.S. Army's CECOM for
deliveries of batteries and for design and procurement of production tooling and
equipment and from subcontracting fees received in connection with the DOT
program. We also recognized revenues from subcontracting fees received in
connection with Phase II of the United States Department of Transportation (DOT)
program, which began in the fourth quarter of 2001 and was completed in July
2002.
In the first quarter of 2003, revenues were $3.2 million for the
Defense and Security Products Division (compared to $0 in the first quarter of
2002, due to the inclusion of IES and MDT in our 2003 results, and $829,000 for
the Electric Fuel Batteries Division (compared to $571,000 in the first quarter
of 2002, an increase of $258,000, or 45%), due primarily to an increase in
revenues from CECOM batteries sold to the U.S. Army. Of the $3.2 million
increase in Defense and Security Products revenues, $2.0 million was
attributable to the inclusion of IES in our results in the first quarter of 2003
and $1.2 million was attributable to the inclusion of MDT in our results in the
first quarter of 2003.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues totaled $2.6
million during the first quarter of 2003, compared to $384,000 in the first
quarter of 2002, an increase of $2.3 million, or 587%, due to the inclusion of
IES and MDT in our 2003 results.
Direct expenses for our two divisions during the first quarter of 2003
were $2.9 million for the Defense and Security Products Division (compared to $0
in the first quarter of 2002, due to the inclusion of IES and MDT in our 2003
results), and $1.0 million for the Electric Fuel Batteries Division (compared to
$489,000 in the first quarter of 2002, an increase of $503,000, or 103%), due
primarily to an increase in sales and activities related to CECOM batteries.
Of the $2.9 million increase in Defense and Security Products direct
expenses, $1.7 million was attributable to the inclusion of IES in our results
in the first quarter of 2003 and $1.2 million was attributable to the inclusion
of MDT in our results in the first quarter of 2003.
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ELECTRIC FUEL CORPORATION
Gross profit was $1.4 million during the first quarter of 2003,
compared to $187,000 during the first quarter of 2002, an increase of $1.2
million, or 649%. This increase was the direct result of all factors presented
above, most notably the inclusion of IES and MDT in our 2003 results. In the
first quarter of 2003, IES contributed $970,000 to our gross profit, MDT
contributed $358,000, and our other product lines contributed $71,000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the first quarter of 2003 were $358,000, compared to $101,000 the first
quarter of 2002, an increase of $258,000, or 256%. This increase was the result
of the research and development activities that support the activities at our
CECOM facility in Auburn, Alabama, which accounted for $173,000 of the increase,
and the inclusion of IES and MDT, which accounted for $84,000 of the increase,
in our 2003 results.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the
first quarter of 2003 were $704,000, compared to $57,000 the first quarter of
2002, an increase of $647,000, or 1,136%. This increase was primarily
attributable to the following factors:
>> We had sales and marketing expenses in the first quarter of 2003
related to IES of $505,000, which we did not have the first quarter of
2002;
>> We had sales and marketing expenses in the first quarter of 2003
related to MDT of $76,000, which we did not have the first quarter of
2002; and
>> We incurred expenses for consultants in the amount of $55,000 in
connection with our CECOM battery program with the U.S. Army.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the first quarter of 2003 were $1.0 million compared to $1.2
million the first quarter of 2002, a decrease of $236,000, or 19%. This decrease
was primarily attributable to the write-down in 2002 of certain notes receivable
from stockholders and to certain expenses in 2002 related to options granted to
a financial consultant in the aggregate amount of $440,000, which were not
repeated in 2003, which decrease was partially offset by the inclusion of the
expenses of IES ($180,000) and MDT ($108,000) in our 2003 results.
FINANCIAL (EXPENSES) INCOME, NET. Financial (expenses) income, net of
interest expenses and exchange differentials, totaled approximately $(261,000)
in the first quarter of 2003 compared to $64,000 the first quarter of 2002, an
increase of $325,000. This increase in financial expenses was due primarily to
$88,000 in interest expense on our debentures during the first quarter of 2003,
and amortization of compensation related to the issuance of our debentures and
the warrants that we issued in connection with our debentures in the amount of
$189,000, which expenses had no equivalent during the first quarter of 2002.
