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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to_________
COMMISSION FILE NUMBER 0-23336
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.)
885 THIRD AVENUE, SUITE 2900, NEW YORK, NEW YORK 10022-4834
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 230-2172
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[_].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant as of March 16, 1998 was approximately $20,296,091
(based on the last sale price of such stock as reported by The Nasdaq National
Market).
As of March 16, 1998, 14,229,003 shares of registrant's Common Stock, $.01 par
value per share (the "Common Stock"), were issued and outstanding.
PART I
ITEM 1. BUSINESS
GENERAL
Electric Fuel Corporation ("EFC" or the "Company") is engaged in the
design, development and commercialization of an innovative, advanced zinc-air
battery. To date, the main application for the Company's technology has been a
system for powering zero emission electric vehicles. In part, because the market
for electric vehicles has not demonstrated previously anticipated levels of
growth in 1997, the Company began a strategic shift to actively expand its
activities in non-electric vehicle applications for its zinc-air battery
technology. The Company intends to establish its proprietary zinc-air batteries
as the industry leader in the markets for portable electronic devices, electric
vehicles, safety products and defense applications.
The Company's high-energy, high-power zinc-air battery is composed of a
zinc-anode and an air (oxygen reduction) cathode. During discharge, oxygen from
the air is electrochemically reduced to hydroxide ions at the cathode, and zinc
at the anode is consumed by conversion to zinc oxide. While zinc-air technology
has been in use for over a century, the Company has developed unique technology
that provides its batteries with enhanced performance in both power and energy
at a low manufacturing cost.
To fully utilize its zinc-air battery technology for a wide selection of
applications, at the end of 1997 the Company created three market related
business units: Electric Vehicles, Consumer Batteries, and Defense and Safety
Products.
The Electric Vehicle division is continuing to focus on fleet applications
of the zinc-air battery system with its partners in the United States, Europe
and Asia. Pursuant to a Memorandum of Understanding, the division is also
continuing development of a transit bus in cooperation with the Center for
Sustainable Technology ("CST") in Las Vegas, Nevada, for the US transit market,
and of new vehicle applications including an electric scooter battery for the
Far East market.
The Consumer Batteries division has been formed to pursue the increasing
market interest in a primary single use battery as a substitute for the current
heavier, more expensive, rechargeable batteries. Applications are expected to
include batteries for cellular telephones, camcorders, laptop computers and
other portable consumer electronic devices.
The Defense and Safety Products division has been formed to continue to
expand the development of other advanced uses of the battery technology,
including a high-power zinc-oxygen battery for torpedoes and other military
applications and an advanced portable zinc-air battery for the US Army. This
division also oversees the Company's water-activated survivor locator light
products for the airline and marine markets and is pursuing further development
of the safety products business.
The Company was incorporated in Delaware in 1990. Unless the context
requires otherwise, all references to the "Company" refer collectively to the
Company and its wholly-owned subsidiary incorporated under the laws of Israel,
Electric Fuel (E.F.L.) Limited ("EFL"), Electric Fuel GmbH, a German wholly-
owned subsidiary of EFL and other subsidiaries of EFC and EFL. EFC's executive
offices are located at 885 Third Avenue, New York, New York 10022, and its
telephone number at its executive offices is (212) 230-2172.
The Company's R&D activities are primarily carried out by EFL at its
facilities in Jerusalem and Beit Shemesh, Israel. The Company's facility in
Bremen, Germany primarily facilitates the activities of the electric vehicle
division in Europe. In May 1997, the Company opened a battery research and
development facility in Auburn, Alabama. The Auburn facility is located in a
newly constructed building near Auburn University. The facility builds and tests
prototype cells and batteries.
BUSINESS STRATEGY
Consistent with the formation of its three divisions, the Company is
focusing its efforts on commercializing its technology in three main areas:
electric vehicles, consumer electronics and defense and safety products.
-2-
The Company's strategy is to market its Electric Fuel System for electric
vehicles (the "Electric Fuel Electric Vehicle System") initially to large
commercial and mass transit fleet operators. The Company believes that
environmental concerns, recently enacted and proposed legislation create
significant incentives for fleet operators to use electric vehicles, and that
the Electric Fuel Electric Vehicle System is particularly suitable for fleet
operations. Governmental action continues in the United States, and the Company
believes this will create incentives for fleet operators and primarily bus and
mass transit operators to introduce electric vehicles into their fleets. In the
Far East, proposed legislation affecting scooters creates a significant market
for electric scooters. The Company intends to strengthen existing 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 Electric Vehicle System.
For its consumer battery technology, the Company intends to manufacture
cells and assemble batteries, and work with strategic partners on marketing,
sales and distribution. Strategic partners for cell phone batteries may include
cell phone manufacturers, battery producers and assemblers, cellular phone
service providers and consumer goods distributors.
The Company expects that defense products will be developed for, and sold
by, prime contractors or directly to military and defense agencies. The Company
will continue to seek new applications for its technology in defense projects.
For its safety products, the Company intends to continue to work with large
distributors which specialize in this market. The Company is investigating
several new applications for its water activated battery technology, including
for use in marine life jackets.
THE ELECTRIC VEHICLE DIVISION
The Electric Vehicle division focuses on fleet applications of the zinc-air
battery system with its partners in the United States, Europe and Asia.
THE COMPANY'S ELECTRIC FUEL ELECTRIC VEHICLE SYSTEM
- ---------------------------------------------------
The Electric Fuel zinc-air energy system consists of an in-vehicle, zinc-
air battery composed of a series of zinc-anode cassettes; a battery exchange
unit for fast vehicle turn-around; an automated battery refueling system for
mechanically replacing, rather than electrically recharging, depleted fuel
cassettes; and a regeneration system for recycling the depleted fuel cassettes.
With its proprietary air cathode and zinc anode, the zinc-air battery delivers a
combination of high energy density and high power density, which together power
electric vehicles with speed, acceleration, and range like those of conventional
vehicles.
The Electric Fuel zinc-air battery system for powering electric vehicles
offers significant advantages over other electric vehicle batteries, making it
ideal for fleet and mass transit operators. Fleet operators require a long
operating range, large payload capacity, operating flexibility, all weather
performance, fast vehicle turnaround, and competitive life-cycle costs. Electric
Fuel powered full-size vehicles, capable of long-range, high-speed travel, fill
the needs of the transit operators, in all weather conditions, with cost
effective fast refueling. An all-electric, full-size bus, powered by the
Electric Fuel system can provide transit authorities a full day's range for both
heavy duty city and suburban routes in all weather conditions.
In field trials with major European entities, the Company is demonstrating
the commercial viability of the battery system by regularly driving 300 to 400
km in actual drive cycles. In 1996, an Mercedes-Benz MB410 van powered by the
Electric Fuel zinc-air battery crossed the Alps and traveled from Chambray,
France over the Moncenisio Pass and continued to the Edison zinc-air
regeneration plant in Turin, Italy. The 152 mile (244 km) drive included a 93
mile (150 km) continuous climb over mountainous terrain in which the vehicle
climbed over 4950 feet (1500 meters) to reach the summit at 6874 feet (2083
meters), using only 65% of the battery's capacity. In November 1997, the Company
powered a Mercedes-Benz MB410 van from central London to Central Paris on a
single charge, a distance of 272 miles (439 km), not including the transport
through the English Channel Tunnel.
-3-
MAJOR PROGRAMS AND STRATEGIC PARTNERSHIPS
- -----------------------------------------
The Company has formed several strategic partnerships and is engaged in
demonstration programs in various locations with respect to the Electric Fuel
Electric Vehicle System.
Germany - The Deutsche Post
- ---------------------------
In a field test managed by the German postal service, the Electric Fuel
Electric Vehicle System is being tested by the Deutsche Post in vehicles powered
by the Electric Fuel battery in Bremen, Germany (the "Field Test"). The Field
Test is managed by Deutsche Post to conduct a representative operating test of
the Electric Fuel Electric Vehicle System. Only vehicles powered by the Electric
Fuel Electric Vehicle System are being tested. In addition to Deutsche Post,
participants in the Field Test currently include Vattenfall AB, the largest
utility in Sweden, the Swedish postal service, as well as German industrial
suppliers Mercedes-Benz AG, and Webasto AG Fahrzeugtechnik, an automotive parts
manufacturer ("Webasto"). A consortium of South African companies led by ESKOM,
the South African utility company, has also joined the Field Test as an
Associate Partner and is considering a demonstration project in South Africa. To
date, over 40,000 kilometers have been logged on electric vehicles in the Field
Test.
In December 1997, the Company and Deutsche Post agreed to extend the Field
Test through May 1998. Deutsche Post, subject to the satisfaction of certain
conditions, has also agreed to fund the additional operating costs for this
period. Deutsche Post has stated that it will decide in June 1998, on the basis
of its own requirements and at its discretion, whether it deems the Field Test
successful, and whether or not it intends to accept it for use in its fleet. The
Company believes that acceptance of the Electric Fuel Electric Vehicle System by
Deutsche Post for its fleet is a key factor with respect to the Company's
efforts to commercialize the Electric Fuel Electric Vehicle System in Europe.
There can be no assurance, however, that Deutsche Post will deem the Field Test
to have been successful and, even if they do, they may not accept the Electric
Fuel Electric Vehicle System as a powering system for a substantial portion of
its fleet.
Germany -- Krupp UHDE
- ---------------------
The Company has a three year agreement, terminating February 1999, with
Krupp UHDE under which both companies will cooperate in the joint development
and marketing of Electric Fuel regeneration plants during the term of the Field
Test. Additionally, the Company and Krupp UHDE have entered into an agreement
which provides for a cooperative marketing arrangement for commercial Electric
Fuel regeneration plants in Germany, Austria, Switzerland, Belgium, Luxembourg
and The Netherlands. This cooperation agreement is for an exclusive basis until
five years after the completion of the Field Test and will terminate in the year
2011. Pursuant to this agreement, the Company is entitled to receive fees on a
per transaction basis based on Krupp UHDE's revenues related to the sale of
regeneration plants as well as recurring fees from the purchasers of these
plants.
Italy -- Edison
- ----------------
In May 1993, the Company entered into an exclusive license agreement
(pursuant to the exercise of an option granted in 1991) with Edison, Italy's
leading private operator in the field of electric energy production. Pursuant to
this license, which terminates in 2008, Edison is authorized to manufacture, use
and sell Electric Fuel Vehicle batteries, Refueling Systems, Regeneration
Systems and related services based on the Company's technology in Italy, France,
Spain and Portugal. The license also grants Edison non-exclusive license rights
for the sale of Electric Fuel battery systems and related services to Deutsche
Post and Deutsche Telekom, if the Company has first sold in excess of an
aggregate of 250 batteries to those customers.
As part of the license agreement, Edison agreed to cooperate in a
development program which will cover a maximum of four years commencing in
December 1996. During this four-year period, Edison will purchase from the
Company batteries and related components and services in an amount up to $4.0
million, but not less than 600 million Italian lira (approximately $341,000) per
year. In October 1996, the Company agreed to offset the $4.0 million obligation
by an amount equal to the amount of certain prior payments made by Edison to the
Company of approximately $2.0 million with respect to the purchase of products
and services from the Company in connection with Edison's activities
-4-
to date. Edison's present commitment has therefore been reduced to $2.0 million.
After the earlier of (x) the end of the four-year period or (y) Edison selling
at least 150 battery systems in any consecutive four-month period, the
cooperation described above will terminate and Edison will be obligated to
purchase from the Company no less than 35% of all battery cells required by it
for manufacturing battery systems and no less than 20% of the refueling systems
it requires so long as the Company is able to provide these products at prices
competitive with Edison's internal costs of producing these products itself.
There can, however, be no assurance that the Company will be able to produce
such components in a manner that will make such sales profitable to the Company.
The license expires in the year 2008, and Edison is under no obligation to
exploit the Company's technology.
Through December 31, 1997, the Company had reported revenues from Edison of
$7.2 million for a licensing fee, the supply of prototype batteries and other
system components, a refueling system and a pilot 10 kg/hour regeneration plant.
In accordance with the license agreement, Edison has agreed to pay the Company
royalties on net sales of products and services incorporating the Company's
technology, after those sales exceed $10 million, at the following rates: 5% on
net sales over $10 million up to $100 million; 4% on net sales over $100 million
up to $125 million; 3% on net sales over $125 million up to $150 million; and 2%
on net sales over $150 million.
Sweden -- Vattenfall
- --------------------
Contemporaneously with the Field Test in Bremen, Vattenfall AB and the
Swedish postal service, Posten Distribution AB, have been operating two of the
Field Test vehicles in Sweden. For this purpose, Vattenfall has contracted with
the Company to purchase Electric Fuel Vehicle batteries, identical to those
being used in the Field Test. The Company has agreed to provide refueling and
regeneration services to Vattenfall from the 100 kg/hour regeneration plant in
Bremen.
In April 1997, the Company completed a rights agreement with Vattenfall,
under which Vattenfall exercised its right for a license to establish and
operate the Electric Fuel infrastructure for the territory of Sweden, Denmark,
Norway, Finland and St. Petersburg, Russia. While a definitive license agreement
has not yet been signed, the rights agreement covers the main elements of the
license agreement and the future development of the Electric Fuel Electric
Vehicle System in the Scandinavian market. If executed, the agreement would run
for 25 years and allow Vattenfall, for payment of royalties and certain other
considerations to Electric Fuel, the exclusive right to commercialize the
Electric Fuel Electric Vehicle System. Vattenfall would then have the exclusive
right to own and operate regeneration plants, to run and operate refueling and
battery exchange stations and to distribute Electric Fuel batteries in the above
described territory. Execution of the definitive license agreement will be
decided upon by Vattenfall only after completion of the Field Test in May 1998.
Israel -- Israel Electric Corporation
- -------------------------------------
During the fourth quarter of 1996, the Company and the Israel Electric
Corporation ("IEC") entered into an agreement (the "IEC Agreement") pursuant to
which the Company and IEC agreed to cooperate with respect to a demonstration
program for and marketing of the Electric Fuel Electric Vehicle System in
Israel. Pursuant to the IEC Agreement, IEC was also granted the exclusive
license for sales of Electric Fuel and the provision for zinc-air battery
refueling and regeneration services in Israel, Egypt, Jordan, Lebanon, Syria and
the Palestinian Authority. In addition, IEC has agreed to pay to the Company
royalties based on a percentage of revenues related to the license after June
30, 1999. The IEC Agreement also provides a right of first refusal to IEC with
respect to similar licenses covering Saudi, Arabia, Iraq, Iran and the United
Arab Emirates. The IEC Agreement may be terminated by either party for breach
and by IEC, in any event, upon 60 days notice to the Company. IEC has paid the
Company $960,000 in connection with the IEC Agreement. IEC will be test driving
one Mercedes-Benz MB410 van in Israel during 1998.
The Netherlands
- ---------------
Electric Fuel, pursuant to a Memorandum of Understanding, is working on a
program for the Province of Gelderland, the largest province in Holland, to
utilize the Electric Fuel Electric Vehicle System in passenger van "train-
taxis", cabs which transport people between train stations and their final
destinations. The program is managed by KEMA,
-5-
an international consulting and management organization which specializes in
electric energy systems. Other project partners include electric utility
companies NUON of Holland and Vattenfall of Sweden. One Mercedes-Benz Vito
passenger van was converted to an electric drivetrain and was presented at the
World Sustainable Energy Trade Fair in Amsterdam in May 1997, where the Company
exhibited its technology. This vehicle is currently undergoing final
modifications at Mercedes-Benz to accept Electric Fuel batteries.
THE UNITED STATES
- -----------------
Electric Power Research Institute
- ---------------------------------
In 1997, the Company and the Electric Power Research Institute, the
research and development organization for the electricity industry, signed a
memorandum of understanding for a phased program to collaborate in the
development and commercial introduction of the Electric Fuel technology in North
America. In accordance with the memorandum of understanding, a preliminary study
was performed by EPRI in cooperation with Electric Fuel to establish principal
markets for the Electric Fuel vehicle battery system. EPRI is now conducting an
assessment of fleet market acceptability of the Electric Fuel zinc-air
batteries. EPRI is also conducting a program to investigate the economic
feasibility of establishing a zinc regeneration infrastructure in specific US
geographic regions, assess the environmental impact of the technology and its
infrastructure, verify performance of the zinc-air battery system in a certified
laboratory and test the performance of the battery under actual use conditions
in the United States.
New York Power Authority
- ------------------------
The Company and the New York Power Authority signed a memorandum of
understanding in 1997 for a joint program to introduce the Electric Fuel zinc-
air battery system in the New York City area, concentrating at first on buses
for mass transit. Under the program, Electric Fuel and the New York Power
Authority have stated their intent to work together to secure local partners
drawn from the private and public sectors who are interested in participating in
the demonstration project. These include local business fleet operators, transit
operators, environmental and government organizations.
The Company and the New York Power Authority have also stated their
intention to jointly undertake feasibility studies to determine the technical
and financial viability of moving forward with a full-scale commercial operation
to include construction of a zinc regeneration facility in New York City.
