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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2003.
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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)
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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
August 13, 2002 was 40,078,032.
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ELECTRIC FUEL CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Interim Consolidated Financial Statements (Unaudited):
- --------------------------------------------------------------
Consolidated Balance Sheets at June 30, 2003 and December 31, 2002............................ 3-4
Consolidated Statements of Operations for the Six Months Ended June 30, 2003 and 2002, and the
Three Months Ended June 30, 2003 and 2002................................................. 5
Consolidated Statements of Changes in Stockholders' Equity during the Six-Month Period Ended
June 30, 2003............................................................................. 6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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 15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk........................... 38
Item 4 - Controls and Procedures.............................................................. 39
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K..................................................... 40
SIGNATURES.................................................................................... 41
2
ELECTRIC FUEL CORPORATION
Item 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS (U.S. Dollars)
- --------------------------------------------------------------------------------
June 30, 2003 December 31, 2002
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 2,502,955 $ 1,457,526
Certificates of deposit due within one year .......................... 48,305 633,339
Trade receivables, net of allowance for doubtful accounts in the
amount of $41,394 and $40,636 as of June 30, 2003 and December 31,
2002, respectively ................................................. 3,666,506 3,776,195
Other receivables .................................................... 1,419,471 1,032,311
Inventories .......................................................... 2,097,089 1,711,479
Assets of discontinued operations .................................... 119,158 349,774
----------- -----------
Total current assets ....................................... 9,853,484 8,960,624
----------- -----------
SEVERANCE PAY FUND ....................................................... 931,395 1,025,071
PROPERTY AND EQUIPMENT, NET .............................................. 2,414,993 2,555,249
GOODWILL ................................................................. 5,037,594 4,954,981
OTHER INTANGIBLE ASSETS, NET ............................................. 2,081,236 2,567,457
----------- -----------
$20,318,702 $20,063,382
=========== ===========
================================================================================
The accompanying notes are an integral part of the Financial Statements.
3
ELECTRIC FUEL CORPORATION
CONSOLIDATED BALANCE SHEETS (U.S. Dollars)
- ---------------------------------------------------------------------------------------------------------------------
June 30, 2003 December 31, 2002
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables ....................................................... $ 2,546,072 $ 2,900,117
Other accounts payable and accrued expenses .......................... 2,053,778 2,009,109
Current portion of promissory note due to purchase of a subsidiary ... 450,000 1,200,000
Short term loans ..................................................... 25,341 108,659
Liabilities of discontinued operations ............................... 433,684 1,053,799
------------- -------------
Total current liabilities ................................................. 5,508,875 7,271,684
LONG TERM LIABILITIES
Accrued severance pay ................................................ 2,892,169 2,994,233
Convertible debenture ................................................ 988,572 --
Promissory note due to purchase of a subsidiary ...................... 477,827 516,793
------------- -------------
Total long-term liabilities ............................................... 4,358,568 3,511,026
MINORITY RIGHTS ........................................................... 95,078 243,172
SHAREHOLDERS' EQUITY:
Share capital -
Common stock - $0.01 par value each;
Authorized: 100,000,000 shares as of June 30, 2003 and December 31,
2002; Issued: 40,233,365 shares as of June 30, 2003 and 35,701,594
shares as of December 31, 2002; Outstanding - 39,678,032 shares as
of June 30, 2003 and 35,146,261 shares as of December 31, 2002 ... 402,335 357,017
Preferred shares - $0.01 par value each;
Authorized: 1,000,000 shares as of June 30, 2003 and December 31,
2002; No shares issued and outstanding as of June 30, 2003 and
December 31, 2002 ................................................ -- --
Additional paid-in capital ........................................... 119,054,045 114,082,584
Deferred stock compensation .......................................... (12,000) (12,000)
Accumulated deficit .................................................. (104,522,494) (100,673,619)
Treasury stock, at cost (common stock - 555,333 shares as of June 30,
2003 and December 31, 2002) ........................................ (3,537,106) (3,537,106)
Notes receivable from shareholders ................................... (1,195,045) (1,177,589)
Accumulated other comprehensive income (loss) ........................ 166,446 (1,786)
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Total shareholders' equity ................................................ 10,356,181 9,037,501
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$ 20,318,702 $ 20,063,382
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The accompanying notes are an integral part of the Financial Statements.
4
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (U.S. Dollars)
- ---------------------------------------------------------------------------------------------------------------------
Six months ended June 30, Three months ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues ................................. $ 7,526,588 $ 995,598 $ 3,493,135 $ 425,053
Cost of revenues ......................... 5,112,889 759,874 2,479,170 376,246
------------ ------------ ------------ ------------
Gross profit ............................. 2,413,699 235,724 1,013,965 48,807
Research and development ................. 510,544 218,647 152,505 118,147
Selling and marketing expenses ........... 1,637,576 159,639 933,589 102,700
General and administrative expenses ...... 2,473,507 2,386,833 1,460,752 1,116,511
Amortization of intangible assets ........ 623,543 -- 311,771 --
------------ ------------ ------------ ------------
5,245,170 2,765,119 2,858,617 1,337,358
------------ ------------ ------------ ------------
Operating loss ........................... (2,831,471) (2,529,395) (1,844,652) (1,288,551)
Financial (expenses) income, net ......... (983,821) 116,719 (725,609) 52,556
------------ ------------ ------------ ------------
Net loss before taxes .................... (3,815,292) (2,412,676) (2,570,261) (1,235,995)
Tax expenses ............................. (277,047) (476) (274,185) (373)
------------ ------------ ------------ ------------
Net loss before minority interest in
profit of a subsidiary ................ (4,092,339) (2,413,152) (2,844,446) (1,236,368)
Loss to minority ......................... 160,298 -- 203,526 --
------------ ------------ ------------ ------------
Net loss from continuing operations ...... $ (3,932,041) $ (2,413,152) $ (2,640,920) $ (1,236,368)
Profit (loss) from discontinued operations 83,166 (3,560,881) 179,127 (1,423,456)
------------ ------------ ------------ ------------
Net loss for the period .................. $ (3,848,875) $ (5,974,033) $ (2,461,793) $ (2,659,824)
============ ============ ============ ============
Basic and diluted net loss per share from
continuing operations .................. $ (0.11) $ (0.08) $ (0.07) $ (0.04)
============ ============ ============ ============
Basic and diluted net loss per share from
discontinued operations ................ $ 0.00 $ (0.12) $ 0.00 $ (0.05)
============ ============ ============ ============
Combined basic and diluted net loss per
share .................................. $ (0.11) $ (0.20) $ (0.07) $ (0.09)
============ ============ ============ ============
Weighted average number of shares used in
computing basic and diluted net loss per
share .................................. 35,678,067 30,570,107 36,209,872 30,963,919
============ ============ ============ ============
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The accompanying notes are an integral part of the Financial Statements.
5
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (U.S. Dollars)
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Deferred
--------------------------- paid-in stock Accumulated Treasury
Shares Amount capital compensation deficit stock
------------ ------------- --------------- ------------ ----------------- ----------------
BALANCE AT JANUARY 1, 2003 -
AUDITED...................... 35,701,594 $ 357,017 $114,082,584 $ (12,000) $(100,673,619) $ (3,537,106)
CHANGES DURING THE SIX-MONTH
PERIOD ENDED JUNE 30, 2003
Compensation related to
issuance of warrants to
holders of convertible
debenture................. 1,290,000
Compensation related to
beneficial conversion
feature of convertible
debentures................ 600,000
Conversion of convertible
debentures................ 2,358,871 23,589 1,486,089
Exercise of warrants issued
to holders of convertible
debentures and investors.. 1,957,606 19,576 1,405,656
Shares issued to consultants 215,294 2,153 152,178
Compensation related to
options issued to
consultants............... 29,759
Interest accrued on notes
receivable from
shareholders.............. 7,779
Other comprehensive loss -
Foreign currency
translation adjustment.....