INCOME TAXES. We and certain of our subsidiaries incurred net operating
losses during the first quarter of 2003 and 2001 and, accordingly, we were not
required to make any provision for income taxes. MDT had taxable income, but we
may use EFL's losses to offset MDT's income, and accordingly MDT has made no
provision for income taxes.
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ELECTRIC FUEL CORPORATION
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
totaled $312,000 in the first quarter of 2003, compared to $0 the first quarter
of 2002, due to amortization of intangibles assets related to our purchase of
IES and MDT in 2002. Of this $312,000 increase, $263,000 was attributable to
amortization of intangibles assets related to our purchase of IES and $49,000
was attributable to amortization of intangibles assets related to our purchase
of MDT.
NET LOSS FROM CONTINUING OPERATIONS. Due to the factors cited above, we
reported a net loss from continuing operations of $1.3 million in the first
quarter of 2003, compared to a net loss of $1.2 million the first quarter of
2002, an increase of $136,000, or 12%.
NET LOSS FROM DISCONTINUED OPERATIONS. In the third quarter of 2002, we
decided to discontinue operations relating to the retail sales of our consumer
battery products. Accordingly, all revenues and expenses related to this segment
have been presented in our consolidated statements of operations for the three
months ended March 31, 2003 in an item entitled "Loss from discontinued
operations."
Net loss from discontinued operations in the first quarter of 2003 was
$96,000, compared to $2.2 million the first quarter of 2002, a decrease of $2.1
million, or 96%.
NET LOSS. Due to the factors cited above, we reported a net loss of
$1.4 million in the first quarter of 2003, compared to a net loss of $3.3
million the first quarter of 2002, a decrease of $1.9 million, or 58%.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had cash and cash equivalents of approximately
$1.9 million, compared to $12.8 million as of March 31, 2002, a decrease of
$10.9 million. The decrease in cash was primarily the result of losses incurred
in our consumer battery division, which we shut down in the third quarter of
2002, the costs of the acquisitions of IES and MDT, and working capital needed
in our other segments.
We used available funds in the first three months of 2003 primarily for
sales and marketing, continued research and development expenditures, and other
working capital needs. We increased our investment in fixed assets by $139,000
(including fixed assets used in discontinued operations) during the quarter
ended March 31, 2003, primarily in the Electric Fuel Batteries Division. Our
fixed assets amounted to $2.4 million at quarter end.
Based on our internal forecasts, we believe that our present cash
position and cash flows from operations will be sufficient to satisfy our
estimated cash requirements through the next year. This belief is based on
certain assumptions that our management believes to be reasonable, some of which
are subject to the risk factors detailed below. We may seek additional funding,
including through the issuance of equity or debt securities. However, there can
be no assurance that we would be able to obtain any such additional funding, and
if such additional funding could not be secured, we would have to further
modify, reduce, defer or eliminate certain of our anticipated future commitments
and/or programs, in order to continue future operations.
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ELECTRIC FUEL CORPORATION
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.
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
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
23
ELECTRIC FUEL CORPORATION
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 MATERIAL ADVERSE CONSEQUENCES 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
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ELECTRIC FUEL CORPORATION
businesses. Although we have retained the management personnel at IES and MDT,
we cannot assure that such personnel will continue to work for us or that we
will be successful in managing this new business. If we are unable to
successfully operate these new businesses, especially the business of IES, our
business, financial condition and results of operations could be materially
impaired.
WE CANNOT ASSURE YOU OF MARKET ACCEPTANCE OF OUR MILITARY ZINC-AIR
BATTERY PRODUCTS AND ELECTRIC VEHICLE TECHNOLOGY.