Center for Sustainable Technology
- ---------------------------------
The Company and the Center for Sustainable Technology, L.L.C., have signed
a memorandum of understanding to establish the first US-based Electric Fuel
battery bus demonstration site in Las Vegas.
Subject to receiving funding from the U.S. Department of Transportation, it
is anticipated that the joint project will include outfitting, operating and
maintaining a zinc-air powered bus in Nevada to demonstrate the practical
applications of the Electric Fuel Electric Vehicle System in transit buses, and
demonstrate the superior performance and convenience of the Electric Fuel
Electric Vehicle System.
The Center for Sustainable Technology and the Company plan to develop
engineering requirements for a model zinc regeneration facility to refuel a
fleet of electric vehicles. Electric Fuel and the Center for Sustainable
Technology intend to form strategic alliances with both public and private
organizations in Nevada to support this phase of the project. There can be no
assurance, however, that such funding will be obtained.
JAPAN -- TOMEN CORPORATION
- --------------------------
The Company and Tomen Corporation have signed a cooperation agreement to
introduce the Electric Fuel Electric Vehicle System in Japan and other locations
in the Far East. Under the first phase of the agreement, the Company and Tomen
will determine feasibility of advancing the zinc-air technology in Japan,
including pursuing a demonstration
-6-
project and researching the potential market requirements. Tomen is acting as
Electric Fuel's exclusive marketing representative with industry, governmental
and quasi-governmental organizations, and is researching the legal and
regulatory requirements in Japan to commercialize the zinc-air technology.
The Company and Tomen are also working to form strategic alliances with
public and private organizations to support the program and advance the
commercialization of the zinc-air battery.
COMPETITION
- -----------
The Company believes that its products must be available at a price that is
competitive with alternative technologies, particularly those intended for use
in zero or low-emission vehicles. Besides other battery technologies, these
include "hybrid systems", which combine internal combustion engine, diesel
engine, battery technologies, use of hydrogen, and regular or low pollution
fuels such as gasoline, diesel, compressed natural gas, liquified natural gas,
ethanol and methanol. Other alternative technologies presently use costly
components, including use of fuel cells, supercapacitors, flywheels and
catalytic removal of pollutants. These various technologies are at differing
stages of development and any one of them, or a new technology, may prove to be
more cost effective, or otherwise more readily acceptable by consumers, than the
Electric Fuel Electric Vehicle System. In addition, the California Air Resource
Board has expressed concerns to the Company about the infrastructure
requirements of the Electric Fuel Electric Vehicle System as compared to battery
technologies which use electrical recharging.
The competition to develop electric vehicle battery systems and to obtain
funding for the development of electric vehicle battery systems is, and is
expected to remain, intense. The Company's technology competes with other
battery technologies as well as with different zinc-air batteries and with
advanced vehicle propulsion systems. The competition consists of development
stage companies as well as major international companies, and consortia
including such companies, including automobile manufacturers, battery
manufacturers, and energy production and transportation companies, many of which
have financial, technical, marketing, sales, manufacturing, distribution and
other resources significantly greater than those of the Company.
There are many entities, including governmental, quasi-governmental, non-
profit and private organizations, involved in advancing research and development
of electric vehicle and low emission vehicle technologies.
In addition, several consortia have been formed to fund research on
electric vehicle battery technologies which compete with the Company's battery
technology, including the United States Advanced Battery Consortium ("USABC"),
an organization that has funded to date a total of $260 million, which is
financed by the United States Department of Energy, General Motors Corporation,
Ford Motor Company, Chrysler Corporation, and the Electric Power Research
Institute; the Advanced Lead-Acid Battery Consortium, funded by North American
lead manufacturers; and the New Energy Development Organization, a Japanese
consortium funded by the Japanese government and certain Japanese battery
manufacturers. The Company believes that competing zinc-air battery
technologies are at a much earlier stage of development, not just in terms of
size and number of cells, modules and demonstrations in electric vehicles, but
also in terms of the scale of development effort.
The Company believes that the Electric Fuel Electric Vehicle System
exhibits a combination of performance characteristics superior to those of other
electric vehicle battery technologies that are currently commercially available
or, to the Company's knowledge, currently under development. Electric vehicle
performance requirements that are likely to be established by fleet operators
will include vehicle range, load capacity, speed and acceleration
characteristics, refueling/recharging time and operating cost per mile.
An area of increased development has been that of fuel cell powered
vehicles, spearheaded by the Ballard Corp.'s solid polymer electrolyte hydrogen-
air fuel cell program. The Company considers that intrinsic problems of this
system, covering costs of the precious metal catalysts and other cell components
such as the polymer membrane, as well as the development of a safe and compact
method of storing the hydrogen fuel (or successfully generating it via a
reformer from a conventional alternative liquid fuel), could delay
implementation of this system for several years. Significant investments
-7-
in this technology have been made by major automobile companies (i.e., Mercedes-
Benz, Ford, General Motors, and Chrysler Corp.)
Progress achieved by rival electric vehicle systems may have an adverse
effect on acceptance of the Company's electric vehicle battery technology.
MARKETING
- ---------
The Company plans to seek to expand its existing strategic alliances in
Europe, the United States and in the Far East, benefiting from experience gained
in connection with the Field Test and its alliances with the Deutsche Post,
Edison, Vattenfall and KEMA. The Company also intends to seek support of
government agencies, electric utilities and zinc manufacturers.
CONSUMER BATTERY DIVISION
The Consumer Batteries division is pursuing the increasing market interest
in a primary battery as a substitute for the current heavier, more expensive,
rechargeable batteries. Applications include batteries for cellular telephones,
camcorders, laptop computers and other portable consumer electronic devices.
PRODUCTS
- --------
The Company is currently developing a series of primary, prismatic, zinc-
air cells for use in battery packs for cell phones. The Company has produced
prototype cells for the three most popular models of cell phones -- the Motorola
MicroTAC type , Nokia 2100 series and the Ericsson 600. The Company believes
these batteries will offer competitive advantages in performance, convenience,
price, safety and recycling.
According to Hershel Shostek and Associates, an independent research firm,
at the end of 1997 there were over 200 million subscribers for cellular phones
worldwide, with projected growth to almost 800 million users by the year 2003.
The Company believes that a significant number of these users will purchase
primary batteries for their cell phones as an accessory or back-up for their
rechargeable batteries. Consumer acceptance of a primary battery for cell
phones is expected to increase as more cell phone networks have become digital
and cell phones power requirements is decreasing. Based on a digital cellular
network with a new generation lower power cell phone, tests have demonstrated
that Electric Fuel batteries could provide up to four weeks of power at standby
and 15 hours of talk time.
Battery Performance
- -------------------
Electric Fuel Batteries deliver a unique combination of high energy density
and high power density which provides superior performance in cell phones,
camcorders and notebook PCs. The Company believes it can achieve an improvement
factor of 3-4 times against any available rechargeable battery made for these
products. The Company believes this power feature is the reason many consumers
will use a primary (single use) battery.
In Company testing, an Electric Fuel battery for analog cellular phones has
exhibited capacity of 2.65Ah, equivalent to over six hours of "talk time" in
analog cellphones. This is three times more time than currently available Li-
ion battery provides with equal battery pack dimensions. The Electric Fuel
battery also weighs one third less than the Li-ion battery. The Company has
developed a specification of a battery for a leading notebook computer with a
capacity of 110Wh, compared to 30-35Wh for most Li-ion rechargeable batteries
for notebook computers.
Convenience
- -----------
Electric Fuel Batteries are expected to provide the same kind of
convenience for cell phones and notebook PCs that "AA"s provide to "walkman"
type cassette/CD players and pagers. A typical user will be able to use a
digital cellular telephone for up to four weeks with a single battery. The
Company's batteries are expected to be small, lightweight and
-8-
available in multiple retail channels. With an expected two year shelf life, the
Company's batteries can be kept in a briefcase, purse, desk drawer, glove
compartment, etc. and always be fully charged and ready to use.
MARKETING
The Company's objective is to become a leading provider of primary battery
cells and batteries for portable electronic devices(PED's), initially for cell
phones. To achieve that objective, the Company intends:
(1) to develop a network of strategic alliances with OEMs of these
products, as well as companies engaged in the distribution & retailing of these
products, battery manufacturers and others;
(2) to initially market battery cells, made by the company, to large OEMs
who build and bundle the primary batteries with new product shipments and then
distribute batteries to the installed base of consumers through traditional and
emerging retail channels;
(3) as costs come down and market acceptance increases, the Company intends
to market cells and batteries through various consumer distribution channels and
seek strategic relationships with leading consumer battery manufacturers; and
(4) to develop a "power by Electric Fuel" brand name recognition program
with OEMs and the battery manufacturers.
The Company's business strategy is based on selling high performance, zinc-
air cells and batteries to customers including OEMs such as leading cellular
telephone manufacturers worldwide; and carriers and cellular phone providers, as
well to private-label battery manufacturers and distributors of cellular
products and accessories.
The Company believes that initial penetration of primary batteries into
these markets will depend on receiving initial orders for the cells from OEMs.
Thereafter, with increasing consumer awareness and demand, consumer product
companies can be approached. The Company's primary target is the cell phone
market. The Company believes that after some initial success with a primary
battery in the cell phone market, camcorders and notebook PCs batteries can be
introduced to the market as well.
The Company believes that the market for primary batteries for these
devices is not significant today principally because current primary batteries
don't provide significant performance or weight advantages to make such a
product acceptable to consumers. The Company believes that its primary zinc-air
cells, with three or four times more performance combined with lighter weight
match the requirements of the marketplace. The Company further believes that
consumer acceptance is reasonably assured as most other portable electronics
(such as walkman-type cassette players and electronic handheld games) are
operated with primary batteries, as do nearly all household items such as
cameras, watches and flashlights, etc.
The Company believes that long life, primary batteries for these devices
offer significant advantages to both OEMs, service providers and consumers.
Consumers will benefit by having additional operating time and features, OEMs
will benefit by being able to offer PED's with enhanced features and by selling
a frequently purchased, branded product (the batteries). Service providers,
especially cellular carriers will benefit by an increase of "minutes of use" by
subscribers.
The Company projects two sources of sales for primary batteries for
cellular phones: batteries shipped with new handsets and batteries sold into the
installed base.
DISTRIBUTION
- ------------
The Company does not intend to be directly involved in the distribution of
batteries to the consumer. Rather, batteries are expected to be distributed
through two channels. The first is distribution of cell phone batteries bundled
with new handsets sold by OEMs, in order to reach both new customers and current
customers who are purchasing new equipment. The retail end of this channel has
traditionally been resellers and specialty outlets. In addition, cellular
equipment and service is increasingly becoming available at mass merchants. The
second channel of distribution is by third
-9-
party distributors who sell to retailers from mass merchants to regional and
local supermarkets and convenience stores and specialty retailers (such as
airport shops).
Marketing for batteries, both primary and rechargeable has evolved and
expanded during the past year. Large battery companies are entering the mass
channels of distribution with branded name rechargeable batteries for cell
phones & notebook PCs. These companies are targeting the traditional retail
channels for alkaline batteries to sell rechargeable batteries for cell phones
and notebook PCs. As these retailers begin selling rechargeables for cell phones
and notebook PCs, the Company belives there will be a similar opportunity to
market a primary battery for cell phones and notebook PCs in these outlets.
COMPETITION
- -----------
The Company's batteries will compete with both rechargeable and primary
battery packs. Competing rechargeable batteries include nickel-cadmium, nickel-
metal-hydride and lithium-ion. Alkaline batteries are making an initial
appearance in the market for primary batteries for cellular phones. The
companies offering these competing technologies have substantially greater
resources than the Company. The Company believes its batteries will offer
competitive advantages in performance, convenience, price, safety and recycling.
DEFENSE AND SAFETY DIVISION
The Defense and Safety Products division is continuing to expand the
development of other advanced uses of the battery technology, including a high-
power zinc-oxygen battery for torpedoes and an advanced portable zinc-air
battery for the US Army. This division also oversees the Company's water-
activated survivor locator light for the airline and marine applications and
will pursue further development of the safety products business. The Company was
recently awarded a contract from Israel's Ministry of Defense to develop an
advanced zinc-air battery for a propulsion system. The first phase of the
contract will run through the end of 1998.
DEFENSE
In recent years, the Company has undertaken a number of funded, defense-
related research and development projects related to its zinc-air battery
technology. These projects, in the Company's opinion, can expand its future
product line while allowing it to exploit the technology synergies between these
development projects and the Company's other zinc-air battery development
programs.
PROJECTS
- --------
In December 1997, the Company was awarded a contract from the US Army's
Communications-Electronics Command (CECOM) to develop an advanced primary zinc-
air battery. The contract runs from January 1, 1998 through June 30, 1999.
Under the terms of the contract, the Company is required to deliver ten
prototype battery packs of at least 400 watt-hours each. CECOM has set 400 watt-
hours per kilogram as the minimum specific energy content of the prototype
batteries to be delivered under the contract. Electric Fuel was one of three
companies selected to perform the development work, along with Rayovac Corp. and
Eagle Picher Industries, Inc.
The battery is to be developed initially for portable forward field
chargers, and is later to be adapted for other field applications such as
backpack (wearable) and man-portable power sources and chargers.
The primary zinc-air battery cell under development for the Army is similar
to the cell being developed by the Company for consumer battery applications,
and therefore the Company intends to pursue additional military contracts for
primary zinc-air battery development.
The Company concluded the work on a second development contract for its
compact, high-power zinc-oxygen battery for torpedo propulsion in July 1997.
This contract with STN Atlas Elektronik GmbH of Hamburg, Germany,
-10-
(STN ATLAS) which ran from July 1996 through July 1997, was a follow-up to the
first contract with STN ATLAS, which ran from July 1995 through June 1996.
STN ATLAS is the prime contractor to the German Defense Ministry for a new
generation of heavyweight torpedo, and Electric Fuel's zinc-oxygen technology is
being considered by STN ATLAS as a possible technology for a future version of
the torpedo.
MARKETING
- ---------
With shrinking defense budgets in most Western countries, less funds are
being made available for research and development. The defense establishment in
many countries, including the US, is looking to adopt so-called dual-use
technologies, i.e., technologies that are produced for commercial markets and
that can be adapted to military specifications with a minimum of expenditure.
The Electric Fuel zinc-air technology fits this latter requirement, as the
batteries being developed for military applications are similar to the batteries
that Electric Fuel has developed and continues to develop for the electric
vehicle and consumer battery markets.
Because the Electric Fuel technology appears capable of achieving energy
and power densities in combinations heretofore unachieved by other battery
technologies, it appears that there may be a sustainable market for the
Company's products in the military following the development stages. Obviously,
the Company's chances of success in the military markets would be adversely
affected should alternative battery technologies prove capable of achieving
similar performance levels.
COMPETITION
- -----------
The Company's primary zinc-air battery competes with both primary and
secondary batteries for portable military applications.
Other primary batteries available to the military market include zinc-
manganese dioxide (i.e., the same as commercial alkaline batteries), lithium-
sulfur dioxide, lithium-thionyl (or sulfuryl) chloride, and lithium-manganese
dioxide, as well as zinc-air. The lithium batteries are inherently more
hazardous than the zinc batteries. Greater disposal problems are presented for
lithium than for zinc. Lithium batteries are also more costly.
All of the lithium technologies have higher energy densities than the zinc-
manganese dioxide (which can reach about 125 Wh/kg). However, both lithium-
sulfur dioxide have energy densities in the range of 240 - 270 Wh/kg, while the
Company's zinc-air is projected to attain 400 Wh/kg in the project funded by US
Army CECOM. Lithium sulfuryl chloride can reach as high as 450 Wh/kg, but is
suitable only for low rate discharge and cannot provide the continuous power
densities demanded by the mililtary for applications such as the CECOM forward
field charger.
Primary zinc-air development contract have also been awarded by the US Army
CECOM to two other battery manufacturers. Successful development of primary
zinc-air cells by either of the other companies could adversely affect the
Company's ability to market its product in military markets.
The Company's high-power zinc-oxygen battery technology competes with
primary and secondary silver-zinc batteries, and with developmental aluminum-
silver oxide batteries.
Silver-zinc batteries are produced by other battery manufacturers, and are
commonly used for underwater propulsion and torpedo propulsion. Cost of
producing and maintaining such batteries is high, and the zinc-oxygen battery
can yield somewhat higher energy and power densities.
The aluminum-silver oxide battery has been developed by SAFT and Friwo
Silberkraft and has been implemented in a lightweight torpedo, but scaling up to
heavyweight torpedo size has been reported to be complicated because of the
electrolyte circulation systems.
-11-
SAFETY PRODUCTS
In 1996, the Company began to produce and market products for the aviation
and marine safety and emergency markets.
Products
- --------
The first safety product commercialized by the Company is the model WAB-
H12 Survivor Locator Light (SLL), which is a battery-powered light used to
locate survivors of airplane or boat accidents in the water. The battery itself
is activated by immersion in water. The SLL is typically attached to life
vests, life rafts, and similar flotation devices by the manufacturers of the
flotation devices, who are the Company's primary customers for the product.
The WAB-H12 SLL consists of a magnesium-cuprous chloride battery attached
to a light assembly that includes a mini-bulb inside a plastic focusing lens.