Net loss..................... (3,848,875)
------------ ------------- --------------- ------------ ----------------- ----------------
Total comprehensive loss.....
BALANCE AT JUNE 30, 2003 -
UNAUDITED.................... 40,233,365 $ 402,335 $119,054,045 $ (12,000) $(104,522,494) $ (3,537,106)
============ ============= =============== ============ ================= ================
Notes Accumulated
receivable other Total
from comprehensive comprehensive
shareholders loss loss Total
-------------- ------------ -------------- --------------
BALANCE AT JANUARY 1, 2003 -
AUDITED...................... $ (1,177,589) $ (1,786) $ 9,037,501
CHANGES DURING THE SIX-MONTH
PERIOD ENDED JUNE 30, 2003
Compensation related to
issuance of warrants to
holders of convertible
debenture................. $ 1,290,000
Compensation related to
beneficial conversion
feature of convertible
debentures................ $ 600,000
Conversion of convertible
debentures................ (9,667) $ 1,500,000
Exercise of warrants issued
to holders of convertible
debentures and investors.. $ 1,425,232
Shares issued to consultants $ 154,331
Compensation related to
options issued to
consultants............... $ 29,759
Interest accrued on notes
receivable from
shareholders.............. (7,779) -
Other comprehensive loss -
Foreign currency
translation adjustment..... 168,232 168,232 $ 168,332
Net loss..................... (3,848,875) $ (3,848,875)
-------------- ------------ -------------- --------------
Total comprehensive loss..... (3,680,643)
==============
BALANCE AT JUNE 30, 2003 -
UNAUDITED.................... $ (1,195,045) $ 166,446 $ 10,356,181
============== ============ ==============
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The accompanying notes are an integral part of the Financial Statements.
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ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (U.S. Dollars)
- ----------------------------------------------------------------------------------------------------------------
Six months ended June 30,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period .................................................. $(3,848,875) $(5,974,033)
Net loss for the period from discontinued operations ..................... (83,166) 3,560,881
Adjustments required to reconcile net loss to net cash used in operating
activities:
Depreciation ........................................................... 348,401 275,000
Amortization of intangible assets ...................................... 623,543 --
Amortization of deferred financial expenses ............................ 1,036,072 --
Amortization of compensation related to options granted to consultants . 29,759 185,450
Stock-based compensation due to shares granted to consultants .......... 154,331 --
Loss to minority ....................................................... (160,298) --
Write-off of inventory ................................................. 26,000 --
Impairment of property and equipment ................................... 62,332 --
Interest (income) expenses accrued on promissory notes due to purchase
of subsidiary ........................................................ (38,966) --
Capital gain from sale of property and equipment ....................... (3,163) (4,257)
Write-off of notes receivable from stockholders ........................ -- 505,816
Liability for employee rights upon retirement, net ..................... (10,023) 234,744
Changes in operating asset and liability items:
Decrease in trade receivables .......................................... 242,923 121,536
Increase in other accounts receivable .................................. (287,559) (184,095)
Increase in capitalized research and development projects .............. (101,894) --
Increase in inventories ................................................ (323,595) (20,810)
Decrease in trade payables ............................................. (455,504) (349,867)
Decrease in accounts payable and accruals .............................. (72,676) (230,355)
----------- -----------
Net cash used in operating activities from continuing operations
(reconciled from continuing operations)................................. (2,862,358) (1,879,990)
Net cash used in operating activities from discontinued operations
(reconciled from discontinued operations) ............................. (391,388) (3,335,379)
----------- -----------
Net cash used in operating activities .................................... (3,253,746) (5,215,369)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of promissory note related to purchase of subsidiary ......... (750,000) --
Purchase of property and equipment ..................................... (270,603) (142,479)
Loans granted to stockholders .......................................... -- (4,528)
Proceeds from sale of property and equipment ........................... 7,586 4,257
Decrease in demo inventories, net ...................................... 10,317 --
Decrease in certificates of deposit due within one year ................ 585,034 --
Net cash used in discontinued operations ............................... -- (237,429)
----------- -----------
Net cash used in investing activities .................................... (417,666) (380,179)
----------- -----------
FORWARD ..................................................................... $(3,671,412) (5,595,548)
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The accompanying notes are an integral part of the Financial Statements.
7
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (U.S. Dollars)
- -------------------------------------------------------------------------------------------------------------------
Six months ended June 30,
2003 2002
------------ ------------
FORWARD ..................................................................... $ (3,671,412) $ (5,595,548)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term credit from banks ............................... (91,001) --
Proceeds from issuance of share capital, net ........................... -- 3,230,000
Proceeds from exercise of options and warrants ......................... 1,325,837 103,410
Payment of interest and principal on notes receivable from shareholders -- 43,308
Convertible debenture received ......................................... 3,500,000 --
------------ ------------
Net cash provided by financing activities ................................... 4,734,836 3,376,718
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS ....................................... 1,063,424 (2,218,830)
DECREASE IN CASH DUE TO EXCHANGE RATE DIFFERENCES ........................... (17,995) --
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 ............... $ 2,502,955 $ 10,452,924
============ ============
SUPPLEMENTARY INFORMATION ON NON-CASH TRANSACTIONS:
Issuance of share capital (including additional paid-in capital) in respect
of notes receivable ...................................................... $ -- $ 85,055
============ ============
Exercise of options and warrants against notes receivable ................... $ 99,394 $ 70,000
============ ============
Conversion of convertible debenture against shares .......................... $ 1,500,000 $ --
============ ============
Compensation related to beneficial conversion feature of convertible
debentures .................................................................. $ 1,890,000 $ --
============ ============
================================================================================
The accompanying notes are an integral part of the Financial Statements.
8
ELECTRIC FUEL CORPORATION
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 facilities are primarily located in Auburn, Alabama, and
its research and development operations 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 and the rules and regulations of the
Securities and Exchange Commission, and include the accounts of Electric-Fuel
Corporation and its subsidiaries. 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 June 30, 2003 and the operating results and cash flows for the six
months ended June 30, 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 six months ended June 30, 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 FASB No.
Interpretation No. 44,
9
ELECTRIC FUEL CORPORATION
"Accounting for Certain Transactions Involving Stock Compensation" ("FIN No.