Our batteries for the defense industry and a signal light powered by
water-activated batteries for use in life jackets and other rescue apparatus are
the only commercial Zinc-Air battery products we currently have available for
sale. Significant resources will be required to develop and produce additional
consumer products utilizing this technology on a commercial scale. Additional
development will be necessary in order to commercialize our technology and each
of the components of the Electric Fuel System for electric vehicles and defense
products. We cannot assure you that we will be able to successfully develop,
engineer or commercialize our Zinc-Air energy system, or that we will be able to
develop products for commercial sale or that, if developed, they can be produced
in commercial quantities or at acceptable costs or be successfully marketed. The
likelihood of our future success must be considered in light of the risks,
expenses, difficulties and delays frequently encountered in connection with the
operation and development of a relatively early stage business and with
development activities generally.
We believe that public pressure and government initiatives are
important factors in creating an electric vehicle market. However, there can be
no assurance that there will be sufficient public pressure or that further
legislation or other governmental initiatives will be enacted, or that current
legislation will not be repealed, amended, or have its implementation delayed.
In addition, we are subject to the risk that even if an electric fuel vehicle
market develops, a different form of zero emission or low emission vehicle will
dominate the market. In addition, we cannot assure you that other solutions to
the problem of containing emissions created by internal combustion engines will
not be invented, developed and produced. Any other solution could achieve
greater market acceptance than electric vehicles. The failure of a significant
market for electric vehicles to develop would have a material adverse effect on
our ability to commercialize this aspect of our technology. Even if a
significant market for electric vehicles develops, there can be no assurance
that our technology will be commercially competitive within that market.
OUR ACQUISITION STRATEGY INVOLVES VARIOUS RISKS.
Part of our strategy is to grow through the acquisition of companies
that will complement our existing operations or provide us with an entry into
markets we do not currently serve. Growth through acquisitions involves
substantial risks, including the risk of improper valuation of the acquired
business and the risk of inadequate integration. There can be no assurance that
suitable acquisition candidates will be available, that we will be able to
acquire or manage profitably such additional companies or that future
acquisitions will 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
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ELECTRIC FUEL CORPORATION
to maintain our operational standards, controls and procedures and subject us to
contingent and latent risks that are different, in nature and magnitude, than
the risks we currently face.
We may finance future acquisitions with cash from operations or
additional debt or equity financings. There can be no assurance that we will be
able to generate internal cash or obtain financing from external sources or
that, if available, such financing will be on terms acceptable to us. The
issuance of additional common stock to finance acquisitions may result in
substantial dilution to our stockholders. Any debt financing may significantly
increase our leverage and may involve restrictive covenants which limit our
operations.
WE MAY NOT SUCCESSFULLY INTEGRATE OUR NEW ACQUISITIONS.
In light of our recent acquisitions of IES and MDT, our success will
depend in part on our ability to manage the combined operations of these
companies and to integrate the operations and personnel of these companies along
with our other subsidiaries and divisions into a single organizational
structure. There can be no assurance that we will be able to effectively
integrate the operations of our subsidiaries and divisions and our
newly-acquired businesses into a single organizational structure. Integration of
these operations could also place additional pressures on our management as well
as on our key technical resources. The failure to successfully manage this
integration could have an adverse material effect on us.
If we are successful in acquiring additional businesses, we may
experience a period of rapid growth that could place significant additional
demands on, and require us to expand, our management, resources and management
information systems. Our failure to manage any such rapid growth effectively
could have a material adverse effect on our financial condition, results of
operations and cash flows.
IF WE ARE UNABLE TO MANAGE OUR GROWTH, OUR OPERATING RESULTS WILL BE
IMPAIRED.
We are currently experiencing a period of growth and development
activity which could place a significant strain on our personnel and resources.
Our activity has resulted in increased levels of responsibility for both
existing and new management personnel. Many of our management personnel have had
limited or no experience in managing growing companies. We have sought to manage
our current and anticipated growth through the recruitment of additional
management and technical personnel and the implementation of internal systems
and controls. However, our failure to manage growth effectively could adversely
affect our results of operations.