The battery is activated by either sea water or fresh water, and lasts for 12
hours. The lens is designed to focus maximum light in the horizontal and
vertical directions dictated by various specifications governing certification
of the product.
The Company manufactures, assembles and packages the SLL in its factory in
Bet Shemesh, Israel. First shipments of the WAB-H12 were made in 1996, and as of
the first quarter of 1998 regular monthly shipments are being made to several
customers, most of whom are leading manufacturers of life vests and rafts for
the commercial aviation market worldwide.
At the end of 1997, the Company began development of a new product intended
specifically for the marine market, where new certification requirements are to
take effect on July 1, 1998 (See Certification). This new product, designated
the model WAB-MX8 lifejacket light, has been submitted for testing and approval
as of March 1998. The WAB-MX8 utilizes two batteries of the type made for the
WAB-H12 light, and uses a high efficiency bulb enclosed in a non-focusing dome-
type lens intended to maximize light intensity throughout the upper hemisphere
of the light sub-assembly, as dictated by the new marine certification
requirements.
If approval is obtained, the Company expects to begin manufacturing the
WAB-MX8 life jacket lightby the end of 1998.
The Company expects to continue to develop additional products for the
marine safety market, including products based on the Company's water-activated
technology, as well as products based on conventional, commercially available
batteries.
CERTIFICATION
- -------------
For use in the aviation market, a survivor locator light requires
certification by the US Federal Aviation Administration (FAA) under Technical
Specification Order (TSO) C-85. This certification is generally recognized
worldwide. The primary functional requirement is that the appliance provide a
minimum light intensity of 1.0 candela (cd) in certain specified horizontal and
vertical directions for a minimum of 8 hours.
TSO approval is given to non-American manufacturers by the civil aviation
authority in the country of manufacture, after TSO Design Approval by the FAA
itself. Since the Company's manufacturing facilities are located in Bet Shemesh,
Israel, this approval is given by the Civil Aviation Authority of Israel (CAAI).
The Company's Model WAB-H12 Survivor Locator Light received this approval
and Aeronautical Product Approval (APA) C-85 certification from the CAAI in
1996, following TSO Design Approval by the FAA, and this approval is given
without time limit. The Company is obligated to manufacture the WAB-H12 light
with a quality assurance system approved by CAAI, and approval of the Company's
Quality Assurance system for the WAB-H12 was also granted in 1996. Each shipment
of TSO-certified lights must be accompanied by a CAAI-issued Certificate of
-12-
Airworthiness, demonstrating that every shipment from the Company is preceded by
an inspection visit from the CAAI Airworthiness Division.
A new FAA specification, TSO C-85a, has been in effect since the 4th
quarter of 1996. This new specification has more stringent testing requirements
than the original TSO. Any SLL's approved under the original TSO C-85 may
continue to be manufactured indefinitely under that approval, and there is no
obligation to upgrade to the new TSO. To the Company's knowledge, no SLL has yet
been approved under TSO C-85a. The Company has not yet applied for approval
under the new specification, but intends to apply in 1998.
For use in the marine market, approval by bodies such as the US Coast Guard
are required. There are two types of approval relevant to the Company's
products: US Coast Guard (USCG) approval for lakes and inland waterways, and
approval under the International Marine Organization (IMO) Safety on Life at Sea
(SOLAS) Convention for use at sea, which can be obtained through the USCG. The
primary functional requirement is similar to that of the FAA TSO C-85, except
that the minimum light intensity is 0.75 cd in the marine market instead of 1.0
cd. The Company received both types of approval from the USCG in 1997 for the
WAB-H12 light.
However, in 1996 new SOLAS regulations were approved, calling for a change
in the functional requirement wherein the 0.75 cd light intensity would be
required throughout the "upper hemisphere" rather than in certain directions
only. As a result, the Company's SOLAS approval expires on June 30, 1998, while
the USCG approval for lakes and inland waterways extends to 2002.
The Company expects to receive SOLAS approval for at least one new product,
the model WAB-MX8 lifejacket light, in 1998. The Company will manufacture the
WAB-MX8 light in its Bet Shemesh factory, under the auspices of its CAAI-
approved Quality Assurance system.
MARKETING
- ---------
The annual market for life jacket lights is estimated at more than 2
million units worldwide, of which about 50% is in the United States. About one-
third of the sales are in the aviation market, and the other two-thirds in the
marine market. All markets have shown growth of at least 5% per year in recent
years, but recent economic developments in the Asian markets could mean a
flattening or slight reduction in the market over the next two years.
The Company first targeted the aviation market, because of the small number
of lifejacket manufacturers producing TSO-certified products. There are about 5
major producers worldwide catering to the TSO market, with 4 of them located in
the US.
COMPETITION
- -----------
The two largest manufacturers of aviation and marine safety products,
including TSO and SOLAS-approved lifejacket lights, are ACR Electronics Inc. of
Hollywood Florida, and McMurdo Ltd. of England.
ACR offers a wide range of water-activated and manually activated safety
products, mostly for the marine market, including lights, strobes, transponders
and beacons. ACR uses a water-activated magnesium-cuprous iodide battery for its
TSO and SOLAS lifejacket lights, and has announced a primary lithium-battery
based product to meet the new SOLAS regulations.
McMurdo also makes a range of water-activated and manually activated
lifejacket and liferaft lights and related products for the marine market, and
its parent company (and exclusive distributor) Pains Wessex Ltd. of England
manufactures other marine safety products such as emergency pyrotechnic devices.
McMurdo uses water-activated magnesium-silver chloride batteries in its TSO
lights, and offers both water-activated and lithium-based lights for the marine
market. McMurdo has also announced a primary lithium-battery based product to
meet the new SOLAS regulations.
-13-
MANUFACTURING
The Company has constructed a production facility in leased premises in Bet
Shemesh, Israel for manufacturing and assembling the Electric Fuel batteries and
related components of the Electric Fuel System. This facility is utilized to
manufacture and assemble Electric Fuel batteries for electric vehicle
demonstration programs, survivor locator lights, and prototype consumer
battery cells. The Company plans to expand this facility as needed to enable
more efficient assembly of batteries in greater quantities. The Company believes
that the manufacturing process required to produce its batteries incorporates
relatively standard and inexpensive procedures and, that therefore, the
establishment of a full-scale production facility should be commercially
feasible.
It is the Company's plan that zinc anodes for its electric vehicle battery
will be manufactured by parties licensed by the Company to operate regeneration
facilities. Regeneration and refueling equipment are expected to be
manufactured by the Company and by third parties licensed by the Company to do
so, although proprietary components of the equipment may be manufactured and
supplied by the Company. Prototype regeneration and refueling systems have been
constructed by the Company and are in operation at its facilities in Israel and
a prototype regeneration facility is in operation in Italy. The Company has also
constructed a 100 kg/hr regeneration facility in Bremen, Germany. The zinc
regeneration facility in Israel is used to produce zinc for the Company's
consumer zinc-air batteries as well.
REGULATORY AND ENVIRONMENTAL MATTERS
The Company believes that its zinc-air batteries as currently contemplated
will be in compliance with applicable Israeli, European, and United States
federal, state and local standards that govern the manufacture, storage, use and
transport of the various chemicals used, and waste materials produced, in the
manufacture and use of the Company's zinc-air battery, including zinc and
potassium hydroxide. The Company has obtained the necessary permits under the
Israeli Dangerous Substances Law, 1993, required for the use of zinc metal,
potassium hydroxide and certain other substances in its facilities in Israel.
The presence of potassium hydroxide as an electrolyte in the Company's
electric vehicle batteries may subject its disposal to regulation under some
circumstances. This electrolyte is the same as the electrolyte used in primary
alkaline batteries and rechargeable nickel-cadmium and nickel-metal hydride
batteries. The Company's electric vehicle battery technology uses relatively
small amounts of spillable potassium hydroxide. The United States Department of
Transportation regulates the transport of potassium hydroxide, and it is likely
that the over-the-road transport of Electric Fuel will require manifesting and
placarding.
The EPA, the Occupational Safety and Health Administration and other
federal, state and local governmental agencies would have jurisdiction over
operations of Company production facilities were they to be located in the
United States. Based upon risks associated with potassium hydroxide, government
agencies may impose additional restrictions on the manufacture, transport,
handling, use, and sale of the Company's products.
PATENTS AND TRADE SECRETS
The Company relies on certain proprietary technology and seeks to protect
its interests through a combination of patents, know-how, trade secrets and
security measures, including confidentiality agreements. The Company's policy
generally is to secure protection for significant innovations to the fullest
extent practicable. Further, the Company continuously seeks to expand and
improve the technological base and individual features of the Electric Fuel
System through on-going research and development programs.
In general, the Company's proprietary technology may be categorized as
follows: the overall Electric Fuel System or a combination of the Electric Fuel
System components; the zinc anode, including its physical and mechanical
attributes; the construction of the air cathode; cell structure and
arrangements; connectors; the automatic refueling system; zinc regeneration and
safety features; small consumer batteries, their components and manufacture.
The Company's issued patents and pending and anticipated patent applications are
principally related to inventions within these categories. The Company believes
that these patents, together with its trade secrets, experience, know-how and
contractual
-14-
arrangements adequately protect the Company's technology. The Company holds 34
unexpired patents granted in the United States of which five are non-zinc-air
patents covering such items as water activated batteries. The Company also holds
nine approved patent applications in Europe and two approved patent applications
in Israel. The Company has patent applications pending in the United States, in
Europe, Israel, Japan, and elsewhere, and is continually preparing additional
patent applications for filing in the United States and elsewhere. All of the
Company's currently issued patents expire between June 2009 and December 2014.
In addition to patent protection, the Company relies on the laws of unfair
competition and trade secrets to protect its proprietary rights. The Company
attempts to protect its trade secrets and other proprietary information through
agreements with customers and suppliers, proprietary information and
confidentiality agreements with employees and consultants and other security
measures. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1995, 1996, and 1997, the Company's
gross research and product development expenditures, including costs of revenues
of prototype batteries and components of the Electric Fuel System, were $14.4
million, $13.1 million and $12.2 million, respectively. During these periods,
the Office of the Chief Scientist of the Israel Ministry of Industry and Trade
(the "Chief Scientist") participated in research and development efforts of the
Company thereby reducing the Company's gross research and product development
expenditures in the amounts of $1.6 million, $1.5 million and $2.4 million,
respectively.
Under the terms of the grants from the Chief Scientist and current Chief
Scientist regulations, the Company is obligated to pay royalties at the rate of
3% of the net sales of products developed from projects funded by the Chief
Scientist for the first three years of sales, with increasing levels thereafter,
up to 5%. The Company currently pays royalties at the rate of 3% of Electric
Vehicle revenues. The obligation to make such royalty payments ends when 100% of
the amount granted (in NIS linked to the dollar) is repaid. The Government of
Israel does not own proprietary rights in the technology developed using its
funding, but certain restrictions with respect to the technology apply,
including the obligation to obtain the Israeli Government's consent to
manufacture the product based on such technology outside of Israel or for the
transfer of the technology to a third party, which consent may be conditioned
upon an increase in royalty rates or in the amount to be repaid. Current
regulations require, that in the case of the approved transfer of manufacturing
rights out of Israel, the maximum amount to be repaid will be increased to 120%
to 300% of the amount granted, depending on the extent of the manufacturing to
be conducted outside of Israel, and that an increased royalty rate will be
applied.
EMPLOYEES
As of March 15, 1998, the Company had 3 employees at its Auburn, Alabama
research facility. In its Israeli subsidiary there were 116 full-time employees,
of whom 7 hold doctoral degrees and 59 hold other advanced degrees. Of the
total, 44 employees were engaged in product research and development, 52 were
engaged in production and operations, and the remainder in general and
administrative functions. The Company had, in its German subsidiary, 28
employees engaged in plant operations there. The Company's success will depend
in large part on its ability to attract and retain skilled and experienced
employees.
The employees and the Company are not parties to any collective bargaining
agreements. However, as substantially all of the Company's employees are
located in Israel and employed by EFL, certain provisions of the collective
bargaining agreements between the Histadrut (General Federation of Labor in
Israel) and the Coordination Bureau of Economic Organizations (including the
Manufacturers' Association of Israel) are applicable to EFL's employees by order
(the "Extension Order") of the Israeli Ministry of Labor and Welfare. These
provisions principally concern the length of the work day and the work week,
minimum wages for workers, contributions to a pension fund, insurance for work-
related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment, including certain automatic
salary adjustments based on changes in the Israeli CPI.
-15-
Israeli law generally requires severance pay upon the retirement or death
of an employee or termination of employment without due cause. EFL currently
funds its ongoing severance obligations by making monthly payments to approved
severance funds or insurance policies. In addition, Israeli employees and
employers are required to pay specified sums to the National Insurance
Institute, which is similar to the United States Social Security Administration.
Since January 1, 1995, such amounts also include payments for national health
insurance. The payments to the National Insurance Institute are approximately
14.6% of wages (up to a specified amount), of which the employee contributes
approximately 66% and the employer contributes approximately 34.0%. The
majority of the permanent employees of EFL are covered by "managers insurance,"
which provides life and pension insurance coverage with customary benefits to
employees, including retirement and severance benefits. The Company contributes
14.33% to 15.83% (depending on the employee) of base wages to such plans and the
permanent employees contribute 5% of base wages.
In 1993, an Israeli court held that companies that are subject to the
Extension Order are required to make pension contributions exclusively through
contributions to Mivtachim Social Institute of Employees Ltd. ("Mivtachim"), a
pension fund managed by the Histadrut. The Company subsequently reached an
agreement with Mivtachim with respect to providing coverage to certain
production employees and bringing it into conformity with the court decision.
The agreement does not materially increase the Company's pension costs or
otherwise materially adversely affect its operations. Mivtachim has agreed not
to assert any claim against EFL with respect to any past practices of EFL
relating to this matter. Although the arrangement does not bind employees with
respect to instituting claims relating to any nonconformity by EFL, the Company
believes that the likelihood of the assertion of claims by employees is low and
that any potential claims by employees against EFL, if successful, would not
result in any material liability to the Company.
THE REORGANIZATION
Immediately prior to the Company's initial public offering in March, 1994,
one of the Company's principal stockholders, Advanced Materials Technologies,
Inc. ("Amtec") was merged with and into the Company (the "Reorganization").
The Boards of Directors of EFC and Amtec determined that a reorganization of the
ownership of EFC and Amtec was necessary in order to simplify the corporate
structure, achieve operating efficiencies and put publicly traded stock in the
hands of EFC's ultimate stockholders. The Reorganization was accomplished by a
merger pursuant to which Amtec was merged with and into EFC, with EFC being the
surviving corporation and with holders of Amtec's Common and Preferred Stock
receiving shares of EFC's Common Stock in exchange for the Amtec equity held by
them. Thus, the effects of the Reorganization were (1) to eliminate Amtec by
merging it with and into EFC, and (2) to give former stockholders of Amtec
equity interests directly in EFC in exchange for their equity interests in
Amtec. EFC also acquired certain assets totaling approximately $328,000 in
connection with the Reorganization.
ITEM 2. PROPERTIES
EFC's corporate headquarters are located in New York, New York and leased
on a month-to-month basis. The Auburn, Alabama research facility, constituting
approximately 2,000 square feet, is leased on an annual basis. The Company's
research and development and administrative facilities, constituting
approximately 11,000 square feet, are located in Jerusalem, Israel and held
under a lease agreement expiring in March 2000. The Company's production
facilities for the manufacture and assembly of Electric Fuel batteries, related
Electric Fuel System components, and Survivor Locator Lights, constituting
approximately 34,000 square feet, are located in Beit Shemesh, near Jerusalem,
Israel and held under lease agreements which expired on December 31, 1997. The
Company is completing a new agreement whereby the lease term would be extended
for up to 10 years, with the ability to terminate the lease at any time upon 12
months written notice. In addition, during 1996, the Company leased in Beit
Shemesh, additional space of approximately 16,000 square feet. The lease
agreement expires on March 19, 1999, and the term of the lease may be extended
for up to two years upon six months' prior written notice. The Company intends
to transfer the production facilities currently located in Beit Shemesh to a new
facility in Jerusalem, once it is constructed.
The Company's wholly owned subsidiary, Electric Fuel GmbH ("EFGmbH"), has
leased a facility located in Bremen, Germany from Stadtwerke Bremen AG within
which it has established a regeneration plant to operate vehicles
-16-
for the Deutsche Post Field Test. The lease is currently in effect and will
remain in effect until 6 months after the end of the Field Test. EFGmbH has the
option of extending the term of the lease until December 12, 2006. In the event
that EFGmbH exercises its option, it has the right to terminate the agreement at
the end of each calendar quarter upon three months written notice. In addition
EFGmbH has leased approximately 3,000 square feet of office space alongside the
regeneration facility. Part of the space is sub-leased. The lease agreement
expires on April 30, 1998, at which time the offices will be moved into the
Stadtwerke facility.
The aggregate rental payments under the long term leases, at rates in
effect at December 31, 1997, are approximately $242,000, $174,000, and $39,000
in the years ended December 31, 1998, 1999 and 2000 respectively. The rental
payments in Israel are payable in Israeli currency linked to the Israeli
Consumer Price Index.