44") in accounting for its employee stock option plans. Under APB No. 25, when
the exercise price of the Company's stock 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 net earnings 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 fair value for these options is amortized over their
vesting period and estimated at the date of grant using a Black-Scholes Option
Valuation Model with the following weighted-average assumptions for the three
and six months ended June 30, 2003 and 2002:
Six months ended June 30, Three months ended June 30,
----------------------------- ------------------------------
2003 2002 2003 2002
------------- ------------ ------------- -------------
(Unaudited)
Risk free interest 1% 1.5% 1% 1.5%
Dividend yields 0% 0% 0% 0%
Volatility 0.538 0.643 0.538 0.643
Expected life 4 4 4 4
Pro forma information under SFAS No. 123:
Six months ended June 30, Three months ended June 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -----------
(Unaudited)
Net loss as reported (3,848,875) $ (5,974,033) $ (2,461,793) $(2,659,824)
============= ============= ============= ===========
Add: Stock-based compensation expense
determined under fair value method for
all awards, net of related tax effects $ (1,413,157) $ (1,241,117) $ (701,776) $ (603,556)
============= ============= ============= ===========
Pro forma net loss (5,262,032) $ (7,215,150) $ (3,163,569) $(3,263,380)
============= ============= ============= ===========
Basic and diluted loss per share, as
reported $ (0.11) $ (0.20) $ (0.07) $ (0.09)
============= ============= ============= ===========
Pro forma basic and diluted loss per share $ (0.15) $ (0.24) $ (0.09) $ (0.11)
============= ============= ============= ===========
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:
June 30, 2003 December 31, 2002
----------------- -----------------
(Unaudited) (Audited)
Raw materials................... $ 855,933 $ 893,666
Work-in-progress................ 535,207 296,692
Finished goods.................. 705,949 521,121
----------------- -----------------
$ 2,097,089 $ 1,711,479
================= =================
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ELECTRIC FUEL CORPORATION
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 did 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 the Company's 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.
In April 2003, the FASB issued Statements of Financial Accounting Standards No.
149 ("SFAS No. 149"), an amendment to SFAS No. 133. SFAS No. 149 clarifies under
what circumstances a contract with initial investments meets the characteristics
of a derivative and when a derivative contains a financing component. This SFAS
is effective for contracts entered into or modified after June 30, 2003. The
Company does not expect the adoption of SFAS No. 149 to have a material impact
on the Company's financial condition or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS 150 affects the
issuer's accounting for three types of freestanding financial instruments:
11
ELECTRIC FUEL CORPORATION
>> mandatorily redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets;
>> instruments that do or may require the issuer to buy back some
of its shares in exchange for cash or other assets; includes
put options and forward purchase contracts; and
>> obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominately to a
variable such as a market index or varies inversely with the
value of the issuers' shares.
SFAS No. 150 does not apply to features embedded in a financial instrument that
is not a derivative in its entirety. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company does not expect the adoption of SFAS
No. 150 to have a material impact on the Company's financial condition or
results of operations.
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: 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 of the Company. 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 six months ended June 30, 2003 and 2002:
Defense
Electric and Safety
Fuel Batteries Products Total
--------------- --------------- ---------------
Six Months Ended June 30, (U.S. dollars)
------------------------ -------------------------------------------------
2003:
Revenues from outside customers $ 2,853,841 $ 4,672,747 $ 7,526,588
2002:
Revenues from outside customers $ 995,598 $ - $ 995,598
12
ELECTRIC FUEL CORPORATION
c. Revenues from major customers:
June 30,
--------------------------------------
2003 2002
----------------- -----------------
%
--------------------------------------
Electric Fuel Batteries:
Customer A 30% 38%
Customer B 2% 31%
Defense and Security Products:
Customer C 18% -
Customer D 22% -
Note 5: CONVERTIBLE DEBENTURES AND WARRANTS
a. 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 became convertible into a maximum of 5,468,750 shares of common
stock.
In June 2003, a total of $1,500,000 principal amount of debentures was converted
at a conversion price of $0.64 per share.
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
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 recorded financial expenses of
approximately $600,000 and in connection with the warrants, the Company recorded
financial expenses of approximately $1,290,000. The total of $1,890,000 is
amortized ratably over the life of the Debentures until June 30, 2005.
The Debentures are presented in the balance sheet as follows:
June 30, 2003
----------------
(Unaudited)
Original principle amount.................................... $ 3,500,000
Amount converted into shares................................. (1,500,000)
Compensation related to issuance of warrants and debenture... (1,890,000)
Financial expenses related to amortization of compensation... 878,572
----------------
Total debentures, net........................................ $ 988,572
================
b. Warrants:
As part of the SPA referred to above, the Company issued to the purchasers of
its Debentures an aggregate of 3,500,100 warrants ("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.
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ELECTRIC FUEL CORPORATION
In May and June 2003, warrants to purchase a total of 1,957,606 shares of common
stock, having an aggregate exercise price of $1,425,232, were exercised. An
aggregate of 1,000,029 of these warrant were Warrants issued in connection with
the issuance of the Debentures, and were exercised at their exercise price of
$0.64 per share. The remaining 957,577 of these warrants had originally been
issued in May 2001 at an exercise price of $3.22 per share, but were repriced on
June 30, 2003, immediately prior to exercise, to $0.82 per share. In connection
with this repricing, the holders of these 957,577 warrants received an aggregate
of 638,385 new five-year warrants to purchase shares at an exercise price of
$1.45 per share and exercisable after December 31, 2003. As a result of this
repricing, the Company will record a compensation expense in the amount of
approximately $390,000 in the third quarter of 2003.
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 Investment Center accordingly cancelled
the Company's "approved enterprise" status in connection with a portion of the
Company's existing facilities, but agreed that it would not seek return of any
grants issued in the past.
While continuation of the Company's "approved enterprise" status would have
given the Company certain tax benefits, inasmuch as the Company has a
substantial loss carryforward, the Company does not believe that the
cancellation of its "approved enterprise" status will have any material adverse
effect on it.
Note 7: SUBSEQUENT EVENTS
a. Repricing and exercise of warrants:
In July 2003, the Company repriced an additional 400,000 warrants that it had
issued in May 2001. These warrants had originally been issued in May 2001 at an
exercise price of $3.22 per share, but were repriced in July 2003, immediately
prior to exercise, to $0.82 per share. In connection with this repricing, the
holders of these 400,000 warrants received an aggregate of 266,667 new warrants
to purchase shares at an exercise price of $1.45 per share.
b. Establishment of new subsidiary:
In August 2003, the Company established a new subsidiary, Arcon Security
Corporation, a Delaware corporation based in the United States, to provide
homeland security consulting and other services.
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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 and Arotech(TM) is a
trademark of Electric Fuel Corporation. All company and product names mentioned
may be trademarks or registered trademarks of their respective holders. Unless
the context requires otherwise, all references to us refer collectively to
Electric Fuel Corporation (Arotech) and Arotech's wholly-owned Israeli
subsidiary, Electric Fuel (E.F.L.) Limited (EFL), its majority-owned Israeli
subsidiary, MDT Protective Industries Ltd., and its wholly-owned Delaware
subsidiaries, Electric Fuel Transportation Corp. and IES Interactive Training,
Inc.
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.
General
We are a world leader in primary and refuelable Zinc-Air fuel cell
technology, engaging directly and through our subsidiaries in the use of
Zinc-Air battery technology for defense and security products and other military
applications and for electric vehicles, in car armoring, and in interactive
multimedia use-of-force simulators. We operate in two business units:
>> we develop, manufacture and market defense and security
products, including advanced hi-tech multimedia and
interactive digital solutions for training of military, law
enforcement and security personnel and sophisticated
lightweight materials and advanced engineering processes to
armor vehicles; and
>> we pioneer advancements in Zinc-Air battery technology for
defense and security products and other military applications
and for electric vehicles.
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ELECTRIC FUEL CORPORATION
We incurred significant operating losses for the years ended December
31, 2000, 2001 and 2002 and the first six 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.
Background
We began work in 1990 on the research, development and
commercialization of an advanced Zinc-Air battery system for powering electric
vehicles, work that continues to this day. Beginning in 1998, we also began to
apply our Zinc-Air fuel cell technology to the defense industry, by receiving
and performing a series of contracts from the U.S. Army's
Communications-Electronics Command (CECOM) to develop and evaluate advanced
primary Zinc-Air fuel cell packs. This effort culminated in 2002 in our receipt
of a National Stock Number, a Department of Defense catalog number assigned to
products authorized for use by the U.S. military, and our subsequent receipt of
$2.5 million and $1.6 million delivery orders for our newly designated BA-8180/U
military batteries.