WE WILL NEED TO DEVELOP THE EXPERIENCE TO MANUFACTURE CERTAIN OF OUR
PRODUCTS IN COMMERCIAL QUANTITIES AND AT COMPETITIVE PRICES.
We currently have limited experience in manufacturing in commercial
quantities and have, to date, produced only limited quantities of military
batteries and components of the batteries for electric vehicles. In order for us
to be successful in the commercial market, these products must be manufactured
to meet high quality standards in commercial quantities at competitive prices.
The development of the necessary manufacturing technology and processes will
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 de-
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ELECTRIC FUEL CORPORATION
velop this technology or these processes. Moreover, we cannot assure you that we
will be able to successfully implement the quality control measures necessary
for commercial manufacturing.
SOME OF THE COMPONENTS OF OUR TECHNOLOGY AND OUR PRODUCTS POSE POTENTIAL
SAFETY RISKS WHICH COULD CREATE POTENTIAL LIABILITY EXPOSURE FOR US.
Some of the components of our technology and our products contain
elements that are known to pose potential safety risks. Also, because electric
vehicle batteries contain large amounts of electrical energy, they may cause
injuries if not handled properly. In addition to these risks, and although we
incorporate safety procedures in our research, development and manufacturing
processes, there can be no assurance that accidents in our facilities will not
occur. Any accident, whether occasioned by the use of all or any part of our
products or technology or by our manufacturing operations, could adversely
affect commercial acceptance of our products and could result in significant
production delays or claims for damages resulting from injuries. Any of these
occurrences would materially adversely affect our operations and financial
condition.
WE MAY FACE PRODUCT LIABILITY CLAIMS.
To date, there have been no material claims or threatened claims
against us by users of our products, including the products manufactured by MDT,
based on a failure of our products to perform as specified. In the event that
any claims for substantial amounts were to be asserted against us, they could
have a materially adverse effect on our financial condition and results of
operations. We maintain general product liability insurance. However, there is
no assurance that the amount of our insurance will be sufficient to cover
potential claims or that the present amount of insurance can be maintained at
the present level of cost, or at all.
SOME OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT CONTRACTS.
Most of IES's customers to date have been in the public sector of the
U.S., including the federal, state and local governments, and in the public
sectors of a number of other countries, 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.
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ELECTRIC FUEL CORPORATION
OUR FIELDS OF BUSINESS ARE HIGHLY COMPETITIVE.
The competition to develop defense and security products and electric
vehicle battery systems, and to obtain funding for the development of these
products, is, and is expected to remain, intense.
Our defense and security products compete with other manufacturers of
specialized training systems, including Firearms Training Systems, Inc., a
producer of interactive simulation systems designed to provide training in the
handling and use of small and supporting arms. In addition, we compete with
manufacturers and developers of armor for cars and vans, including O'Gara-Hess &
Eisenhardt, a division of Armor Holdings, Inc.
Our battery technology competes with other battery technologies, as
well as other Zinc-Air technologies. The competition in this area of our
business consists of development stage companies, major international companies
and consortia of such companies, including battery manufacturers, automobile
manufacturers, energy production and transportation companies, consumer goods
companies and defense contractors. Many of our competitors have financial,
technical, marketing, sales, manufacturing, distribution and other resources
significantly greater than ours.
Various battery technologies are being considered for use in electric
vehicles and defense and safety products by other manufacturers and developers,
including the following: lead-acid, nickel-cadmium, nickel-iron, nickel-zinc,
nickel-metal hydride, sodium-sulfur, sodium-nickel chloride, zinc-bromine,
lithium-ion, lithium-polymer, lithium-iron sulfide, primary lithium,
rechargeable alkaline and Zinc-Air.