The Company is actively looking for additional land to construct larger
premises near its Jerusalem facilities. The Company received a letter in August
1995 from the Israel Ministry of Industry and Trade authorizing the allocation
to the Company of approximately 5.4 dunam (approximately 1.4 acres) with rights
to construct facilities of up to approximately 90,000 square feet in Jerusalem,
near its existing facilities. Although the Company has paid the Jerusalem Land
Development Authority approximately $77,000 in development fees related to this
site, the Company continues to look for a more suitable site. If the Company
does not enter into a lease agreement for the site, the development fees will be
returned to the Company.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-17-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Since February, 1994, the Company's Common Stock has been traded under the
symbol EFCX in The Nasdaq National Market. The following table sets forth, for
the periods indicated, the range of high and low closing prices of the Company's
Common Stock in The Nasdaq National Market System.
HIGH LOW
------- ------
1994
First Quarter $ 14.25 $ 8.00
Second Quarter 12.50 6.50
Third Quarter 8.50 5.50
Fourth Quarter 8.50 5.75
1995
First Quarter $ 6.25 $ 4.25
Second Quarter 13.875 4.625
Third Quarter 11.375 7.875
Fourth Quarter 10.00 7.875
1996
First Quarter $ 11.75 $ 6.25
Second Quarter 8.00 6.125
Third Quarter 7.25 5.875
Fourth Quarter 7.00 5.875
1997
First Quarter $ 7.63 $ 4.75
Second Quarter 7.75 5.31
Third Quarter 10.25 6.13
Fourth Quarter 9.06 3.25
As of March 17, 1998 the Company had approximately 221 holders of record of
its Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Board of Directors presently intends to retain all earnings for use in the
Company's business. Any future determination as to payment of dividends will
depend upon the financial condition and results of operations of the Company and
such other factors as are deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below with respect to the
statements of income (loss) for each of the five fiscal years in the period
ended December 31, 1997, and with respect to the balance sheets at the end of
each such fiscal year has been derived from the financial statements of the
Company, which have been audited by Kesselman & Kesselman, independent certified
public accountants in Israel, and a member firm of Coopers and Lybrand
International. The financial information set forth below is qualified by and
should be read in conjunction with the Financial Statements contained in Item 8
of this Report and the notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in Item 7 of this
Report."
-18-
Year Ended December 31
1993 1994 1995 1996 1997
------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE)
Statement of Operation Data
Revenues $3,694 $ 4,873 $ 4,372 $ 5,405 $ 4,526
Research and Development - expenses and 1,830 4,770 14,379 13,068 12,228
costs of revenues
Less: royalty-bearing grants (578) (699) (1,561) (1,506) (2,382)
- ----- ------ ------- -------- -------- -------
1,252 4,071 12,818 11,562 9,846
Provision for anticipated program losses - 1,500 2,600 - -
Selling, general and administrative 1,694 3,365 2,725 4,693 4,440
expenses ------ ------- -------- -------- -------
Operating income (loss) $ 748 $(4,063) $(13,798) $(10,850) $(9,760)
Financial Income (expenses) 50 583 664 794 775
------ ------- -------- -------- -------
Income (loss) before taxes on income $ 798 $(3,480) $(13,134) $(10,056) $(8,985)
Taxes on Income 147 20 35 (38) 144
------ ------- -------- -------- -------
Income (loss) from the operations of the $ 651 $(3,500) $(13,169) $(10,018) $(9,129)
Company and its subsidiaries ====== ======= ======== ======== =======
Share in loss of investee Company $ - 61 52 - -
------ ------- -------- -------- -------
Net Income (loss) 651 (3,561) (13,221) (10,018) (9,129)
====== ======= ======== ======== =======
Earnings (loss) per share $0.08 $(0.43) $(1.87) $(0.92) $(0.73)
====== ======= ======== ======== =======
Weighted average number of common 7,926 8,319 7,088 10,947 12,515
shares outstanding (in thousands)
AS AT DECEMBER 31
1993 1994 1995 1996 1997
------ ------- -------- -------- -------
BALANCE SHEET DATA:
Cash, cash equivalents & investments in $2,514 $18,222 $ 9,580 $ 23,959 $16,717
marketable debt securities
Receivables and other assets 958 2,528 4,135 3,259 3,101
Fixed assets, net of depreciation 398 1,989 5,986 7,304 4,754
------ ------- -------- -------- -------
Total Assets $3,870 $22,739 $ 19,701 $ 34,522 $24,572
====== ======= ======== ======== =======
Liabilities $2,783 $ 3,736 $ 13,880 $ 6,652 $ 5,813
Long term debt 0 0 0 0 0
Stockholders Equity 1,087 19,003 5,821 27,870 18,759
------ ------- -------- -------- -------
Total liabilities and stockholders equity $3,870 $22,739 $ 19,701 $ 34,522 $24,572
====== ======= ======== ======== =======
-19-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements contained in Item 8 of this report, and notes thereto.
Amounts reported here have been rounded to the nearest thousand, unless such
amounts are more than 1.0 million, in which event such amounts have been rounded
to the nearest hundred thousand.
GENERAL
From its inception, the Company has been engaged principally in the
research, design, development and commercialization of an innovative, advanced
zinc-air battery. To date, the main application for the Company's technology has
been a system for powering zero emission electric vehicles. The Electric Fuel
Electric Vehicle System consists of a refuelable zinc-air battery comprised of a
series of cells with removable zinc-anode cassettes, a battery exchange system,
a battery refueling system for refueling the depleted fuel cassettes, and a
regeneration system for recycling the depleted cassettes.
In part, because the market for electric vehicles has not demonstrated
previously anticipated levels of growth in 1997, the Company began a stategic
shift to actively expand its activities into additional applications for its
zinc-air battery technology. In addition to its electric vehicle application,
the Company is focusing efforts in developing and commercializing its battery
technology for consumer electronics, defense and safety applications. The
Company is developing a zinc-oxygen battery for torpedoes, is developing an
advanced portable zinc-air battery for the US Army's Communications-Electronics
Command (CECOM), has developed and is selling a signal light powered by water
activated batteries for use in life jackets and other rescue apparatus (the
"Survivor Locator Light"), and is developing a primary battery for hand-held
electronic devices, such as cellular telephones, and laptop computers. Other
than the Survivor Locator Light, the Company currently has no commercial
products available for sale and does not expect to generate sales in commercial
quantities in the near term.
In January 1998, the Company announced the creation of three market-related
divisions to expand its zinc-air battery technology for wider applications. The
three divisions are Electric Vehicle, Consumer Batteries, and Defense and Safety
Products.
The Company has experienced significant fluctuations in the sources and
amounts of its revenues and expenses, and the Company believes that the
following comparisons of results of operations for the periods presented do not
provide a meaningful indication of the development of the Company. During these
periods, the Company has received periodic lump-sum payments relating to
licensing and other revenues from its strategic partners, which have been based
on the achievement of certain milestones, rather than ratably over time. The
Company's expenses have been based upon meeting the contractual requirements
under its agreements with various strategic partners and, therefore, have also
varied according to the timing of activities, such as the need to provide
prototype products and to establish and engineer refueling and regeneration
facilities. The Company's research and development expenses have been offset, to
some extent, by the periodic receipt of research grants from the Chief
Scientist. The Company expects that, because of these and other factors,
including general economic conditions and delays due to legislation and
regulatory and other processes and the development of competing technologies,
future results of operations may not be meaningfully compared with those of
other periods. Thus, the Company believes that period-to-period comparisons of
its past results of operations should not be relied upon as indications of
future performance.
The Company incurred significant operating losses for the years ended
December 31, 1997, 1996 and 1995, and expects to continue to incur significant
operating losses over the next several years. These losses may increase and be
incurred over a longer period of time as the Company expands its research and
development activities and establishes production and facilities, and such
losses may fluctuate from quarter to quarter. However, if any of its products
are successfully commercialized, the Company expects to derive revenues from the
sale of components of the Electric Fuel Electric Vehicle System, including
refueling and Electric Fuel services, batteries for portable electronic
products, defense
-20-
and safety products manufactured by the Company, as well as from licensing
rights to the Electric Fuel technology to third parties. There can be no
assurance that the Company will ever derive such revenues or achieve
profitability.
Functional Currency
- -------------------
The Company's management considers the United States dollar to be the
currency of the primary economic environment in which EFL operates and,
therefore, EFL has adopted and is using the United States dollar as its
functional currency. Further, the Company believes that the operations of EFL's
subsidiaries are an integral part of the Israeli operations. While a significant
proportion of EFL's revenues have been denominated in Deutsche Marks as a result
of its involvement in the Field Test, based on the Company's historical
experience and the Company's strategic objectives, management continues to
consider the United States dollar to be the currency of the primary economic
environment in which EFL operates. Furthermore, revenues not related to the
Field Test are primarily in U.S. dollars. Transactions and balances originally
denominated in United States dollars are presented at the original amounts.
Gains and losses arising from non-dollar transactions and balances are included
in net income.
Forward Looking Statements
- --------------------------
When used in this discussion, the words "believes," "anticipated," and
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially from those projected. See
"Important Factors Regarding Forward-Looking Statements" filed as Exhibit 99 to
this Report and incorporated herein by reference. Readers are cautioned not to
place undue reliance on these forward-looking statements which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
- --------------------------------------
Revenues for the year ended December 31, 1997, totaled $4.5 million
compared with $5.4 million for the comparable period in 1996. Revenues for 1997
included fees collected in relation to a rights agreement completed with
Vattenfall under which Vattenfall exercised its right for a license to establish
and operate the Electric Fuel infrastructure for the territory of Sweden,
Denmark, Norway, Finland and St. Petersburg, Russia. Additional revenues related
to Vattenfall will be recognized only after a definitive license agreement has
been signed. Execution of the definitive license agreement will be decided upon
by Vattenfall only after completion of the Field Test in May 1998. Additionally,
the Company completed recognition of revenues relating to its activities in
connection with the Deutsche Post Field Test program. For 1998, the Company and
the Deutsche Post have agreed that, subject to the satisfaction of certain
conditions, the Deutsche Post will cover direct operating costs of the Bremen
plant and the test vehicles until May 1998, up to a maximum amount of DM 2.5
million ($1.4 million). The Company also completed recognition of revenues from
Phase 2 of its agreement with STN Atlas Elektronic GmbH (STN) to develop a high
power zinc oxygen battery for torpedoes. In addition, the Company recognized
revenues from the supply of batteries and equipment to Edison, as well as from
the sale of survivor lights to various customers in the United States,
principally in the fourth quarter. Survivor light revenues are expected to
increase during 1998. Revenues for the year ended December 31, 1996, were
principally derived from activities relating to the Field Test, and the granting
of a license to Israel Electric Company for regeneration and refueling in Israel
and other neighboring countries. Additionally, the Company completed recognition
of revenues related to phase 1 of its development program with STN, and began
recognition of Phase 2 of its STN program. The Company also recognized revenues
from Edison in connection with the license granted to it.
Research and development expenses and cost of revenues totaled $12.2
million during 1997 compared with $13.1 million during 1996. The 1996 research
and development expenses and cost of revenues are net of $1.9 million,
representing utilization of a portion of the previously accrued provision for
project losses. The Company believes that, given the Company's stage of
development, it is not, at this time, meaningful to distinguish between research
and development expenses and cost of revenues. The decrease in expenses from
1996 was principally attributable to a reduction of expenses in connection with
the Deutsche Post Field Test, particularly the costs of the construction of the
-21-
regeneration plant in Bremen, and production costs related to the supply of
batteries for the Field Test. This overall decrease was partially offset by
increased R&D expenses, both for electric vehicles as well as for batteries for
portable electronic devices, and production costs related to Survivor Locator
Lights. During the year ended December 31, 1997, the Company recorded $2.4
million of royalty-bearing grants in connection with the Company's 1997 research
and development program, including an increase of $582,000 in Chief Scientist
grants in connection with the Company's 1996 research and development program.
For the year ended December 31, 1996, the Company recorded $1.5 million of Chief
Scientist grants. Since the Deutsche Post and the Company have agreed to extend
the operations of the Field Test through May, 1998, expenses related to the
Field Test are expected to continue to be incurred through the second quarter of
1998. However, direct Field Test expenses during 1998, in contrast to previous
years, will be fully funded by the Deutsche Post. During 1997, the salvage value
for the regeneration facility in Bremen was reduced by $2.2 million to a value
of $1.0 million to reflect the Company's current expectations of the value of
the plant at the end of the Field Test. The reduction in salvage value was
offset by the elimination of the provision for anticipated program losses in the
amount of $2.2 million. R&D expenses and cost of operations related to consumer
battery and defense and safety applications are expected to increase
significantly during 1998, as the Company intensifies its efforts in these new
areas, while expenses related to electric vehicle development are expected to
decrease in 1998.
The provision for anticipated program losses previously recorded by the
Company was eliminated during 1997 as the Company does not expect to incur
losses during 1998 on the Field Test. Overall, the costs of the Field Test
incurred by the Company have exceeded the related program budgeted amounts by
more than 20% and during 1997, the Company, pursuant to the terms of the Field
Test Partners Agreement, entered into discussions to obtain additional funding
from the Deutsche Post. To date, the Company has not obtained any such funding,
and accordingly, the Company operated only a limited number of vehicles during
1997. In the fourth quarter of 1996, the Deutsche Post requested that the
Company refund the sum of approximately DM 1.8 million (approximately $1.0
million) representing milestone payments on account of Opel batteries, which are
the subject of a dispute between the Deutsche Post and the Company. The advances
were made in accordance with mutually agreed contractual milestones, previously
acknowledged by the Deutsche Post as having been achieved, and therefore the
Company does not believe that it is required to refund any of the payments.
However, until the resolution of this issue, the Company has deferred
recognizing this amount in revenues.
Selling, general and administrative expenses for the year ended December
31, 1997 were $4.4 million compared with $4.7 million in 1996. While there was a
decrease in the overall amount, there were certain nonrecurring expenses
included in 1996, particularly a settlement arrangement with respect to a
terminated consultant included in marketing expenses (see Note 5(a)3 to the
Consolidated Financial Statements). Excluding the above, there was an increase
in selling general and administrative expenses of approximately $200,000. This
was primarily attributable to increased salaries, fees and allocated overhead
expenses with respect to the expanded geographic scope of the Company's
activities including the United States, Scandinavia, and the Far East, as well
as from the Company's diversification into new applications for its zinc-air
battery technology. The Company does not expect further increases in selling,
general and administrative expenses for 1998.
Financial income, net of interest expense, exchange differentials, bank
charges, and other fees, totaled approximately $775,000 in 1997 compared to
$794,000 in 1996.
The Company, and its Israeli subsidiary, EFL, have incurred net operating
losses or had earnings arising from tax-exempt income during the years ended
December 31, 1997 and 1996 and, accordingly no provision for income taxes was
required. Taxes in these entities incurred in 1997 and 1996 are primarily
composed of United States federal alternative minimum taxes. However, for 1997,
the Company's European subsidiaries had net income, which arose as a result of
intercompany transactions, and they have therefore recorded a provision for
income taxes, in the amount of $106,000.
The Company reported a net loss of $9.1 million in 1997 compared with a net
loss of $10.0 million in 1996 due to the factors cited above.
-22-
Years Ended December 31, 1996 and 1995
- --------------------------------------
Revenues for the year ended December 31, 1996, totaled $5.4 million
compared with $4.4 million in the comparable period in 1995, an increase of $1.0
million. Revenues for 1996 were principally derived from activities relating to
the Field Test program. The balance of the revenues related to the Field Test
are expected to be recognized in 1997. The Company also recognized revenues in
connection with the granting of a license to the Israel Electric Company for
zinc-air battery refueling and regeneration in Israel and other neighboring
countries. Additionally, the Company completed recognition of revenues related
to phase 1 of its development program with STN Atlas Elektronik GmbH ("STN") to
develop a high power zinc oxygen battery for torpedoes, and began recognition of
revenues from Phase 2 of its STN program. Finally, the Company recognized
revenues from Edison in connection with the license granted to it. Revenues for
the year ended December 31, 1995, were principally derived from activities
relating to the Field Test, and a grant of marketing rights and the sale of
equipment to Vattenfall AB when Vattenfall and the Swedish Post joined the Field
Test as associate partners. In addition, revenues related to phase 1 of the
Company's agreement with STN and the completion and delivery of all of the
Company's outstanding orders from Edison were recognized in 1995.
Research and development expenses and cost of revenues totaled $13.1
million during 1996 (net of $1.9 million utilization of a portion of the
previously accrued provision for project losses) compared with $14.4 million
during 1995. These expenses for both 1996 and 1995 include expenses in
connection with the Field Test, including costs related to construction of the
Bremen regeneration facility and battery production costs, costs associated with
the operation of the Company's production facilities in Israel, and the
continued development and engineering costs relating to the Electric Fuel
System. The Company believes that, given the Company's stage of development, it
is not, at this time, meaningful to distinguish between research and development
expenses and cost of revenues. In the year ended December 31, 1996, the Company
recorded $1.5 million of royalty-bearing grants representing substantially all
of the expected grants from the Chief Scientist in connection with the Company's
1996 research and development program, including an increase of $320,000 in
Chief Scientist grants in connection with the Company's 1995 research and
development program. For the year ended December 31, 1995, the Company recorded
$1.6 million of Chief Scientist grants. Expenses related to the Field Test are
expected to continue to be incurred through 1997 as the Company continues to
deliver batteries and operates the Bremen regeneration plant. Field Test
expenses have substantially exceeded any expected revenues related thereto.