We further enhanced our capabilities in the defense industry through
our purchase in the third quarter of 2002 of two new subsidiaries: IES
Interactive Training, Inc., which provides specialized "use of force" training
for police, homeland security personnel and the military, and MDT Protective
Industries Ltd., which is engaged in the use of sophisticated lightweight
materials and advanced engineering processes to armor vehicles.
Between 1998 and 2002, we were also engaged in the design, development
and commercialization of our proprietary Zinc-Air fuel cell technology for
portable consumer electronic devices such as cellular telephones, PDAs, digital
cameras and camcorders. In October 2002, we discontinued retail sales of our
consumer battery products because of the high costs associated with consumer
marketing and low volume manufacturing.
We were incorporated in Delaware in 1990, and we have been doing
business under the name "Arotech Corporation" since February 2003. We anticipate
changing our corporate name to Arotech Corporation at our next annual
shareholders' meeting in September 2003.
Defense and Security Products
Interactive Use-of-Force Training
Through our wholly-owned subsidiary, IES Interactive Training, Inc.
(IES), we provide specialized "use of force" training for police, homeland
security personnel and the military. We offer products and services that allow
organizations to train their personnel in safe, productive, and realistic
environments. We believe that our training systems offer more functionality,
greater flexibility, unprecedented realism and a wider variety of user interface
options than competing products. Our systems are sold to corporations,
government agencies, military and law enforcement professionals around the
world. The simulators are currently used by some of the worlds leading training
academies, including (in the United States) the Secret Service, the Bureau of
Alcohol, Tobacco and Firearms, the Houston Police Department, the Customs
Service, the Border Patrol, the Bureau of Engraving and Printing, the Coast
Guard, the Federal Law Enforcement
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ELECTRIC FUEL CORPORATION
Training Centers, the California Department of Corrections, the Detroit Police
Department, the Washington DC Metro Police and international users such as the
Israeli Defense Forces, the German National Police, the Royal Thailand Army, the
Hong Kong Police, the Russian Security Police, and over 400 other training
departments worldwide.
Our interactive training systems range from the powerful Range 3000
use-of-force simulator system to the multi-faceted A2Z Classroom Training
system. The Range 3000 line of simulators addresses the entire use of force
training continuum in law enforcement, allowing the trainee to use posture,
verbalization, soft hand skills, impact weapons, chemical spray, low-light
electronic weapons and lethal force in a scenario based classroom environment.
The A2Z Classroom Trainer provides the trainer with real time electronic
feedback from every student through wireless handheld keypads. The combination
of interactivity and instant response assures that learning takes place in less
time with higher retention.
Vehicle Armoring
Through our majority-owned MDT Protective Industries Ltd. (MDT), we
specialize in using state-of-the-art lightweight ceramic materials, special
ballistic glass and advanced engineering processes to fully armor vans and cars.
MDT is a leading supplier to the Israeli military, Israeli special forces and
special services. MDT's products are proven in intensive battlefield situations
and under actual terrorist attack conditions, and are designed to meet the
demanding requirements of governmental and private sector customers worldwide.
Electric Fuel Batteries
We have been engaged in research and development in the field of
Zinc-Air electrochemistry and battery design for over ten years, as a result of
which we have developed our current technology and its applications. We have
successfully applied our technology to our high-energy battery packs for
military and security applications. We have also applied our technology to the
development of a refuelable Zinc-Air fuel cell for powering zero-emission
electric vehicles. Through these efforts, we have sought to position ourselves
as a world leader in the application of Zinc-Air technology to innovative
primary and refuelable power sources.
We believe that our Zinc-Air batteries provide the highest energy and
power density combination available today in the defense market, making them
particularly appropriate where long missions are required and low weight is
important.
Military Batteries
Our line of existing battery products for the military and defense
sectors includes Advanced Zinc-Air Power Packs (AZAPPs) utilizing our most
advanced cells (which have specific energy of 400 watt-hours per kilogram), a
line of super-lightweight AZAPPs that feature the same 400 Wh/kg cell technology
in smaller cells, and our new, high-power Zinc-Air Power Packs (ZAPPs), which
offer extended-use portable power using our commercial Zinc-Air cell technology.
Our AZAPPs have received a National Stock Number (a Department of Defense
catalog number assigned to products authorized for use by the U.S. military),
making our AZAPPs available for purchase by all units of the U.S. Armed Forces.
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ELECTRIC FUEL CORPORATION
Electric Vehicle
Our Electric Vehicle effort, conducted through our subsidiary Electric
Fuel Transportation Corp., continues to focus on obtaining and implementing
demonstration projects in the U.S. and Europe, and on building broad industry
partnerships that can lead to eventual commercialization of the Zinc-Air energy
system. This approach supports our long-term strategy of achieving widespread
implementation of the Electric Fuel Zinc-Air energy system for electric vehicles
in large commercial and mass transit vehicle fleets. Our all-electric bus,
powered by our Zinc-Air fuel cell technology, has demonstrated a world-record
127-mile range under rigorous urban conditions, and we have successfully
demonstrated our vehicle in "on-the-road" programs in Germany, Sweden, Italy,
Israel and the United States, most recently in public tests in Las Vegas, Nevada
in November 2001, and in Washington, D.C., on Capitol Hill, with the
participation of certain members of the United States Senate, in March 2002. We
intend to strengthen existing relationships and to develop new networks of
strategic alliances with fleet operators, companies engaged in energy production
and transportation, automobile manufacturers and others in order to establish
the infrastructure necessary for further development and commercialization of
the Electric Fuel Zinc-Air system.
Lifejacket Lights
We produce water-activated lifejacket lights for commercial aviation
and marine applications based on our patented water-activated magnesium-cuprous
chloride battery technology. We intend to continue to work with OEMs,
distributors and end-user companies to expand our market share in the aviation
and marine segments. We presently sell four products in the safety products
group, two for use with marine life jackets and two for use with aviation life
vests. All four products are certified under applicable international marine and
aviation safety regulations.
Facilities
Our principal executive offices are located at 632 Broadway, New York,
New York 10012, and our telephone number at our executive offices is (646)
654-2107. Our corporate website is www.arotech.com. Our periodic reports to the
Securities Exchange Commission, as well as recent filings relating to
transactions in our securities by our executive officers and directors, that
have been filed with the Securities and Exchange Commission in EDGAR format are
available through hyperlinks located on the investor relations page of our
website, at http://www.arotech.com/compro/investor.html. Reference to our
websites does not constitute incorporation of any of the information thereon or
linked thereto into this quarterly report.
The offices and facilities of our two of our principal subsidiaries,
EFL and MDT, are located in Israel (in Beit Shemesh and Lod, respectively, both
of which are within Israel's pre-1967 borders). We conduct research and
development activities through EFL, and most of our senior management is located
at EFL's facilities. We also conduct development and production activities at
IES's offices in Littleton, Colorado, and at our new production facility in
Auburn, Alabama, which builds and tests advanced batteries for the defense
market.
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ELECTRIC FUEL CORPORATION
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 six months ended June 30, 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 six months ended June 30, 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.
Three months ended June 30, 2003, compared to the three months ended June 30,
2002.