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
28
ELECTRIC FUEL CORPORATION
patent applications, covering elements of our technology in the United States
and in Europe. In addition, we have patent applications pending in the United
States and in foreign countries, including the European Community, Israel and
Japan. We intend to continue to file patent applications covering important
features of our technology. We cannot assure you, however, that patents will
issue from any of these pending applications or, if patents issue, that the
claims allowed will be sufficiently broad to protect our technology. In
addition, we cannot assure you that any of our patents will not be challenged or
invalidated, that any of our issued patents will afford protection against a
competitor or that third parties will not make infringement claims against us.
Litigation, or participation in administrative proceedings, may be
necessary to protect our proprietary rights. This type of litigation can be
costly and time consuming and could divert company resources and management
attention to defend our rights, and this could harm us even if we were to be
successful in the litigation. The invalidation of patents owned by or licensed
to us could have a material adverse effect on our business. In addition, patent
applications filed in foreign countries are subject to laws, rules and
procedures that differ from those of the United States. Therefore, there can be
no assurance that foreign patent applications related to patents issued in the
United States will be granted. Furthermore, even if these patent applications
are granted, some foreign countries provide significantly less patent protection
than the United States. In the absence of patent protection, and despite our
reliance upon our proprietary confidential information, our competitors may be
able to use innovations similar to those used by us to design and manufacture
products directly competitive with our products. In addition, no assurance can
be given that others will not obtain patents that we will need to license or
design around. To the extent any of our products are covered by third-party
patents, we could require a license under such patents to develop and market our
patents.
Despite our efforts to safeguard and maintain our proprietary rights,
we may not be successful in doing so. In addition, competition is intense, and
there can be no assurance that our competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our
technology. Moreover, in the event of patent litigation, we cannot assure you
that a court would determine that we were the first creator of inventions
covered by our issued patents or pending patent applications or that we were the
first to file patent applications for those inventions. If existing or future
third-party patents containing broad claims were upheld by the courts or if we
were found to infringe third party patents, we may not be able to obtain the
required licenses from the holders of such patents on acceptable terms, if at
all. Failure to obtain these licenses could cause delays in the introduction of
our products or necessitate costly attempts to design around such patents, or
could foreclose the development, manufacture or sale of our products. We could
also incur substantial costs in defending ourselves in patent infringement suits
brought by others and in prosecuting patent infringement suits against
infringers.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, through non-disclosure and confidentiality agreements with our
customers, employees, consultants, strategic partners and potential strategic
partners. We cannot assure you that these agreements will not be breached, that
we would have adequate remedies for any breach or that our trade secrets will
not otherwise become known or be independently developed by competitors.
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ELECTRIC FUEL CORPORATION
WE HAVE UNDERGONE RECENT MANAGEMENT CHANGES.
In October 2002, Yehuda Harats, who had been our CEO since the
inception of our company, resigned from his positions with us in order to pursue
other interests. Our Board of Directors selected our long-time Chairman of the
Board, Robert S. Ehrlich, to be our new President and CEO. Our success will
depend to some extent on our ability to quickly and smoothly execute the change
in leadership as a result of this change of CEO.
WE ARE DEPENDENT ON KEY PERSONNEL AND OUR BUSINESS WOULD SUFFER IF WE FAIL
TO RETAIN THEM.
We are highly dependent on certain members of our management and
engineering staff, and the loss of the services of one or more of these persons
could adversely affect us. We are especially dependent on the services of our
Chairman, President and Chief Executive Officer, Robert S. Ehrlich. The loss of
Mr. Ehrlich could have a material adverse effect on us. We are party to an
employment agreement with Mr. Ehrlich, which agreement expires at the end of
2003. We do not have key-man life insurance on Mr. Ehrlich.
THERE ARE RISKS INVOLVED WITH THE INTERNATIONAL NATURE OF OUR BUSINESS.
A significant portion of our sales are made to customers located
outside the U.S., primarily in Europe and Asia. In 2000, 2001 and 2002, without
taking account of revenues derived from discontinued operations, 45%, 49%, 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 to-
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ELECTRIC FUEL CORPORATION
tal 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.
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
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ELECTRIC FUEL CORPORATION
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.