Since the plant is currently dedicated to the Field Test, the cost of the plant
(net of anticipated residual value) is reflected as a current expense.
Selling, general and administrative expenses for the year ended December
31, 1996 increased to $4.7 million compared with $2.8 million in 1995. This
increase was attributable to the following: increased salaries, fees and
allocated overhead expenses with respect to the Company's expanded activities,
particularly in Germany; a settlement arrangement with respect to a terminated
consultant included in marketing expenses (see Note 5(a)3 to the Consolidated
Financial Statements); increased severance accruals resulting from modifications
to certain named executive officers' employment agreements; and increased costs
as the Company intensified its marketing efforts into new geographic areas.
Further increases in recurring selling, general and administrative expenses are
expected as the Company expands and its activities.
The provision for anticipated program losses previously recorded by the
Company reflects the program losses related to the Field Test currently
estimated by management, and accordingly no increase to the provision was
recorded in 1996. In the future, however, the provision may be increased to
reflect any revised estimates of project costs. The balance of the provision for
the uncompleted portions of the program amounts to $2.2 million as at December
31, 1996. The overall provision includes cost estimates based on the Company's
production experience to date for the supply of batteries and battery-vehicle
interface equipment, the estimated service expenses for the Field Test fleet and
costs related to the regeneration plant in Bremen, Germany which is supporting
the Mercedes-Benz Field Test vehicles in service at December, 1996.
Financial income, net of interest expense, exchange differences, bank
charges, and other fees, totaled approximately $794,000 in 1996 compared to
$665,000 in 1995. Financial income, primarily interest earned in the United
States and Israel from both taxable and tax-exempt securities, increased to
$1.1 million in 1996 from $781,000 in 1995.
-23-
The Company incurred net operating losses or had earnings arising from tax-
exempt income during the years ended December 31, 1996 and 1995 and,
accordingly, no provision for income taxes was required. Taxes in 1996 and 1995
are primarily composed of United States federal alternative minimum taxes.
The Company reported a net loss of $10.0 million in 1996 compared with a
net loss of $13.2 million in 1995 due to the factors cited above.
IMPACT OF YEAR 2000
The Company has begun investigating the impact of year 2000 on its computer
software. The Company's materials requisition, manufacturing and inventory
management software is unaffected by Year 2000 problems. However, its financial
accounting and payroll applications are for the most part not year 2000
compliant. The financial and payroll applications are "off the shelf" programs
under service contracts with the original vendors. These vendors have indicated
that they are adapting their software to be year 2000 compliant, and while there
might be certain customization and retraining expenses associated with the
upgraded software, the Company does not expect to incur material expenditures to
resolve year 2000 issues. The Company has not yet investigated the impact
regarding operating software for its manufacturing and analytical equipment. The
Company is instituting a program to analyze all software in the Company to
ensure year 2000 compliance. This program is expected to be completed prior to
December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As the Field Test comes to its conclusion in mid 1998, the Company
expects a reduction in its expenditures in connection with the engineering and
commercialization of the Electric Fuel battery for Electric Vehicles, that will
be partially offset by both a significant increase in connection with its
efforts to research and develop batteries for consumer electronic devices and
various defense contracts, as well as increased production costs related to the
Survivor Locator Lights. The Company expects that its overall research and
development, operational and selling, general and administrative expenses will
be lower in 1998 than in 1997, unless the Company generates additional revenues
which will support an increase in such expenses.
During the second quarter of 1997, the Company and Deutsche Post executed a
letter of intent agreeing to enter into negotiations for the establishment of a
joint venture entity that would provide the necessary financial and
technological resources in order to continue to develop and successfully
commercialize the Electric Fuel Electric Vehicle System in certain European
regions. Pursuant to the Letter of Intent, the parties agreed to negotiate a
definitive agreement by September 30, 1997. During September, the parties agreed
to extend the timetable for negotiations until December 31, 1997. The Letter of
Intent did not resolve the funding problems associated with the Field Test,
which were expected to be resolved during the course of, or subsequent to, the
negotiations on the joint venture. In addition, the Company expected to resolve
the dispute with respect to the Opel refund as part of these negotiations. As of
December 31, 1997 no definitive agreement was reached and the Letter of Intent
automatically terminated. In December 1997, the Deutsche Post notified the
Company that the technology satisfied all the Deutsche Post requirements and
that it, subject to the satisfaction of certain conditions, was extending the
Field Test to May 31, 1998. The Deutsche Post has given the Company no
indication of what program it might support after this date, and there can be no
assurance that there will be any on-going relationship with the Deutsche Post
following May 31, 1998. Total net consideration to the Company through December
31, 1997, for the batteries, equipment and services supplied in connection with
the Field Test has amounted to approximately $7.5 million for the fiscal years
1995-1997. This excludes the revenues, currently deferred, in connection with
the Company's discussions with the Deutsche Post with respect to the Opel
batteries.
As of December 31, 1997, the Company had cash, cash equivalents and
financial investments of approximately $16.7 million compared with $24.0 million
as of December 31, 1996.
The Company used available funds in 1997 primarily for continued research
and development expenditures, the advancement of its commitments with regards to
the Field Test, and other working capital needs. The Company increased its
investment in fixed assets by $508,000 during the year ended December 31, 1997.
Following the reduction in the salvage
-24-
value of the Bremen facility by $2.2 million, fixed assets amounted to $7.1
million as at year end. Fixed assets include $1.0 million related to the value
of the Bremen facility after its use in the Field Test, based on recent
engineering estimates.
EFL presently has a line of credit with the First International Bank of
Israel Ltd. ("FIBI") ("the Credit Facility"). Borrowings under the Credit
Facility bear interest at FIBI's prime rate + 2% per annum, are unconditionally
guaranteed by the Company and are secured by a pledge of foreign currency
deposits in the amount of NIS 750,000 (approximately $212,000), Additionally the
Credit Facility imposes financial and other covenants on EFC and EFL and
presently expires on May 31, 1998, at which time the Credit Facility will be
reviewed for renewal by FIBI. The Credit Facility provides EFL with a line of
credit in the maximum principal amount of NIS 3.8 million (approximately $1.1
million), which can be used as credit support for various obligations of EFL,
and enables EFL to enter into up to US $4.0 million in currency hedging forward
contracts with a 5% collateral requirement. As of December 31, 1997, the bank
had issued letters of credit and bank guarantees totaling approximately
$410,000. At the present time, the Company is not engaged in any hedging
activities.
The Company has no long term debt outstanding and expects that its cash
flow from operations, together with present cash reserves and amounts available
under the Credit Facility, will be sufficient to fund the Company's projected
activities through the second quarter of 1999. If there is no ongoing program
with the Deutsche Post, the Company may decide to further scale back certain of
its efforts in its Electric Vehicle division. However, additional strategic
alliances may require the establishment or expansion of facilities in Israel or
elsewhere. In addition, the Company may determine that it should invest in
certain programs, such as additional electric vehicle demonstration programs,
which it believes will advance the development and commercialization of the
Electric Fuel Electric Vehicle System. The Company is also using its resources
to research and develop other applications exploiting its proprietary
technology, including batteries for consumer electronic devices. Accordingly,
the Company may be required to seek additional funding or pursue other options,
such as joint ventures or other strategic relationships. The Company continues
to consider financing alternatives when presented and, if financing becomes
available on satisfactory terms, including prices, the Company may obtain
additional funding, including through the issuance of equity securities.
Approximately 48% of the stock of the Company's Israeli-based subsidiary,
EFL, is now owned (directly, indirectly or by application of certain attribution
rules) by three United States citizens. If at any time in the future, 50% or
more of the shares of EFL are held or deemed to be held by five or fewer
individuals (including, if applicable, those individuals who currently own an
aggregate of 48% of the Company) 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 the Company could be subject to
additional U.S. taxes on any undistributed FPHC income of EFL. For 1997, EFL has
no income which would qualify as undistributed FPHC income. However, no
assurance can be given that in the future EFL will not have income which
qualifies as undistributed FPHC income.
Actual cash requirements will depend in part upon actual and anticipated
sales and licenses. The Company may also be able to finance some portion of its
fixed asset and equipment needs through Approved Enterprise grants from the
Government of Israel.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
- ---------------------------------------------
Historically, the majority of the Company's revenues have been in U.S.
dollars, although a significant proportion of the Company's revenues are
currently in Deutsche Marks, primarily related to the Field Test. The United
States dollar cost of the Company's operations in Israel, with regard to
expenses incurred in NIS, is influenced by the extent to which an increase in
the rate of inflation in Israel is not offset by the devaluation of the NIS in
relation to the dollar. In most recent years, inflation in Israel has not been
fully compensated by the devaluation of the NIS, and, accordingly, the dollar
cost of the Company's NIS expenses has increased. The Company does not believe
that continuing inflation in Israel or delays in the devaluation of the NIS are
likely to have a material adverse effect on the Company, except to the extent
that such circumstances have an impact on Israel's economy as a whole. In the
years ended December 31, 1994, 1995, 1996 and in 1997, the annual rates of
inflation in Israel were 14.5%, 8.1%, 10.6%, and 7.0%, respectively, compared to
the devaluation of the NIS against the dollar during such periods of 1%, 3.9%,
3.7%, and 8.8% respectively. Any decrease in the value of the Deutsche Mark as
against the dollar would result in a decrease in the dollar value of such
revenues. While in the past,
-25-
the Company has engaged in currency hedging in an effort to decrease the impact
of short-term currency fluctuations, the Company is not currently engaging in
currency hedging.
EFFECTIVE CORPORATE TAX RATE
The Company's production facilities in Israel have been granted "Approved
Enterprise" status under the (Israeli) Law for Encouragement of Capital
Investments, 1959 (the "Investment Law"), and consequently are eligible for
certain tax benefits for up to ten years after they first generate taxable
income (provided the maximum period as prescribed by the Investment Law has not
elapsed). The Company has elected to receive a grant of funds together with a
reduced tax rate for the aforementioned period.
EFL's effective corporate tax rate may be affected by the classification of
certain items of income as being "approved income" for purposes of the Approved
Enterprise Law, and hence subject to a lower tax rate (25% to 10%, depending on
the extent of foreign ownership of EFL - presently 15%) than is imposed on other
forms of income under Israeli law - presently 36%. The effective tax upon income
distributed by the Company to its stockholders would be increased as a result of
the withholding tax imposed upon dividends distributed by EFL to EFC, resulting
in an overall effective corporate tax rate of approximately 28% for income
arising from EFL's Approved Enterprises and 44% regarding other income.
EFC and EFL have incurred net operating losses or had earnings arising from
tax-exempt income during the years ended December 31, 1997 and 1996 and,
accordingly no provision for income taxes was required. Taxes in these entities
paid in 1997 and 1996 are primarily composed of United States federal
alternative minimum taxes. However, for 1997, the Company's European
subsidiaries had net income, which arose as a result of intercompany
transactions, and have therefore recorded a provision for income taxes.
As of December 31, 1997 the Company has U.S. net operating loss carry
forwards of approximately $275,000 which are available to offset future taxable
income, expiring primarily in 2009 and foreign net operating loss carry forwards
of approximately $40 million which are available to offset future taxable
income, indefinitely.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors.................................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1997....... F-3
Consolidated Statements of Income (Loss) for the Three Years
in the Period Ended December 31, 1997...................... F-5
Consolidated Statements of Changes in Stockholders' Equity for
the Three Years in the Period Ended December 31, 1997...... F-6
Consolidated Statements of Cash Flows for the Three Years
in the Period Ended December 31, 1997...................... F-8
Notes to Consolidated Financial Statements...................... F-10
-26-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND SIGNIFICANT EMPLOYEES
Executive Officers and Directors
The Company's executive officers and directors and their ages as of
December 31, 1997, are as follows:
NAME AGE POSITION WITH THE COMPANY
- ------------------- --- ----------------------------------
Robert S. Ehrlich 59 Chairman of the Board of Directors
and Chief Financial Officer
Yehuda Harats 46 President, Chief Executive
Officer and Director
Joshua Degani 50 Executive Vice President - Technical
Operations, Chief Operating Officer
Menachem Korall/(1)/ 51 Senior Vice President of Technology
Stewart Edelman 37 Treasurer and Principal Accounting
Officer
Dr. Jay M. Eastman 49 Director
Jack E. Rosenfeld 59 Director
Harvey M. Krueger 68 Director
Lawrence M. Miller 51 Director
Leon S. Gross 91 Director
___________
/(1)/ Mr. Korall's employment with the Company terminated on January 31, 1998
(see item 11 for further information).
The Company's By-Laws provide for a Board of Directors of one or more
directors, and the number of directors is currently fixed at seven. Under the
terms of the Company's certificate of incorporation, the Board of Directors is
composed of three classes of similar size, each elected in a different year, so
that only one-third of the Board of Directors is elected in any single year. Mr.
Harats, Dr. Eastman and Mr. Gross are designated Class I directors and have been
elected for a term expiring in 1998 and until their successors are elected and
qualified; Messrs. Rosenfeld and Miller are designated Class II directors
-27-
elected for a term expiring in 1999 and until their successors are elected and
qualified; and Mr. Ehrlich and Mr. Krueger are designated Class III directors
elected for a term which expires in 2000.
ROBERT S. EHRLICH has been Chairman of the Board of the Company since
January 1993 and Chief Financial Officer of the Company since May 1991. From May
1991 until January 1993, Mr. Ehrlich was Vice Chairman of the Board. From May
1990 until March 1994, Mr. Ehrlich was also President, Chief Executive Officer
and a director of Advanced Materials Technology, Inc. ("Amtec"), a former
stockholder which was merged with and into EFC immediately prior to the Closing
of the Company's initial public offering. From December 1987 until July 1992
and again since April 1997, Mr. Ehrlich was Chairman of the Board of PSC Inc., a
New York corporation ("PSCX"), a manufacturer and marketer of hand-held laser
diode bar code scanners. He has served as a director of PSCX since 1987. Mr.
Ehrlich received a B.S. and J.D. from Columbia University in New York, New York.
YEHUDA HARATS has been President, Chief Executive Officer and a director of
the Company since May 1991. Previously, from 1980 to May 1991, he was the
Executive Vice President, Director of the Process Division and head of the Heat
Collection Element Division, at Luz Industries Israel Limited ("LII"). In 1989,
he was part of the team awarded the Rothschild Award for Industry, granted by
the President of the State of Israel, for his work at LII. Before joining LII in
1980, Mr. Harats was Manager of the Maintenance Planning Unit of the Israel Air
Force. Mr. Harats received a B.Sc. in Mechanical Engineering from the Israel
Institute of Technology (Technion) in Haifa, Israel.
DR. JOSHUA DEGANI has been Chief Operating Officer of the Company since
January 1998, and has been Executive Vice President for Technical Operations
since June 1997 when he joined the Company. From December 1991 through May 1997
Dr. Degani was Vice President for Research Development and Engineering in Laser
Industries Ltd. (Sharplan), a world leader in the development and productions of
systems and applications of surgical lasers. From November 1989 until August
1991, he was Program Manager of Large Scale Battery Storage, and Vice President
of Engineering at LII. From February 1983 through October 1989, Dr. Degani was
Director of Research and Development and later Plant Manager for Semiconductor
Devices, a company which developes and manufactures advanced Infrared Detectors
for thermal vision for military applications. From January 1980 through January
1983, he was employed by Bell Telephone Laboratories in New Jersey, USA, as a
Post Doctorate, and later as a Member of the Technical Staff. Dr. Degani
received a B.Sc., M.Sc., and Ph.D., in Physics from Hebrew University in
Jerusalem Israel.
MENACHEM KORALL's employment with the Company terminated on January 31,
1998. Prior to that Mr. Korall was Senior Vice President of Technology since
1994 and was Vice President of Technology since the Company's inception in 1991.
From 1989 until 1991, Mr. Korall was employed by LII as Technical Director of
the Advanced Battery Program. Prior to joining LII, Mr. Korall spent six years
as General Manager of AVX Israel, a subsidiary of AVX Corporation USA, a
manufacturer of electronic components, which is now owned by Kyocera
Corporation. He has also worked in process engineering and production management
and has been a lecturer at the Jerusalem College of Technology. Mr. Korall holds
a B.Sc. in Mathematics and Physics and an M.Sc. in Materials Science from the
Hebrew University in Jerusalem, Israel.
STEWART EDELMAN was elected Treasurer of the Company in March 1995.