Revenues. Revenues from continuing operations for the three months
ended June 30, 2003 totaled $3.5 million, compared to $425,000 for the
comparable period in 2002, an increase of $3.1 million, or 722%. This increase
was primarily the result of the inclusion of IES and MDT in our results in 2003.
During the second quarter of 2003, we recognized revenues from two
divisions: Defense and Security Products, and Electric Fuel Batteries. Our
Defense and Security Products Division recognized revenues from the sale of
interactive use-of-force training systems (through our IES subsidiary) and from
providing armoring services under vehicle armoring contracts (through our MDT
subsidiary). Our Electric Fuel Batteries Division recognized revenues under
contracts with the U.S. Army's CECOM for deliveries of military batteries and
for design and procurement of production tooling and equipment, and from the
sale of lifejacket lights, as well as from subcontracting fees received in
connection with the United States Department of Transportation (DOT) program.
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ELECTRIC FUEL CORPORATION
In the second quarter of 2003, revenues were $1.5 million for the
Defense and Security Products Division (compared to $0 in the second quarter of
2002, due to the inclusion of IES and MDT in our 2003 results, and $2.0 million
for the Electric Fuel Batteries Division (compared to $425,000 in the second
quarter of 2002, an increase of $1.6 million, or 376%), due primarily to an
increase in revenues from CECOM batteries sold to the U.S. Army. Of the $1.5
million increase in Defense and Security Products revenues, $882,000 was
attributable to the inclusion of IES in our results in the second quarter of
2003 and $586,000 was attributable to the inclusion of MDT in our results in the
second quarter of 2003.
Cost of revenues and gross profit. Cost of revenues totaled $2.5
million during the second quarter of 2003, compared to $376,000 in the second
quarter of 2002, an increase of $2.1 million, or 559%, due to the inclusion of
IES and MDT in our 2003 results.
Direct expenses for our two divisions during the second quarter of 2003
were $2.1 million for the Defense and Security Products Division (compared to $0
in the second quarter of 2002, due to the inclusion of IES and MDT in our 2003
results), and $1.8 million for the Electric Fuel Batteries Division (compared to
$523,000 in the second quarter of 2002, an increase of $1.2 million, or 238%),
due primarily to an increase in sales and activities related to CECOM batteries.
Of the $2.1 million increase in Defense and Security Products direct
expenses, $1.3 million was attributable to the inclusion of IES in our results
in the second quarter of 2003 and $780,000 was attributable to the inclusion of
MDT in our results in the second quarter of 2003.
Gross profit was $1.0 million during the second quarter of 2003,
compared to $49,000 during the second quarter of 2002, an increase of $965,000,
or 1,977%. 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 second
quarter of 2003, IES contributed $406,000 to our gross profit, MDT contributed
$21,000, and our other product lines contributed $587,000.
Research and development expenses. Research and development expenses
for the second quarter of 2003 were $153,000, compared to $118,000 the second
quarter of 2002, an increase of $34,000, or 29%. This increase was the result of
the research and development activities that support the activities at our CECOM
facility in Auburn, Alabama and the inclusion of IES and MDT in our 2003
results.
Sales and marketing expenses. Sales and marketing expenses for the
second quarter of 2003 were $934,000, compared to $103,000 the second quarter of
2002, an increase of $831,000, or 809%. This increase was primarily attributable
to the following factors:
>> We had sales and marketing expenses in the second quarter of
2003 related to IES of $296,000, which we did not have the
second quarter of 2002; and
>> We incurred expenses in the amount of $536,000 in connection
with start-up costs for our security consulting business
($300,000) and in connection with sales of our military
batteries ($236,000).
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ELECTRIC FUEL CORPORATION
General and administrative expenses. General and administrative
expenses for the second quarter of 2003 were $1.5 million compared to $1.1
million the second quarter of 2002, an increase of $344,000, or 31%. This
increase was primarily attributable to the inclusion of the expenses of IES
($216,000) and MDT ($126,000) in our 2003 results.
Financial (expenses) income, net. Financial (expenses) income, net of
interest expenses and exchange differentials, totaled approximately $(726,000)
in the second quarter of 2003 compared to $53,000 in the second quarter of 2002,
an increase of $778,000. This increase in financial expenses was due primarily
to $79,000 in interest expense on our debentures during the second 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 $690,000, which expenses had no equivalent during the second quarter of 2002.
Income taxes. We and certain of our subsidiaries incurred net operating
losses during the second quarter of 2003 and 2002 and, accordingly, were not
required to make any provision for income taxes. We have made provision for
income taxes relating to MDT in the amount of $274,000 ($140,000 after deduction
of minority interest).
Amortization of intangible assets. Amortization of intangible assets
totaled $312,000 in the second quarter of 2003, compared to $0 the second
quarter of 2002, due to amortization of intangibles assets related to our
purchase of IES and MDT in 2002. Of this 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 $2.6 million in the second
quarter of 2003, compared to a net loss of $1.2 million the second quarter of
2002, an increase of $1.4 million, or 114%.
Profit (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 June 30, 2003 in an item entitled "Profit (loss) from
discontinued operations."
Profit from discontinued operations in the second quarter of 2003 was
$179,000, compared to a loss from discontinued operations of $1.4 million the
second quarter of 2002, a decrease in loss of $1.6 million, or 113%.
Net loss. Due to the factors cited above, we reported a net loss of
$2.5 million in the second quarter of 2003, compared to a net loss of $2.7
million the second quarter of 2002, a decrease of $198,000, or 7%.
Six months ended June 30, 2003, compared to the six months ended June 30, 2002.
Revenues. Revenues from continuing operations for the six months ended
June 30, 2003 totaled $7.5 million, compared to $996,000 for the comparable
period in 2002, an increase of
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ELECTRIC FUEL CORPORATION
$6.5 million, or 656%. This increase was primarily the result of the inclusion
of IES and MDT in our results in 2003.
During the first six months of 2003, we recognized revenues from two
divisions: Defense and Security Products, and Electric Fuel Batteries. Our
Defense and Security Products Division recognized revenues from the sale of
interactive use-of-force training systems (through our IES subsidiary) and from
providing armoring services under vehicle armoring contracts (through our MDT
subsidiary). Our Electric Fuel Batteries Division recognized revenues under
contracts with the U.S. Army's CECOM for deliveries of military batteries and
for design and procurement of production tooling and equipment, and from the
sale of lifejacket lights, as well as from subcontracting fees received in
connection with the United States Department of Transportation (DOT) program.
In the first six months of 2003, revenues were $4.7 million for the
Defense and Security Products Division (compared to $0 in the first six months
of 2002, due to the inclusion of IES and MDT in our 2003 results, and $2.9
million for the Electric Fuel Batteries Division (compared to $996,000 in the
first six months of 2002, an increase of $1.9 million, or 187%), due primarily
to an increase in revenues from CECOM batteries sold to the U.S. Army. Of the
$4.7 million increase in Defense and Security Products revenues, $2.8 million
was attributable to the inclusion of IES in our results in the first six months
of 2003 and $1.8 million was attributable to the inclusion of MDT in our results
in the first six months of 2003.
Cost of revenues and gross profit. Cost of revenues totaled $5.1
million during the first six months of 2003, compared to $760,000 in the first
six months of 2002, an increase of $4.4 million, or 573%, due to the inclusion
of IES and MDT in our 2003 results.