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,
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ELECTRIC FUEL CORPORATOIN
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 28, 2003, we had 35,146,261 shares
of common stock issued and outstanding. Of these shares, 27,610,658 are freely
transferable without restriction under the Securities Act of 1933 and 7,526,478
may be sold subject to the volume restrictions, manner-of-sale provisions and
other conditions of Rule 144 under the Securities Act of 1933.
In connection with a stock purchase agreement dated September 30, 1996
between Leon S. Gross and us, we also entered into a registration rights
agreement with Mr. Gross dated September 30, 1996, setting forth registration
rights with respect to the shares of common stock issued to Mr. Gross in
connection with the offering. These rights include the right to make two demands
for the registration of the shares of our common stock owned by Mr. Gross. In
addition, Mr. Gross was granted unlimited rights to "piggyback" on registration
statements that we file for the sale of our common stock. Mr. Gross presently
owns 3,547,870 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.
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ELECTRIC FUEL CORPORATION
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
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
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ELECTRIC FUEL CORPORATION
Palestinian Authority, and a significant increase in terror and violence.
Efforts to resolve the problem have failed to result in an agreeable solution.
Continued hostilities between the Palestinian community and Israel and any
failure to settle the conflict may have a material adverse effect on our
business and us. Moreover, the current political and security situation in the
region has already had an adverse effect on the economy of Israel, which in turn
may have an adverse effect on us.
Many of our employees are currently obligated to perform annual reserve
duty in the Israel Defense Forces and are subject to being called for active
military duty at any time. No assessment can be made of the full impact of such
requirements on us in the future, particularly if emergency circumstances occur,
and no prediction can be made as to the effect on us of any expansion of these
obligations. However, further deterioration of hostilities with the Palestinian
community into a full-scale conflict might require more widespread military
reserve service by some of our employees, which could have a material adverse
effect on our business.
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 contin-
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ELECTRIC FUEL CORPORATION
ued 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.
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.
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ELECTRIC FUEL CORPORATION
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to the impact of interest rate changes and foreign
currency fluctuations due to our international sales, production and funding
requirements.
Certain of our activities are carried out by our wholly-owned
subsidiaries EFL and MDT, at their facilities in Israel, and we market some of
our products in Israel; accordingly we have sales and expenses in New Israeli
Shekels. However, the majority of our sales are made outside Israel in U.S.
dollars, and a substantial portion of our costs are incurred in U.S. dollars or
in New Israeli Shekels linked to the U.S. dollar. Therefore, our functional
currency is the U.S. dollar.
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ELECTRIC FUEL CORPORATION
PART II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) The following reports on Form 8-K were filed during the first quarter
of 2003:
DATE FILED ITEM REPORTED
---------- -------------
January 6, 2003...........Sale of $3,500,000 principal amount 9% Secured Convertible Debentures
due June 30, 2005 and certain other related transactions, and
settlement with former CEO
38
ELECTRIC FUEL CORPORATION
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECTRIC FUEL CORPORATION
By: /s/ Robert S. Ehrlich
----------------------------------------
Name: Robert S. Ehrlich
Title: Chairman, President and CEO
/s/ Avihai Shen
----------------------------------------
Name: Avihai Shen
Title: Vice President - Finance
(Principal Financial Officer)
Dated: May 14, 2003
39
ELECTRIC FUEL CORPORATION
CERTIFICATIONS
- --------------------------------------------------------------------------------
I, Robert S. Ehrlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Electric Fuel
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Robert S. Ehrlich
----------------------------------------------
Robert S. Ehrlich, Chairman, President and CEO
(Principal Executive Officer)
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ELECTRIC FUEL CORPORATION
CERTIFICATIONS
- --------------------------------------------------------------------------------
I, Avihai Shen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Electric Fuel
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Avihai Shen
-------------------------------------------
Avihai Shen, Vice President - Finance
(Principal Financial Officer)
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ELECTRIC FUEL CORPORATION
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
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
42