Stewart Edelman has been Controller of Electric Fuel since July 1994 when he
joined the Company. From 1992 through June 1994, Mr. Edelman was in private
practice specializing in high technology companies. From 1989 through 1991, he
was Vice President of Capital Finance and Investment Company, a real estate
investment corporation. Prior to that, Mr. Edelman was employed as a certified
public accountant in various accounting firms, as well as a controller in a
large employee leasing company. He has been qualified as a Certified Public
Accountant in both Israel and the USA, and is currently licensed to practice in
Israel. Mr. Edelman received a B.A. in Accounting and Economics from the Hebrew
University in Jerusalem.
DR. JAY M. EASTMAN has been a director of the Company since October 1993.
Since November 1991, Dr. Eastman has served as President and Chief Executive
Officer of Lucid Technologies, Inc., which is developing laser technology
applications for medical diagnosis and treatment. Dr. Eastman has served as a
director of PSC, Inc. ("PSCX"), a New York Corporation, since April 1996 and
served as Senior Vice President of Strategic Planning from December 1995 through
October 1997. From December 1987 through December 1995, Dr. Eastman was
Executive Vice President of PSCX. He joined PSCX in 1986 when PSCX acquired
Optel Systems, Inc., a corporation which he co-founded and served as Chairman,
President and Chief Executive Officer from its formation in 1981. Dr. Eastman is
also a director of Chapman Instruments, Inc., which develops
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manufacturers and selling surface profiling instruments, Dimension Technologies,
Inc., a developer and manufacturer of 3D displays for computer and video
displays, and Centennial Technologies Inc., a manufacturer of PCMCIA cards. From
1981 until January 1983, Dr. Eastman was Director of the University of
Rochester's Laboratory for Laser Energetics, where he was a member of the staff
from September 1975 to 1981.
JACK E. ROSENFELD has been a director of the Company since October 1993.
Mr. Rosenfeld was President and Chief Executive Officer of Hanover Direct, Inc.
("Hanover"), formerly Horn & Hardart Co., which operates a direct mail marketing
business from September 1990 until December 1995 and had been President and
Chief Executive Officer of its direct marketing subsidiary, since May 1988. From
July 1986 until May 1988, Mr. Rosenfeld was a partner in Rosenfeld & Co. (a
private investment banking group). Mr. Rosenfeld is also a director of Maurice
Corporation and a director of PSCX.
HARVEY M. KRUEGER was elected to the Board of Directors in February 1996.
Mr. Krueger has been a Senior Managing Director of Lehman Brothers Inc., an
investment banking firm and the lead manager of the Company's recent equity
offering, since May 1984. From December 1977 to May 1984, he was Managing
Director of Lehman Brothers Kuhn Loeb, Inc. From 1965 to 1977, he was a Partner
of Kuhn Loeb & Co. and in 1977, he served as President and Chief Executive
Officer of Kuhn Loeb & Co. Mr. Krueger serves as a director on the boards of
directors of a number of companies, including Automatic Data Processing, Inc.,
R.G. Barry Corporation, a manufacturer of footwear, Chaus, Inc., a manufacturer
of women's apparel, and IVAX Corporation, a generic pharmaceutical manufacturer.
In addition, he serves on the International Advisory Board of Club Mediterranee,
S.A. and as chairman of the board of directors of Stockton Partners, Inc., the
general partner of the manager of the Renaissance Fund LDC, a private closed-end
investment fund.
LAWRENCE M. MILLER was elected to the Board of Directors in November 1996.
Mr Miller has been a senior partner in the Washington D.C. law firm of Schwartz,
Woods and Miller since 1990. He served from August 1993 through May 1996 as a
member of the board of directors of The Phoenix Resource Companies, Inc., a
publicly traded energy exploration and production company, and as a member of
the Audit and Compensation Committee of that board. That company was merged into
Apache Corporation in May 1996.
LEON S. GROSS was elected to the Board in March 1997. Mr. Gross' principal
occupation for the past five years has been as a private investor in various
publicly-held corporations, including the Company. He is also majority owner
and an officer of Micro TV, Inc., a business which owns communications towers.
Board of Directors
- ------------------
The Board of Directors of the Company has an Audit Committee consisting of
Messrs. Rosenfeld, Krueger, Miller and Dr. Eastman, and a Compensation Committee
consisting of Dr. Eastman, and Messrs. Rosenfeld and Miller. Created in December
1993, the purpose of the Audit Committee is to review the results of operations
of the Company with officers of the Company who are responsible for accounting
matters and, from time to time, with the Company's independent auditors,
Kesselman & Kesselman, a member of Coopers & Lybrand International. The
Compensation Committee recommends annual compensation arrangements for the Chief
Executive Officer and Chief Financial Officer and reviews annual compensation
arrangements for all officers and significant employees.
VOTING AGREEMENTS
Messrs. Ehrlich, Harats and Korall are parties to a Stockholders Voting
Agreement pursuant to which each of the parties agrees to vote the shares of the
Company's Common Stock held by that person in favor of the election of Messrs.
Ehrlich and Harats (or their designees) as directors of the Company. Messrs.
Gross, Ehrlich and Harats are parties to a Voting Rights Agreement dated
September 30, 1996 pursuant to which each of the parties agrees to vote the
shares of the Company's Common Stock held by that person in favor of the
election of Messrs. Ehrlich, Harats and Miller for five years following October
1996.
DIRECTOR COMPENSATION
Non-employee members of the Board of Directors of the Company are paid
$1,000 (plus expenses) for each Board of Directors meeting attended and $500
(plus expenses) for each meeting of a committee of the Board of Directors
attended. In
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addition, the Board of Directors has adopted a Non-Employee Director Stock
Option Plan pursuant to which non-employee directors receive an initial grant of
options to purchase 15,000 shares of the Company's Common Stock upon the
effective date of such plan or upon the date of his or her election as a
director. Thereafter, non-employee directors will receive options to purchase
5,000 shares of Common Stock per year of service on the Board. All such options
will be granted at fair market value and vest ratably, over three years from the
date of the grant.
DELINQUENT FILINGS
Under the securities laws of the United States, the Company's directors,
certain of its officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their ownership of the Company's
Common Stock and any changes in that ownership to the Securities and Exchange
Commission. Specific due dates for these reports have been established and the
Company is required to report in this Report any failure to file by these dates
during 1997. All of these filing requirements were satisfied by its directors
and officers and, to the knowledge of the Company, ten percent holders, except
as follows; Mr. Korall was required to file a Form 4 on or prior to November 10,
1997, for his sale of 5000 shares of Common Stock in October 1997, and reported
this transaction on a Form 5 filed February 16, 1998; and (ii) Mr. Miller was
required to file a Form 4 on or prior to November 10, 1997, for his purchase of
1,200 shares of Common Stock in October 1997, and reported this transaction on a
Form 4 filed November 19, 1997.
Significant Employees
- ---------------------
The Company's significant employees and their ages as of December 31, 1997
are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Dr. Inna Gektin 54 Senior Research Associate
Menachem Givon 50 Project Manager - Regeneration
Dr. Jonathan Goldstein 51 Chief Scientist
Binyamin Koretz 40 Vice President - Strategic Planning
Dr. Neal Naimer 39 Vice President - Battery Technology
Jonathan Whartman 43 Vice President - Marketing
DR. INNA GEKTIN is a Senior Research Associate of the Company. Prior to
emigrating to Israel in 1990 from the former Soviet Union, Dr. Gektin studied at
the University of Kharkov, and received her Ph.D. from the Physical Technical
Institute of Low Temperature where she worked as Senior Research Associate for
over 20 years.
MENACHEM GIVON is Project Manager - Regeneration. Mr. Givon earned his
bachelors and masters degree in Physics at Ben-Gurion University, and in
parallel has taken considerable coursework in Electrical Engineering. From 1978
to 1990, he specialized in the development of production and quality control
systems at Shoval Metal Industries in the Negev.
DR. JONATHAN GOLDSTEIN is Chief Scientist, responsible for scientific
support of battery technologies, patents, literature, innovative concepts and
advanced systems. From 1977 to 1989, Dr. Goldstein was Senior Electrochemist at
Tadiran Batteries in Rehovot, Israel, providing scientific leadership and
support at various Tadiran battery plants. He was educated at Imperial College,
London, where he obtained a B.Sc., and at City University of London, where he
earned a Ph.D. in Chemistry. Dr. Goldstein is the author of 25 papers, 20 U.S.
patents, and several current patent applications pending in Europe, U.S. and
Japan.
BINYAMIN KORETZ is Vice President of Strategic Planning, responsible for
new business development, economic modeling, intellectual property protection,
and other planning activities. In addition, since January 1998, Mr. Koretz is
responsible for the Company's defense and safety applications. Mr. Koretz was
the Company's Treasurer from 1993 until
-30-
December 1994. Mr. Koretz previously spent six years at American Telephone and
Telegraph, where he was responsible for planning and management of capital
investment in that company's long-distance network. He holds a B.Sc. in Civil
Engineering/Transportation Systems from the Massachusetts Institute of
Technology and an M.B.A. from the University of California at Berkeley.
DR. NEAL NAIMER is Vice President - Battery Technology. Prior to that Dr.
Naimer was Director of Electrode Engineering of the Company's Air Electrode
development program. From 1987 to 1989, he was the Manager of the Chemical Vapor
Deposition (Thin Films) Group at Intel Electronics Jerusalem, and was Project
Manager of the photo voltaic IR detector development program at Tadiran
Semiconductor Devices in Jerusalem from 1984 to 1987. Dr. Naimer was educated at
University College of London, England, where he received his B.Sc. in Chemical
Engineering and a Ph.D. in Chemical Engineering.
JONATHAN WHARTMAN was Director of Special Projects of the Company from 1991
until his election to Vice President of Marketing in 1994. Mr. Whartman was
also Director of Marketing of Amtec from its inception in 1989 through the
merger of Amtec into EFC. Before joining Amtec, Mr. Whartman was Manager of
Program Management at LII, Program Manager for desk-top publishing at ITT Qume,
San Jose, California and Marketing Director at Kidron Digital Systems, an
Israeli computer developer. Mr. Whartman holds a B.A. in Economics and a M.B.A.
from the Hebrew University, Jerusalem, Israel.
-31-
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid and accrued by the Company
for services rendered for 1995, 1996 and 1997 to the Chief Executive Officer and
the three highest paid executive officers who received more than $100,000 in
salary and bonuses during the year ended December 31, 1997 (collectively the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
-------------------------------------------- COMPENSATION
AWARDS
NAME AND PRINCIPAL POSITION
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
AT DECEMBER 31, 1997 YEAR SALARY BONUS COMPENSATION (NUMBER) COMPENSATION
- -----------------------------------------------------------------------------------------------------
Yehuda Harats/(1)/ 1997 $154,968 $ 0/(2)/ $ 10,691/(3)/ 0 $280,748/(4)/
President, Chief 1996 145,220 47,000 127,558 150,000 372,875
Executive Officer and 1995 140,684 40,364 1,742 0 175,309
Director
Robert S. Ehrlich/(1)/ 1997 $154,968 $ 0/(2)/ $ 14,193/(3)/ 0 $264,601/(5)/
Chairman and Chief 1996 145,238 47,000 75,890 150,000 166,628
Financial Officer 1995 140,684 40,364 6,148 0 123,657
Menachem Korall /(1)(6)/ 1997 $117,264 $(5,000)/(7)/ $ 7,863/(3)/ 0 135,182 /(8)/
Vice President of 1996 110,002 35,000 9,635 0 169,956
Technology 1995 106,491 30,328 1,744 0 102,703
Joshua Degani /(1)/ 1997 $ 59,105 $ 5,062/(9)/ $ 3,449/(3)/ 122,500 $ 51,906/(10)/
Executive Vice
President, Technical
Operations
___________________________
(1) The amounts reported for each Named Executive Officer were paid in New
Israeli Shekels ("NIS") and have been translated into U.S. dollars at
the exchange rate of NIS into U.S. dollars at the time of payment or
accrual.
(2) In lieu of a cash bonus for fiscal year 1997, the Compensation Committee
has, in March 1998, approved a grant of options to each of Messrs. Ehrlich
and Harats, the number and terms of which are to be determined based on a
present value of $50,000 under a valuation methodology to be performed by
an independent third party.
(3) Represents the costs of taxes paid by the Executive officer and reimbursed
by the Company.
(4) Of this amount, $29,844 represents the Company's accrual for severance pay
which would be payable to Mr. Harats upon a "change of control" of the
Company or upon the occurrence of certain other events, $27,201 represents
the
-32-
Company's accrual for sick leave and vacation redeemable by Mr. Harats,
$1,061 represents the Company's accrual for severance pay which would be
payable to Mr. Harats under the laws of the State of Israel upon the
termination of his employment by the Company, $35,157 consists of the
Company's payments and accruals to a pension fund which provides a savings
plan, insurance and severance pay benefits and an education fund which
provides for the on-going education of employees. Additionally, $184,486
represents the Company's accrual to fund Mr. Harats' pension and education
funds as well as provide him with certain other post-termination benefits,
and $2,999 represents the value charged for tax purposes for the use of a
car provided by the Company.
(5) Of this amount, $84,301 represents the Company's accrual for severance pay
which would be payable to Mr. Ehrlich upon a "change of control" of the
Company or upon the occurrence of certain other events, $21,519 represents
the Company's accrual for sick leave and vacation redeemable by Mr.
Ehrlich, $4,437 represents the Company's accrual for severance pay which
would be payable to Mr. Ehrlich under the laws of the State of Israel upon
the termination of his employment by the Company, and $35,157 represents
the Company's payments and accruals to pension and education funds.
Additionally, $112,650 represents the Company's accrual to fund Mr.
Ehrlich's pension fund as well as provide him with certain other post-
termination benefits, and $6,536 represents the value charged for tax
purposes for the use of a car provided by the Company.
(6) Mr. Korall's employment with the Company terminated on January 31, 1998.
(7) Represents reversal of previously accrued bonus not paid to Mr. Korall.
(8) Of this amount, $104,603 represents the Company's accrual for severance pay
and other termination benefits payable to Mr. Korall and agreed to as part
of the termination agreement with Mr. Korall, $(16,053) represents the
Company's reduction in the accrual for sick leave and vacation redeemable
by Mr. Korall, $3,443 represents the Company's accrued severance pay which
would be payable to Mr. Korall under the laws of the State of Israel upon
the termination of his employment by the Company, $13,826 consisted of
payments to Mr. Korall in lieu of vacation, and $26,365 represents the
Company's payments and accruals to pension and education funds.
Additionally, $2,998 represents the value charged for tax purposes for use
of a car provided by the Company.
(9) In lieu of cash for part of his bonus for fiscal year 1997, the
Compensation Committee has, in March 1998, approved a grant of options to
Dr. Degani, the number and terms of which are to be determined based on a
present value of $10,000 under a valuation methodology to be performed by
an independent third party.
(10) Of this amount, $36,000 represents the Company's accrual for additional
severance pay which would be payable to Dr. Degani if terminated by the
Company, $1,052 represents the Company's accrual for vacation redeemable by
Dr. Degani, and $11,058 represents the Company's payments and accruals to
pension and education funds. Additionally, $3,796 represents the value
charged for tax purposes for the use of a car provided by the Company.
-33-
The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 1997.
OPTIONS GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
--------------------------------------------------------------------------------
NAME NUMBER OF % OF TOTAL EXERCISE EXPIRATION 5% ($) 10% ($)
SECURITIES OPTIONS OR BASE DATE
UNDERLYING GRANTED TO PRICE
OPTIONS EMPLOYEES ($/SH)
GRANTED IN FISCAL
YEAR
--------------------------------------------------------------------------------
Yehuda Harats 0/(1)/
Robert Ehrlich 0/(1)/
Joshua Degani 122,500/(2)/ 82% 5.5 5/8/07 $423,718 $1,073,784
(1) In lieu of a cash bonus for fiscal year 1997, the Compensation Committee
has, in March 1998, approved a grant of options to each of Messrs. Ehrlich
and Harats, the number and terms of which are to be determined based on a
present value of $50,000 under a valuation methodology to be performed by
an independent third party.
(2) The options granted to Mr. Degani become exercisable as follows: 17,150
options on December 31, 1997, and 35,117 options each, on December 31,
1998, 1999 & 2000. In lieu of cash for part of his bonus for fiscal year
1997, the Compensation Committee has, in March 1998, approved a grant of
options to Dr. Degani, the number and terms of which are to be determined
based on a present value of $10,000 under a valuation methodology to be
performed by an independent third party.
The table below sets forth information for the Named Executive Officers with
respect to fiscal 1997 year-end option values.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS FISCAL-YEAR-END (1)
AT FISCAL YEAR END
----------------------------- -------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
NAME (NUMBER) (NUMBER)
------------ -------------
Yehuda Harats 0 150,000 --- ---
Robert S. Ehrlich 127,478 150,000 --- ---
Menachem Korall 90,000 0 --- ---
Joshua Degani 17,150 105,350 --- ---
_______________________
(1) In-the-money options are options for which the fair market value of the
underlying securities exceeds the exercise or base price of the option. None of
the options held by Named Executive Officers are currently in-the-money.