Direct expenses for our two divisions during the first six months of
2003 were $4.9 million for the Defense and Security Products Division (compared
to $0 in the first six months of 2002, due to the inclusion of IES and MDT in
our 2003 results), and $2.8 million for the Electric Fuel Batteries Division
(compared to $1.0 million in the first six months of 2002, an increase of $1.8
million, or 173%), due primarily to an increase in sales and activities related
to CECOM batteries.
Of the $4.9 million increase in Defense and Security Products direct
expenses, $3.0 million was attributable to the inclusion of IES in our results
in the first six months of 2003 and $1.9 million was attributable to the
inclusion of MDT in our results in the first six months of 2003.
Gross profit was $2.4 million during the first six months of 2003,
compared to $236,000 during the first six months of 2002, an increase of $2.2
million, or 924%. 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 six months of 2003, IES contributed $1.4 million to our gross profit, MDT
contributed $380,000, and our other product lines contributed $658,000.
Research and development expenses. Research and development expenses
for the first six months of 2003 were $511,000, compared to $219,000 the first
six months of 2002, an increase of $292,000, or 134%. This increase was the
result of the research and development activities
22
ELECTRIC FUEL CORPORATION
that support the activities at our CECOM facility in Auburn, Alabama, which
accounted for $367,000 of the increase, and the inclusion of IES and MDT, which
accounted for $118,000 of the increase, in our 2003 results. These increases
were offset to some extent by a decrease in expenses in other areas of the
Electric Fuel Batteries Division.
Sales and marketing expenses. Sales and marketing expenses for the
first six months of 2003 were $1.6 million, compared to $160,000 the first six
months of 2002, an increase of $1.5 million, or 926%. This increase was
primarily attributable to the following factors:
>> We had sales and marketing expenses in the first six months of
2003 related to IES of $801,000, which we did not have the
first six months of 2002;
>> We had sales and marketing expenses in the first six months of
2003 related to MDT of $91,000, which we did not have the
first six months of 2002; and
>> We incurred expenses in the amount of $591,000 in connection
with start-up costs for our security consulting business
($300,000) and in connection with sales of our military
batteries ($291,000).
General and administrative expenses. General and administrative
expenses for the first six months of 2003 were $2.5 million compared to $2.4
million the first six months of 2002, an increase of $87,000, or 4%. This
increase was primarily attributable to the inclusion of the expenses of IES
($396,000) and MDT ($233,000) in our 2003 results, which increase was offset by
the write-down of notes receivable from stockholders and by expenses related to
a 2002 grant of options to one of our investors.
Financial (expenses) income, net. Financial (expenses) income, net of
interest expenses and exchange differentials, totaled approximately $(984,000)
in the first six months of 2003 compared to $117,000 the first six months of
2002, an increase of $1.1 million. This increase in financial expenses was due
primarily to $167,000 in interest expense on our debentures during the first six
months 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 $879,000, which expenses had no equivalent during the first six
months of 2002.
Income taxes. We and certain of our subsidiaries incurred net operating
losses during the first six months of 2003 and 2002 and, accordingly, were not
required to make any provision for income taxes. We have made provision for
income taxes relating to MDT in the amount of $274,000 ($140,000 after deduction
of minority interest).
Amortization of intangible assets. Amortization of intangible assets
totaled $624,000 in the first six months of 2003, compared to $0 the first six
months of 2002, due to amortization of intangibles assets related to our
purchase of IES and MDT in 2002. Of this increase, $526,000 was attributable to
amortization of intangibles assets related to our purchase of IES and $98,000
was attributable to amortization of intangibles assets related to our purchase
of MDT.
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ELECTRIC FUEL CORPORATION
Net loss from continuing operations. Due to the factors cited above, we
reported a net loss from continuing operations of $3.9 million in the first six
months of 2003, compared to a net loss of $2.4 million in the first six months
of 2002, an increase of $1.5 million, or 63%.
Profit (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 six months ended June 30, 2003 in an item entitled "Loss from
discontinued operations."
Profit from discontinued operations in the first six months of 2003 was
$83,000, compared to a loss from discontinued operations of $3.6 million the
first six months of 2002, a decrease in loss of $3.6 million, or 102%.
Net loss. Due to the factors cited above, we reported a net loss of
$3.8 million in the first six months of 2003, compared to a net loss of $6.0
million the first six months of 2002, a decrease of $2.1 million, or 36%.
Liquidity and Capital Resources
As of June 30, 2003, we had cash and cash equivalents of approximately
$2.5 million, compared to $1.5 million as of December 31, 2002, an increase of
$1.0 million. The increase in cash was primarily the result of issuance of
debentures and exercises of warrants.
We used available funds in the second quarter 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 $132,000
during the quarter ended June 30, 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.
RISK FACTORS
The following factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Report and presented elsewhere by management from time to time.
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ELECTRIC FUEL CORPORATION
Business-Related Risks
We have had a history of losses and may incur future losses.
We were incorporated in 1990 and began our operations in 1991. We have
funded our operations principally from funds raised in each of the initial
public offering of our common stock in February 1994; through subsequent public
and private offerings of our common stock and 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 June 30, 2003, we had an accumulated deficit of
approximately $104.5 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 $2.9 million as
of June 30, 2003. 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 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.
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ELECTRIC FUEL CORPORATION
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 could result in an event of default under such agreements which could
result in an acceleration of the debentures and the acceleration of debt under
other instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If the indebtedness under the debentures or other
indebtedness were to be accelerated, there can be no assurance that our assets
would be sufficient to repay in full such indebtedness. The foregoing
description of our agreement with our debenture holders is qualified in its
entirety by reference to the agreements with our debenture holders filed as
exhibits to our Current Report on Form 8-K that we filed with the SEC on January
6, 2003.
We have pledged a substantial portion of our assets to secure our
borrowings.
The debentures are secured by a substantial portion of our assets. If
we default under the indebtedness secured by our assets, those assets would be
available to the secured creditor to satisfy our obligations to the secured
creditor, which could materially adversely affect our results of operations and
financial condition and adversely affect our stock price.
We need significant amounts of capital to operate and grow our business.
We require substantial funds to conduct the necessary research,
development and testing of our products; to establish commercial scale
manufacturing facilities; and to market our products. We continue to seek
additional funding, including through the issuance of equity or debt securities.
However, there can be no assurance that we will obtain any such additional
financing in a timely manner or on acceptable terms. If additional funds are
raised by issuing equity securities, stockholders may incur further dilution. If
additional funding is not secured, we will have to modify, reduce, defer or
eliminate parts of our anticipated future commitments and/or programs.
We may not be successful in operating a new business.
Prior to the IES and MDT acquisitions, our primary business was the
marketing and sale of products based on primary and refuelable Zinc-Air fuel
cell technology and advancements in battery technology for defense and security
products and other military applications, electric vehicles and consumer
electronics. As a result of the IES and MDT acquisitions, a substantial
component of our business will be the marketing and sale of hi-tech multimedia
and interactive digital solutions for training military, law enforcement and
security personnel and sophisticated lightweight materials and advanced
engineering processes used to armor vehicles. These are new businesses for us
and our management group has limited experience operating these types of
businesses. Although we have retained the management personnel at IES and MDT,
we cannot assure that such personnel will continue to work for us or that we
will be successful in managing this new business. If we are unable to
successfully operate these new businesses, especially the business of IES, our
business, financial condition and results of operations could be materially
impaired.
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ELECTRIC FUEL CORPORATION
There can be no assurance of market acceptance of our military Zinc-Air
battery products and electric vehicle technology.