-34-
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Each of Messrs. Ehrlich, Harats and Korall are parties to employment
agreements with the Company (the "Employment Agreements") which can be extended
automatically for additional terms of two years each unless terminated sooner by
either the executive or the Company. Mr. Korall's Employment was terminated on
January 31, 1998 (see below) and each of Messrs. Harats and Ehrlich's Employment
Agreements end December 15, 2000. The Employment Agreements provide for a base
salary of $11,736, $11,736, and $7,500 per month for Messrs. Ehrlich, Harats and
Korall, respectively (the "Base Salary"). On each anniversary of Mr. Korall's
Employment Agreement, Base Salary was adjusted in an amount equal to the excess,
if any, of any increase in the Israeli Consumer Price Index over any devaluation
in currency of Israel compared to the U.S. dollar during the immediately
preceding year. The last adjustment to Mr. Korall's base salary was on January
1, 1997 when it was adjusted to $9,423 per month. With respect to Messrs. Harats
and Ehrlich, Base Salary is adjusted in an amount equal to the greater of 3% or
in an amount equal to the excess, if any, of any increase in the Israeli
Consumer Price Index over any devaluation in currency of Israel compared to the
US Dollar, in each case during the immediately preceding year. Accordingly, Base
Salary for Messrs. Ehrlich, Harats and Korall is, as of January 1, 1998,
$12,942, $12,942 and $9,423 per month, respectively. The Employment Agreements
provide for bonuses to be paid in an amount of (a) not less than 50% of Base
Salary or (b) 2%, 2% and 1%, respectively, of Net Earnings (defined as net
income before taxes and extraordinary and other nonrecurring items) (the
"Bonus"), subject to certain conditions, as well as other benefits such as
vacation, sick leave, provision of automobiles and insurance contributions. The
determination of the amount of Bonus to be paid pursuant to the Employment
Agreements is based on attainment of the Company's budgeted results, including
Net Earnings. Additionally, the Compensation Committee will set qualitative
goals annually as a basis for paying the bonus to each of Messrs. Ehrlich and
Harats. During 1997, no bonuses were accrued for Messrs. Ehrlich, Harats and
Korall. In lieu of a cash bonus, the Compensation Committee has, in March 1998,
approved a grant of options to each of Messrs. Ehrlich and Harats, the number
and terms of which to be determined based on a present value of $50,000 under a
valuation methodology to be performed by an independent third party. The
Employment Agreements also contain confidentiality and non-competition
covenants. Pursuant to the Employment Agreements, each of Messrs. Ehrlich,
Harats and Korall was granted demand and "piggyback" registration rights
covering shares of the Company's Common Stock held by them. The Employment
Agreements may be terminated by the Company in the event of death, disability or
for "Cause" (defined as conviction of certain crimes, willful failure to carry
out directives of the Company's Board of Directors or gross negligence or
willful misconduct). Messrs. Ehrlich and Harats each have the right to terminate
their employment for "Good Reason," which is defined to include adverse changes
in employment status or compensation, insolvency of the Company, material
breaches and certain other events. Upon termination of employment, the
Employment Agreements provide for payment of all accrued and unpaid
compensation, any Bonus due for the year in which employment is terminated and a
termination payment equal to thirty-six times monthly Base Salary at the highest
rate in effect within the 90 day period prior to the termination of employment
and certain benefits will continue and all outstanding options will be fully
vested. In addition, Messrs. Harats and Ehrlich are entitled to an amount equal
to the greater of (x) the average of all bonuses paid to the executive during
the three most recent full calendar years immediately preceding the Termination
Date or (y) all bonuses paid to the executive during the most recent full
calendar year immediately preceding the Termination Date. Furthermore, Mr.
Harats has the right to terminate his employment even without a "Good Reason",
prior to the end of the agreement, and will still be entitled to all the
termination benefits indicated above. On January 28, 1998, Messrs Ehrlich and
Harats agreed, that for 1998, they would waive 25% of their base salary or
$38,820 for the calendar year. The Compensation Committee, in March 1998,
approved a grant of options to each of Messrs. Ehrlich and Harats, the number
and terms of which are to be determined based on a present value of $38,820
under a valuation methodology to be performed by an independent third party. The
options vest 1/12th per month over the calendar year. Messrs. Ehrlich and Harats
each have the right to cancel the arrangement upon two weeks notification to the
Company prior to the beginning of each quarter. Any unvested options would
immediately be forfeited. Furthermore, while their base salary was decreased,
their social benefits and 1998 bonuses, will still be calculated on the full
base salary that they are entitled to by contract.
Dr. Degani entered into an employment agreement with the Company upon
joining the Company in June 1997 (the" Degani Employment Agreement"). The
Degani Employment Agreement has no fixed termination date, and, subject
-35-
to advance notice by either party of two months, may be terminated at will. The
Degani Employment Agreement provides for a base salary of $9,000. This was
adjusted to $9,500, effective January 1998. The Degani Employment Agreement
provides for an annual bonus of not less than 1.5 months base salary, in
accordance with Dr. Degani's success in the position, as well as other benefits
such as vacation, sick leave, provision of an automobile and insurance
contributions. Furthermore, Dr. Degani is entitled to a termination payment (in
addition to severance pay by law), in an amount between 2-5 months base salary,
depending on who gives notice, and how long Dr. Degani has been employed with
the Company. The Degani Employment Agreement also contains confidentiality and
non-competition covenants. On January 28, 1998, Dr. Degani agreed, that for
1998, he would waive $500 per month of his base salary, or $6,000 for the
calendar year. The Compensation Committee, in March 1998, approved a grant of
options to Dr. Degani, the number and terms of which are to be determined based
on a present value of $6,000 under a valuation methodology to be performed by an
independent third party. The options vest 1/12th per month over the calendar
year. Dr Degani may cancel the arrangement upon two weeks notification to the
Company prior to the beginning of each quarter. Any unvested options would
immediately be forfeited. Furthermore, while his base salary was decreased, the
social benefits and 1998 bonuses, will still be calculated on his full base
salary.
On March 12, 1998, the Company and Mr. Korall entered into an agreement
(the "Termination Agreement") to terminate Mr. Korall's Employment Agreement,
and all of each of the Company's and Mr. Korall's right and obligations
thereunder effective as of January 31, 1998. Pursuant to the Termination
Agreement, the Company paid Mr. Korall all salary, other benefits and legally
mandated severance pay due to him through that date. In addition, the Company
agreed to pay to Mr. Korall additional severance pay in the amount of $120,000,
payable in 24 equal monthly installments of $5,000 each, and to extend the date
by which options held by Mr. Korall to purchase 90,000 Shares of the Company may
be exercised to February 28, 2000. The Termination Agreement also contains
mutual general releases between the Company and Mr. Korall. Simultaneously, the
Company entered into a consulting agreement (the "Consulting Agreement") with
Shampi Ltd., a consulting company with which Mr. Korall is affiliated. Pursuant
to the terms of the Consulting Agreement, Mr. Korall will prepare several
reports for the Company dealing with the Company's existing vehicle battery
product and with a proposal for a new battery project. The Consulting Agreement
terminates on April 10, 2000 unless renewed by mutual agreement of the parties.
In consideration of these consulting services, the Company will make 24 equal
monthly payments of $6,000 each to Shampi Ltd., in addition to two lump sum
payments of $31,500 each at the beginning and end of the contract period.
Furthermore, the Company agreed to provide to it a motor vehicle during such
period for the use of Mr. Korall. Pursuant to the Consulting Agreement, Shampi
Ltd and Mr. Korall have agreed to a five-year confidentiality provision and an
agreement not to compete with the Company nor to solicit customers, suppliers or
employees of the Company during the term of the Consulting Agreement and for a
period of twelve months thereafter.
Other employees have entered into individual employment agreements with the
Company. These agreements govern the basic terms of the individual's employment,
such as salary, vacation, overtime pay, severance arrangements and pension
plans. Subject to Israeli law, which restricts a company's right to relocate an
employee to a work site further than sixty kilometers from his or her regular
work site, the Company has retained the right to transfer certain employees to
other locations and/or positions provided that such transfers do not result in a
decrease in salary or benefits. In addition, all of these agreements contain
provisions governing the confidentiality of information and ownership of
intellectual property learned or created during the course of the employee's
tenure with the Company. Under the terms of these provisions, employees must
keep confidential all information regarding the Company's operations (other than
information which is already publicly available) received or learned by the
employee during the course of employment. This provision remains in force for
five years after the employee has left the service of the Company. Further,
intellectual property created during the course of the employment relationship
belongs to the Company.
A number of the individual employment agreements, but not all, contain non-
competition provisions which restrict the employee's rights to compete against
the Company, or work for an enterprise which competes against the Company, for a
period of two years after the employee has left the service of the Company.
-36-
Under the laws of Israel, an employee of the Company who has been dismissed
from service, died in service, retired from service upon attaining retirement
age, or left due to poor health, maternity or certain other reasons, is entitled
to severance pay at the rate of one month's salary for each year of service. The
Company funds this obligation currently by making monthly payments to approved
private provident funds and by its accrual for severance pay in the consolidated
financial statements. See Note 3 of the Notes to the Consolidated Financial
Statements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors for the 1997 fiscal
year consisted of Dr. Jay Eastman, Jack Rosenfeld, and Lawrence Miller. None of
the members have served as officers of the Company.
Robert S. Ehrlich, Chairman and Chief Financial Officer of the Company
serves as Chairman and a director of PSCX, for which Dr. Eastman serves as
director and Mr. Rosenfeld serves as director and member of the Compensation
Committee.
In January 1993, each of Messrs. Ehrlich, Harats and Korall exercised
options to purchase 423,116, 719,304 and 343,785 shares of the Company's Common
Stock, respectively, at an exercise price of $0.35 per share. In payment for the
option exercise, each of Messrs. Ehrlich, Harats and Korall issued non-recourse
promissory notes (the "Promissory Notes") secured by the shares of Common Stock
purchased, bearing interest at one point over the applicable United States
federal funds rate. In December 1994, the Promissory Notes were amended to
change the interest rate to the higher of a United States dollar rate of 7% or
the percentage increase in the Israeli CPI between the date of the Promissory
Notes and the date interest is calculated, based on the original principal
amount of the loan expressed in NIS. Interest is payable at maturity. As of
December 31, 1997, the aggregate amount outstanding pursuant to the Promissory
Notes for each of Messrs. Ehrlich, Harats and Korall was $206,686, $354,774 and
$147,301, respectively (including an aggregate of $206,057 in accrued interest
receivable), which, in the case of Messrs. Ehrlich and Harats, are also the
largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes matured on January 3, 1998.The promissory notes of
Messrs. Ehrlich and Harats were renewed as recourse notes for a period of 10
years through December 31, 2007. Mr. Korall's note has not been renewed. As part
of his termination agreement, Mr. Korall has agreed to sell shares sufficient to
pay the remaining balance of the loan. Interest will continue to accrue on the
Promissory Notes in accordance with the terms thereof until they are fully paid.
In August 1996, each of Messrs. Ehrlich, Harats exercised options to
purchase 80,000, and 170,000 shares of the Company's Common Stock, respectively,
at an exercise price of $5.75 per share. In payment for the option exercise,
each of Messrs. Ehrlich, and Harats issued new non-recourse promissory notes
(the "New Promissory Notes") secured by the shares of Common Stock purchased,
bearing interest at the rate of 6.2% per annum. The income taxes due on the
option exercise were also added to the loan balance. Interest accrues at the
higher of the abovementioned rate or the percentage increase in the Israeli CPI
between the date of the New Promissory Notes and the date interest is
calculated, based on the original principal amount of the loan expressed in NIS.
Israel Value Added Tax ("VAT") is being added to the interest. Both Interest and
the related VAT are payable at maturity. As of December 31, 1997, the aggregate
amount outstanding pursuant to the New Promissory Notes for each of Messrs.
Ehrlich and Harats was $542,619 and $1,153,184, respectively (including an
aggregate of $182,728 in accrued interest and VAT receivable), which are also
the largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes mature on August 20, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the security ownership
of those persons owning of record or known to the Company to be beneficial
owners of more than five percent of the Company's Common Stock as of
-37-
March 16, 1998, each of the Company's Named Executive Officers and directors,
and the shares of Common Stock held by all directors and executive officers of
the Company as a group.
SHARES PERCENTAGE OF
BENEFICIALLY OWNED/(1)(2)/ TOTAL SHARES
OUTSTANDING/(2)/
Five Percent Holders
- ---------------------------------------
Newton D. Becker 3,510,004/(3)/ 12.3%
2743 Aqua Verde Circle
Los Angeles, California
Named Executive Officers & Directors
- ---------------------------------------
Leon S. Gross 3,510,004/(4)(13)/ 24.7%
Robert S. Ehrlich 1,099,979/(5)(9)(13)/ 7.6%
Yehuda Harats 1,536,207/(6)(9)(13)/ 10.7%
Joshua Degani 17,150/(7)/ *
Menachem Korall 495,632/(8)(9)/ 3.5%
Dr. Jay M. Eastman 11,667/(10)/ *
Jack E. Rosenfeld 11,667/(10)/ *
Harvey M. Krueger 14,667/(11)/ *
Lawrence Miller 13,914/(12)/ *
All Directors and Executive Officers
of the Company as a group 6,727,721/(4)(5)(6)(7)(8)(10)(11)(12)/ 45.40%
(10 persons)
* Less than one percent
___________________________
(1) Unless otherwise indicated in these footnotes, each of the persons or
entities named in the table has sole voting and sole investment power with
respect to all shares shown as beneficially owned by that person, subject
to applicable community property laws.
(2) For purposes of determining beneficial ownership of the Company's Common
Stock, owners of options exercisable within sixty days are considered to be
the beneficial owners of the shares of Common Stock for which such
securities are exercisable. The percentage ownership of the outstanding
Common Stock reported herein is based on the assumption (expressly required
by the applicable rules of the Securities and Exchange Commission) that
only the person whose ownership is being reported has converted his options
into shares of Common Stock.
(3) All shares are held in the name of the Becker Family Trust of which Mr.
Becker is the trustee and sole beneficiary during his lifetime. Excludes
633,350 shares held by the Newton Becker Irrevocable Trust No. 1, as to
which Mr. Becker disclaims beneficial ownership. Shares held by the
Irrevocable Trust are held for the benefit of members of Mr. Becker's
family. David E. Becker and Bryan Gordon, Mr. Becker's son and stepson,
respectively, are co-trustees of the Irrevocable Trust.
-38-
(4) Based upon a Form 4 dated February 9, 1998. Includes 5,000 shares of Common
Stock issuable upon exercise of options exercisable within 60 day, and
160,000 shares held by Leon Gross and Lawrence Miller as Co-Trustees of the
Rose Gross Charitable Foundation.
(5) Includes 277,478 shares of Common Stock issuable upon exercise of options
exercisable, or potentially exercisable, within 60 days.
(6) Includes 150,000 shares of Common Stock issuable upon exercise of options
exercisable, or potentially exercisable, within 60 days.
(7) Includes 17,150 shares of Common Stock issuable upon exercise of options
exercisable within 60 days
(8) Includes 90,000 shares of Common Stock issuable upon exercise of options
exercisable, or potentially exercisable, within 60 days.
(9) Messrs. Ehrlich, Harats and Korall are parties to a Stockholders Voting
Agreement pursuant to which each of the parties agrees to vote the shares
of the Company's Common Stock held by that person in favor of the election
of Messrs. Ehrlich and Harats (or their designees) as directors of the
Company.
(10) Includes 11,667 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(11) Includes 11,667 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(12) Includes 5,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(13) Messrs. Gross, Ehrlich and Harats are parties to a Voting Rights Agreement
pursuant to which each of the parties agrees to vote the shares of the
Company's Common Stock held by that person in favor of the election of
Messrs. Ehrlich, Harats and Miller for five years following October 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1993, each of Messrs. Ehrlich, Harats and Korall exercised
options to purchase 423,116, 719,304 and 343,785 shares of the Company's Common
Stock, respectively, at an exercise price of $0.35 per share. In payment for the
option exercise, each of Messrs. Ehrlich, Harats and Korall issued non-recourse
promissory notes (the "Promissory Notes") secured by the shares of Common Stock
purchased, bearing interest at one point over the applicable United States
federal funds rate. In December 1994, the Promissory Notes were amended to
change the interest rate to the higher of a United States dollar rate of 7% or
the percentage increase in the Israeli CPI between the date of the Promissory
Notes and the date interest is calculated, based on the original principal
amount of the loan expressed in NIS. Interest is payable at maturity. As of
December 31, 1997, the aggregate amount outstanding pursuant to the Promissory
Notes for each of Messrs. Ehrlich, Harats and Korall was $206,686, $354,774 and
$147,301, respectively (including an aggregate of $206,057 in accrued interest
receivable), which, in the case of Messrs. Ehrlich and Harats, are also the
largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes matured on January 3, 1998. The promissory notes of
Messrs. Ehrlich and Harats were renewed as recourse notes for a period of 10
years through December 31, 2007. Mr. Korall's note has not been renewed. As part
of his termination agreement, Mr. Korall has agreed to sell shares sufficient to
pay the remaining balance of the loan. Interest will continue to accrue on the
Promissory Notes in accordance with the terms thereof until they are fully paid.