Our batteries for the defense industry and a signal light powered by
water-activated batteries for use in life jackets and other rescue apparatus are
the only commercial Zinc-Air battery products we currently have available for
sale. Significant resources will be required to develop and produce additional
consumer products utilizing this technology on a commercial scale. Additional
development will be necessary in order to commercialize our technology and each
of the components of the Electric Fuel System for electric vehicles and defense
products. We cannot assure you that we will be able to successfully develop,
engineer or commercialize our Zinc-Air energy system, or that we will be able to
develop products for commercial sale or that, if developed, they can be produced
in commercial quantities or at acceptable costs or be successfully marketed. The
likelihood of our future success must be considered in light of the risks,
expenses, difficulties and delays frequently encountered in connection with the
operation and development of a relatively early stage business and with
development activities generally.
We believe that public pressure and government initiatives are
important factors in creating an electric vehicle market. However, there can be
no assurance that there will be sufficient public pressure or that further
legislation or other governmental initiatives will be enacted, or that current
legislation will not be repealed, amended, or have its implementation delayed.
In addition, we are subject to the risk that even if an electric fuel vehicle
market develops, a different form of zero emission or low emission vehicle will
dominate the market. In addition, we cannot assure you that other solutions to
the problem of containing emissions created by internal combustion engines will
not be invented, developed and produced. Any other solution could achieve
greater market acceptance than electric vehicles. The failure of a significant
market for electric vehicles to develop would have a material adverse effect on
our ability to commercialize this aspect of our technology. Even if a
significant market for electric vehicles develops, there can be no assurance
that our technology will be commercially competitive within that market.
Our acquisition strategy involves various risks.
Part of our strategy is to grow through the acquisition of companies
that will complement our existing operations or provide us with an entry into
markets we do not currently serve. Growth through acquisitions involves
substantial risks, including the risk of improper valuation of the acquired
business and the risk of inadequate integration. There can be no assurance that
suitable acquisition candidates will be available, that we will be able to
acquire or manage profitably such additional companies or that future
acquisitions will produce returns that justify our investments therein. In
addition, we may compete for acquisition and expansion opportunities with
companies that have significantly greater resources than we do. Furthermore,
acquisitions could disrupt our ongoing business, distract the attention of our
senior managers, make it difficult to maintain our operational standards,
controls and procedures and subject us to contingent and latent risks that are
different, in nature and magnitude, than the risks we currently face.
We may finance future acquisitions with cash from operations or
additional debt or equity financings. There can be no assurance that we will be
able to generate internal cash or obtain financing from external sources or
that, if available, such financing will be on terms acceptable to us. The
issuance of additional common stock to finance acquisitions may result in
substantial
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ELECTRIC FUEL CORPORATION
dilution to our stockholders. Any debt financing may significantly increase our
leverage and may involve restrictive covenants which limit our operations.
We may not successfully integrate our new acquisitions.
In light of our recent acquisitions of IES and MDT, our success will
depend in part on our ability to manage the combined operations of these
companies and to integrate the operations and personnel of these companies along
with our other subsidiaries and divisions into a single organizational
structure. There can be no assurance that we will be able to effectively
integrate the operations of our subsidiaries and divisions and our
newly-acquired businesses into a single organizational structure. Integration of
these operations could also place additional pressures on our management as well
as on our key technical resources. The failure to successfully manage this
integration could have an adverse material effect on us.
If we are successful in acquiring additional businesses, we may
experience a period of rapid growth that could place significant additional
demands on, and require us to expand, our management, resources and management
information systems. Our failure to manage any such rapid growth effectively
could have a material adverse effect on our financial condition, results of
operations and cash flows.
If we are unable to manage our growth, our operating results will be
impaired.
We are currently experiencing a period of growth and development
activity which could place a significant strain on our personnel and resources.
Our activity has resulted in increased levels of responsibility for both
existing and new management personnel. Many of our management personnel have had
limited or no experience in managing growing companies. We have sought to manage
our current and anticipated growth through the recruitment of additional
management and technical personnel and the implementation of internal systems
and controls. However, our failure to manage growth effectively could adversely
affect our results of operations.
We will need to develop the experience to manufacture certain of our
products in commercial quantities and at competitive prices.
We currently have limited experience in manufacturing in commercial
quantities and have, to date, produced only limited quantities of military
batteries and components of the batteries for electric vehicles. In order for us
to be successful in the commercial market, these products must be manufactured
to meet high quality standards in commercial quantities at competitive prices.
The development of the necessary manufacturing technology and processes will
require extensive lead times and the commitment of significant amounts of
financial and engineering resources, which may not be available to us. We cannot
assure you that we will successfully develop this technology or these processes.
Moreover, we cannot assure you that we will be able to successfully implement
the quality control measures necessary for commercial manufacturing.
Some of the components of our technology and our products pose potential
safety risks which could create potential liability exposure for us.
Some of the components of our technology and our products contain
elements that are known to pose potential safety risks. Also, because electric
vehicle batteries contain large
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ELECTRIC FUEL CORPORATION
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, in particular the Ministry of Defense. 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. MDT has
already experienced a slowdown in orders from the Ministry of Defense due to
budget constraints and a requirement of U.S. aid to Israel that a substantial
proportion of such aid be spent in the U.S., where MDT does not yet have a
factory in operation.
Sales to public sector customers are subject to a multiplicity of
detailed regulatory requirements and public policies as well as to changes in
training and purchasing priorities. Contracts with public sector customers may
be conditioned upon the continuing availability of public funds, which in turn
depends upon lengthy and complex budgetary procedures, and may be subject to
certain pricing constraints. Moreover, U.S. government contracts and those of
many international government customers may generally be terminated for a
variety of factors when it is in the best interests of the government and
contractors may be suspended or debarred for misconduct at the discretion of the
government. There can be no assurance that these factors or others unique to
government contracts or the loss or suspension of necessary regulatory licenses
will not have a material adverse effect on our future results of operations and
financial condition.
Our fields of business are highly competitive.
The competition to develop defense and security products and electric
vehicle battery systems, and to obtain funding for the development of these
products, is, and is expected to remain, intense.
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ELECTRIC FUEL CORPORATION
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 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
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ELECTRIC FUEL CORPORATION
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.
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
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ELECTRIC FUEL CORPORATION
party to an employment agreement with Mr. Ehrlich, which agreement expires at
the end of 2005. 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 15% tax on its "undistributed PHC income,"
in addition to regular corporate 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 21.1% of the stock of EFL was deemed to be beneficially
owned (directly or indirectly by application of certain attribution rules) as of
June 30, 2002 by four United States citizens: Leon S. Gross, Austin W. Marxe and
David M. Greenhouse, and Robert S. Ehrlich (information with respect to the
stockholdings of Messrs. Marxe and Greenhouse is based on a Schedule 13G filed
with the Securities and Exchange Commission on February 11, 2002, as amended on
February 13, 2003). If more than 50% of either (i) the voting power of our
stock, or (ii) the total value of our stock, is ever acquired or deemed to be
acquired by five or fewer individuals (including, if applicable, those
individuals who currently own an aggregate of 21.1% of our shares) who are
United States citizens or residents, EFL would satisfy the foreign personal
holding company (FPHC) stock ownership test under the Internal Revenue Code, and
we could be subject to additional U.S. taxes (including PHC tax) on any
"undistributed FPHC income" of EFL. We believe that EFL has not had any material
undistributed FPHC income. However, no assurance can be given that EFL will not
become a FPHC and have undistributed FPHC income in the future.
Investors should not purchase our common stock with the expectation of
receiving cash dividends.
We currently intend to retain any future earnings for funding growth
and, as a result, do not expect to pay any cash dividends in the foreseeable
future.
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ELECTRIC FUEL CORPORATION
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.
Our common stock trades on the Nasdaq National Market, which specifies
certain requirements for the continued listing of common stock. One of these
requirements, codified in Marketplace Rule 4450(a)(3), states that a Maintenance
Standard 1 company, like us, must maintain stockholders' equity of at least $10
million. As of December 31, 2002, our stockholders' equity had fallen to $9.0
million, and as of March 31, 2003, our stockholders' equity stood at $9.6
million, neither of which met the National Market's continued listing
requirements for Maintenance Standard 1. However, as a result of conversions of
our debentures and exercises of our warrants in May and June 2003, our
stockholders' equity as of June 30, 2003 stood at $10.4 million, bringing us
back into compliance with Maintenance Standard 1. Continued compliance with the
$10 million stockholders' equity requirement will be dependant in great part
upon our ability to become profitable, which would cause our retained earnings
to increase, thereby increasing the amount of stockholders' equity. Additional
warrant exercises, debenture conversions and/or sales of our common stock would
also positively impact our stockholders' equity. Conversely, failure to become
profitable may be expected to have a negative impact on stockholders' equity.
Another 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
periodically traded below $1.00 in the recent past. If our bid price were to go
and remain below $1.00 for 30 consecutive business days, Nasdaq could notify us
of our failure to meet the continued listing standards, after which we would
have 180 calendar days to correct such failure or be delisted from the Nasdaq
National Market. We would also have the opportunity to appeal this notification,
although there can be no assurances that this appeal would be resolved
favorably.
There can be no assurance that our common stock will remain listed on
the Nasdaq National Market. If our common stock were to be delisted from the
Nasdaq National Market, we
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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, although with a lower stockholders' equity requirement
of $2.5 million. 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, stockholders' 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 June 30, 2003, our directors, executive officers and principal
stockholders and their affiliates (including Leon S. Gross (10.1%), Austin W.
Marxe and David M. Greenhouse (7.0%), and Robert S. Ehrlich (5.0%)) collectively
are deemed beneficially to own approximately 21.1% of the outstanding shares of
our common stock, 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). As a
result, these stockholders are able to exercise significant influence over
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying, preventing or discouraging a change in
control of Electric Fuel.
Pursuant to a voting rights agreement dated September 30, 1996, as
amended, between Leon S. Gross, Robert S. Ehrlich, Yehuda Harats and us,
Lawrence M. Miller, Mr. Gross's advisor, is entitled to be nominated to serve on
our board of directors so long as Mr. Gross, his heirs or assigns retain
beneficial ownership of at least 1,375,000 shares of common stock. In addition,
under the voting rights agreement, Mr. Gross and Messrs. Ehrlich and Harats
agreed to vote and take all necessary action so that Messrs. Ehrlich, Harats and
Miller shall serve as members of the board of directors until the earlier of
December 28, 2004 or our fifth annual meeting of stockholders
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ELECTRIC FUEL CORPORATION
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 June 30, 2003, we had 40,078,032 shares of
common stock issued and outstanding. Of these shares, 32,336,260 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 June 30, 2003, there were outstanding warrants to purchase a
total of 6,526,591 shares of our common stock at a weighted average exercise
price of $1.91 per share, options to purchase a total of 8,760,626 shares of our
common stock at a weighted average exercise price of $1.57 per share, of which
5,283,883 were vested and exercisable within 60 days of such date, at a weighted
average exercise price of $2.01 per share, and outstanding debentures and
promissory notes convertible into a total of 3,688,971 shares of our common
stock at a weighted average conversion price of $0.66 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 have benefited from various Israeli government programs, grants and
tax benefits, particularly as a result of the "approved enterprise" status of a
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. In
addition, EFL has granted a floating lien (that is, a lien that applies not only
to assets
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ELECTRIC FUEL CORPORATION
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.
Between 1992 and 2001, 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 had received an aggregate of $9.9 million (net of
royalties paid) from grants from the Chief Scientist and $772,000 from grants
from BIRD, and we may receive future grants, the amounts of which would be
determined at the time of application. The funding from the Chief Scientist
prohibits the transfer or license of know-how and the manufacture of resulting
products outside of Israel without the permission of the Chief Scientist.
Although we believe that the Chief Scientist does not unreasonably withhold this
permission if the request is based upon commercially justified circumstances and
any royalty obligations to the Chief Scientist are sufficiently assured, the
matter is solely within the discretion of the Chief Scientist, and we cannot be
sure that such consent, if requested, would be granted upon terms satisfactory
to us or granted at all. Without such consent, we would be unable to manufacture
any products developed by this research outside of Israel, even if it would be
less expensive for us to do so. Additionally, current regulations require that,
in the case of the approved transfer of manufacturing rights out of Israel, the
maximum amount to be repaid through royalty payments would be increased to
between 120% and 300% of the amount granted, depending on the extent of the
manufacturing to be conducted outside of Israel, and that an increased royalty
rate of up to 5% would be applied. These restrictions could adversely affect our
potential revenues and net income from the sale of such products.
Exchange rate fluctuations between the U.S. dollar and the Israeli NIS may
negatively affect our earnings.
Although a substantial majority of our revenues and a substantial portion of our
expenses are denominated in U.S. dollars, a significant portion of our costs,
including personnel and facilities-related expenses, is incurred in New Israeli
Shekels (NIS). Inflation in Israel will have the effect of increasing the dollar
cost of our operations in Israel, unless it is offset on a timely basis by a
devaluation of the NIS relative to the dollar.
Some of our agreements are governed by Israeli law.
Israeli law governs both our agreement with IES and our agreement with
MDT, as well as certain other agreements, such as our lease agreements on our
subsidiaries' premises in Israel. While Israeli law differs in certain respects
from American law, we do not believe that these differences materially adversely
affect our rights or remedies under these agreements.
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.
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ELECTRIC FUEL CORPORATION
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.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we performed an
evaluation, under the supervision and with the participation of our management,
including the CEO and CFO, of the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 promulgated under the Securities Exchange Act
of 1934. Based on that evaluation, our management, including the CEO and CFO,
concluded that our disclosure controls and procedures are effective in ensuring
that information that we are required to disclose in the reports that we file of
submit under the Securities Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
There have been no changes in our internal controls over financial
reporting that occurred during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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ELECTRIC FUEL CORPORATION
Part II
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as exhibits to this report:
Exhibit Number Description
-------------- -----------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) The following reports on Form 8-K were filed during the second
quarter of 2003 and thereafter:
Date Filed Item Reported
---------- -------------
April 4, 2003 Item 5 - Other Events and Regulation FD Disclosure
May 8, 2003 Item 7 - Financial Statements, Pro Forma Financial Information
and Exhibits (amendment of 8-K filed on August 12, 2002, as
amended on October 11, 2002)
May 12, 2003 Item 7 - Financial Statements, Pro Forma Financial Information
and Exhibits and Item 9 - Regulation FD Disclosure
July 17, 2003 Item 5 - Other Events and Regulation FD Disclosure and Item 7
- Financial Statements, Pro Forma Financial Information and
Exhibits
August 7, 2003 Item 7 - Financial Statements, Pro Forma Financial Information
and Exhibits and Item 12 - Results of Operations and Financial
Condition
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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
(Principal Executive Officer)
/s/ Avihai Shen
----------------------------------------
Name: Avihai Shen
Title: Vice President - Finance
(Principal Financial Officer)
Dated: August 13, 2002
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EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002