In August 1996, each of Messrs. Ehrlich, Harats exercised options to
purchase 80,000, and 170,000 shares of the Company's Common Stock, respectively,
at an exercise price of $5.75 per share. In payment for the option exercise,
each of Messrs. Ehrlich, and Harats issued new non-recourse promissory notes
(the "New Promissory Notes") secured by the shares of Common Stock purchased,
bearing interest at the rate of 6.2% per annum. The income taxes due on the
option exercise were also added to the loan balance. Interest accrues at the
higher of the abovementioned rate or the percentage increase in the Israeli CPI
between the date of the New Promissory Notes and the date interest is
calculated,
-39-
based on the original principal amount of the loan expressed in NIS. Israel
Value Added Tax ("VAT") is being added to the interest. Both Interest and the
related VAT are payable at maturity. As of December 31, 1997, the aggregate
amount outstanding pursuant to the New Promissory Notes for each of Messrs.
Ehrlich and Harats was $542,619 and $1,153,184, respectively (including an
aggregate of $182,728 in accrued interest and VAT receivable), which are also
the largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes mature on August 20, 2001.
In September 1996, Mr. Edelman exercised options to purchase 5,333 shares
of the Company's Common Stock, at an average exercise price of $5.83 per share.
In payment for the option exercise, Mr. Edelman issued a non-recourse promissory
note (the "Promissory Note") secured by the shares of Common Stock purchased,
bearing interest at the rate of 6.2% per annum. The income taxes due on the
option exercise were also added to the loan balance. Interest accrues at the
higher of the abovementioned rate or the percentage increase in the Israeli CPI
between the date of the Promissory Note and the date interest is calculated,
based on the original principal amount of the loan expressed in NIS. VAT is
being added to the interest and is paid currently. Interest is payable at
maturity. As of December 31, 1997, the aggregate amount outstanding pursuant to
the Promissory Note was $36,330 (including an aggregate of $3,512 in accrued
interest and VAT receivable), which is also the largest aggregate amount
outstanding since the issuance of the Promissory Note. The Promissory Note
matures on September 10, 2001.
Pursuant to a Stock Purchase Agreement dated September 30, 1996, between
the Company and Mr. Gross, (the "Purchase Agreement"), on October 2, 1996, the
Company issued 1,538,462 shares of Common Stock to Mr. Gross at a price of
$6.50 per share, for a total purchase price of $10.0 million.
Pursuant to the terms of the Purchase Agreement, Mr. Gross agreed that for
a period of five (5) years from the date of the Purchase Agreement, neither Mr.
Gross nor his Affiliates, as defined in the Securities Act, directly or
indirectly or in conjunction with or through any Associate (as defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
will (i) solicit proxies with respect to any capital stock or other voting
securities of the Company under any circumstances, or become a "participant" in
any "election contest" relating to the election of directors of the Company (as
such terms are used in Rule 14a-11 of Regulation 14A of the Exchange Act) or
(ii) make an offer for the acquisition of substantially all of the assets or
capital stock of the Company or induce or assist any other person to make such
an offer or (iii) form or join any "group" within the meaning of Section
13(d)(3) of the Exchange Act with respect to any capital stock or other voting
securities of the Company for the purpose of accomplishing the actions referred
to in clauses (i) and (ii) above other than pursuant to the Voting Rights
Agreement described below.
In connection with the Purchase Agreement, the Company and Mr. Gross also
entered into a Registration Rights Agreement 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 (2) demands for a shelf registration statement on Form S-3 for the sale
of the Common Stock which may, subject to certain customary limitations and
requirements, be underwritten. In addition, Mr. Gross was granted the right to
"piggyback" on registrations of Common Stock in an unlimited number of
registrations. Also under the Registration Rights Agreement, Mr. Gross is
subject to customary underwriting lock-up requirements with respect to public
offerings of the Company's securities.
Pursuant to a Voting Rights Agreement dated September 30, 1996 and as
amended December 10, 1997,(the "Voting Rights Agreement"), between the Company,
Mr. Gross and certain management shareholders, Robert S. Ehrlich (the Company's
Chairman of the Board and Chief Financial Officer) and Yehuda Harats (the
Company's President and Chief Executive Officer (the "Management
Stockholders")), Lawrence M. Miller, Mr. Gross's advisor, will be entitled to be
nominated to serve on the Company's Board of Directors, so long as Mr. Gross,
his heirs or assigns retains at least 1,375,000 shares of Common Stock. As a
result, the Company's Board of Directors was increased to a total of six
members. 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 10, 2002 or the 5/th/ Annual Meeting after
December 10, 1997. In addition, so long as Mr. Miller serves as a director, Mr.
Gross, who shall succeed Mr. Miller should he cease to serve on the Board
(unless Mr. Gross is then serving on the Board, in which case Mr. Gross may
designate a Director), shall be entitled to attend and receive notice of Board
meetings. Mr. Gross further agreed to vote, at the Company's next Annual Meeting
of Stockholders, and
-40-
take any further necessary action, in favor of an increase in shares authorized
to be issued upon exercise of options under the Company's 1993 Stock Option and
Restricted Stock Purchase Plan.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - See Index to Financial Statements attached
hereto, page 26.
2. Financial Statements Schedules - See Index to Financial Statements
attached hereto, page 26.
3. Exhibits - The following is a list of exhibits:
Exhibit
Number Description
- ------ -----------
2 Merger Agreement dated as of March 2, 1994 between the Company and
Advanced Materials Technology, Inc.(1)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(1)
3.2 Amended and Restated By-Laws of the Company.(4)
4 Specimen Certificate for shares of Common Stock, $.01 par value of the
Registrant.(1)
10.1 Option Agreement dated October 29, 1992 between Electric Fuel B.V.
("EFBV") and Electric Storage Advanced Technologies, Sr ("ESAT").(1)
10.2 Sublicense Agreement dated May 20, 1993 between EFBV and ESAT.(1)
10.3 Letter Agreement dated May 20, 1993 between EFBV and ESAT.(1)
10.4 Notice of Edison's assumption of ESAT's obligations under the
Sublicense Agreement with EFBV.(1)
10.5 Agreement dated December 16, 1992 between EFL and Technischer
Uberwachungsverein Bayern Sachsen e.V. ("TUV").(1)
10.6 Agreement dated July 29, 1992 between EFL and TUV.(1)
10.7 Letter of Intent between the Company and Deutsche Post AG dated
November 18, 1993.(1)
10.8 Amended and Restated 1993 Stock Option and Restricted Stock Purchase
Plan dated November 11, 1996.+
10.9.1 Form of Management Employment Agreements. (1)+
10.9.2 General Employee Agreements.(1)*+
10.10 Office of Chief Scientist documents.(1)*
10.10.1 Letter from the Office of Chief Scientist to the Company dated
January 4, 1995.(4)
10.11 Lease Agreement dated December 2, 1992 between the Company and Har
Hotzvim Properties Ltd.(1)*
-41-
10.12 Letter of Approval by the Investment Center of the Ministry of
Trade.(1)*
10.13 Execution Copy of Purchase Agreement dated as of June 9, 1993 among
the Company, EFL, Advanced Materials Technology, Inc. and the Trustee
of the Chapter 7 Bankruptcy Estate of Luz International Ltd.(1)
10.14 Agreement between EFL and Dr. Walter Trux dated as of March 1,
1993.(1)
10.15 Cooperation Agreement between EFL and Hoechst GmbH dated as of August
22, 1994.(2)
10.16 Agreement between Deutsche Post AG and EFL dated as of September 19,
1994.(2)
10.17 Agreement between Deutsche Post AG and EFL dated as of October 21,
1994.(2)
10.18 Framework Agreement between Vattenfall AB and EFL dated March 27,
1995.(3)
10.19 Summary of the terms of the Lease Agreements dated as of November 11,
1994, November 11, 1994 and April 3, 1995 between EFL and Industries
Building Company, Ltd.(4)*
10.20 Amended and Restated 1995 Non-Employee Director Stock Option Plan.(5)+
10.21 Framework Contract between the Company and Stadtwerke Bremen AG
("Stadtwerke") dated July, 1995.(4)
10.22 Assignment Agreement dated December 31, 1995 between EFL, Hoechst GmbH
and Uhde GmbH ("Uhde").(4)
10.23 Lease between EFL and Stadtwerke dated __________, 1995.(5)*
10.24 Framework Agreement for Cooperation in Marketing and Establishment of
Regeneration Plants between EFL and Uhde dated February 11, 1996.(5)
10.25 Letters of Approval of Lines of Credit from First International Bank
of Israel Ltd. dated March 14, 1996 and March 18, 1996.(5)
10.26 Stock Purchase Agreement between the Company and Leon S. Gross
("Gross") dated September 30, 1996.(6)
10.27 Registration Rights Agreement between the Company and Gross dated
September 30, 1996.(6)
10.28 Voting Rights Agreement between the Company, Gross, Robert Ehrlich and
Yehuda Harats dated September 30, 1996. (6)
10.29 Agreement between the Company and Walter Trux dated December 18, 1996.
(7)
10.30 Cooperation Agreement between The Israel Electric Corporation and EFL
dated as of October 31, 1996.(7)
10.31 Amended and Restated Employment Agreement, dated as of October 1, 1996
between the Company, EFL and Yehuda Harats+ (7)
10.32 Amended and Restated Employment Agreement dated as of October 1, 1996
between the Company, EFL and Robert S. Ehrlich+ (7)
10.33 Lease Agreement between Mori Investments Ltd. and EFL dated March 18,
1996. (7)
-42-
10.34 Agreement dated February 20, 1997 between STN ATLAS Elektronik GmbH
and EFL.(7)
10.35 Agreement dated February 2, 1998 between Deutsche Post AG and EFL.
10.36 Employment Agreement dated May 13, 1997 between the Company, EFL, and
Joshua Degani.+
10.37 Termination Agreement dated March 12, 1998 between the Company, EFL
and Menachem Korall.+
10.38 Consulting Agreement dated March 12, 1998 between the Company, EFL,
and Shampi Ltd.
10.39 Amendment No. 1 to the Voting Rights Agreement between the Company,
Gross, Robert Ehrlich, and Yehuda Harats dated December 10, 1997.
10.40 Amendment No. 2 to the Registration Rights Agreement between the
Company, Gross, Robert Ehrlich and Yehuda Harats dated December 10,
1997.
21 Subsidiaries.(4)
23.1 Consent of Kesselman & Kesselman (a member of Coopers & Lybrand
International), independent certified public accountants in Israel.
27 Financial Data Schedule.
27.1 Amended Financial Data Schedule - Nine Months Ended September 30,
1997.
27.2 Amended Financial Data Schedule - Six Months Ended June 30, 1997.
27.3 Amended Financial Data Schedule - Three Months Ended March 31, 1997.
27.4 Amended Financial Data Schedule - Year Ended December 31, 1996.
27.5 Amended Financial Data Schedule - Nine Months Ended September 30,
1996.
27.6 Amended Financial Data Schedule - Six Months Ended June 30, 1996.
27.7 Amended Financial Data Schedule - Three Months Ended March 31, 1996.
99. Important factors regarding forward-looking statements.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8K during the last
quarter of fiscal year 1997.
________________
* English translation or summary from original.
+ Includes management contracts and compensation plans and arrangements.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-73256), which became effective on February 23,
1994.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, as amended.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-97944), which became effective on February 5, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(6) Incorporated by reference to the Company's Report on Form 8-K dated October
4, 1996.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, as amended
-43-
ELECTRIC FUEL CORPORATION
1997 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 3-4
Statements of loss 5
Statements of changes in stockholders' equity 6-7
Statements of cash flows 8-9
Notes to financial statements 10-31
_______________
_________________________
_______________
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
ELECTRIC FUEL CORPORATION
We have audited the consolidated balance sheets of Electric Fuel Corporation
(hereafter - the "Company") and its subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of loss, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
Board of Directors and management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Israel and in the United States, including those prescribed by the Israeli
Auditors (Mode of Performance) Regulations, 1973. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement, either due to error or
to intentional misrepresentation. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Company's Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a fair basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 1997 and 1996 and the consolidated results of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles in the United States.
Jerusalem, Israel Kesselman & Kesselman
March 20, 1998 Certified Public Accountants (Israel)
2
ELECTRIC FUEL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------------------
1997 1996
------------ ------------
U.S. DOLLARS
------------------------------
A S S E T S
CURRENT ASSETS (note 7):
Cash and cash equivalents 11,771,816 12,662,776
Marketable debt securities (note 8a) 3,101,846 11,296,382
Accounts receivable:
Trade 801,927 369,442
Other (note 8b) 1,711,037 1,915,628
Inventories 538,682 915,032
---------- ----------
T o t a l current assets 17,925,308 27,159,260
---------- ----------
MARKETABLE DEBT SECURITIES (note 8a) 1,843,326
----------
FIXED ASSETS (note 2):
Cost 7,058,716 8,754,771
L e s s - accumulated depreciation and amortization 2,304,327 1,451,095
---------- ----------
4,754,389 7,303,676
---------- ----------
OTHER ASSETS, net of
accumulated amortization (note 8c) 49,182 59,182
---------- ----------
24,572,205 34,522,118
========== ==========
3
DECEMBER 31
-----------------------------
1997 1996
---------- ----------
U.S. DOLLARS
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES (note 7):
Accounts payable and accruals:
Trade 1,169,371 1,079,284
Other (note 8d) 1,786,163 3,505,594
Advances from customers 1,014,948 926,599
---------- ----------
Total current liabilities 3,970,482 5,511,477
LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT,
net of amount funded (note 3) 1,842,749 1,141,030
COMMITMENTS AND CONTINGENT LIABILITIES (note 4)
---------- ----------
Total liabilities 5,813,231 6,652,507
---------- ----------
STOCKHOLDERS' EQUITY (note 5):
Common stock - $ 0.01 par value;
authorized - 28,000,000 shares as of December 31, 1997,
and 1996;
issued - 14,218,161 shares as of December 31, 1997,
and 14,257,508 shares as of December 31, 1996
outstanding - 14,218,161 shares as of December 31, 1997
and 14,185,208 shares as of December 31, 1996 142,182 142,575
Preferred stock - $ 0.01 par value; authorized - 1,000,000 shares,
no shares outstanding
Additional paid-in capital 57,077,708 57,341,451
Accumulated deficit (36,020,457) (26,890,958)
Unrealized gain on available-for-sale securities 436 3,157
Treasury stock, at cost (common stock - 72,300 shares as of
December 31, 1996) (456,394)
Notes receivable from stockholders (2,440,895) (2,270,220)
---------- ----------
Total stockholders' equity 18,758,974 27,869,611
---------- ----------
24,572,205 34,522,118
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
1997 1996 1995
------------ ------------ ------------
U.S. DOLLARS
---------------------------------------------
REVENUES (notes 4a and 9a) 4,526,216 5,405,303 4,371,610
------------ ------------ ------------
RESEARCH AND DEVELOPMENT EXPENSES
AND COST OF REVENUES
Expenses incurred (note 9b) 12,227,559 13,067,747 14,378,805
Less - royalty-bearing grants (note 4b) 2,381,777 1,505,720 1,560,792
------------ ------------ ------------
9,845,782 11,562,027 12,818,013
PROVISION FOR ANTICIPATED
PROGRAM LOSSES (notes 1a(4), h and
4a(1)) 2,600,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (note 9c) 4,440,194 4,693,008 2,752,033
------------ ------------ ------------
14,285,976 16,255,035 18,170,046
------------ ------------ ------------
OPERATING LOSS (9,759,760) (10,849,732) (13,798,436)
FINANCIAL INCOME - net (note 9d) 775,111 793,853 664,722
------------ ------------ ------------
LOSS BEFORE TAXES ON INCOME (8,984,649) (10,055,879) (13,133,714)
TAXES ON INCOME (note 6) 144,850 (38,261) 35,210
------------ ------------ ------------
LOSS FROM THE OPERATIONS OF THE COMPANY
AND ITS SUBSIDIARIES (9,129,499) (10,017,618) (13,168,924)
SHARE IN LOSS OF INVESTEE COMPANY (note 1g) 52,134
------------ ------------ ------------
LOSS (9,129,499) (10,017,618) (13,221,058)
============ ============ ============
LOSS PER SHARE - basic and diluted (note 9e) (0.73) (0.91) (1.86)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (note 9e) 12,502,330 10,961,765 7,103,872
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
(CONTINUED) - 1
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
--------------------
SHARES AMOUNT CAPITAL DEFICIT
------- ------- ----------------- -----------
U.S . DOLLARS
-------------------------------------------------------
BALANCE AT JANUARY 1, 1995 11,183,550 111,836 24,059,587 (3,652,282)
CHANGES DURING 1995:
Shares issued in connection with the exercise of 144,560 1,446 108,521
options
Purchase of treasury stock (8,700 shares)
Accrued interest on notes receivable from stockholders
Payments of interest and principal on notes receivable
from stockholders
Unrealized gain on available-for-sale securities
Loss (13,221,058)
---------- ------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 11,328,110 113,282 24,168,108 (16,873,340)
CHANGES DURING 1996:
Shares issued in a public offering (note 5a(1)) 3,750,000 37,500 /(1)/21,562,647
Shares issued in a private placement (note 5a(2)) 1,538,462 15,384 /(2)/9,920,407
Shares issued in connection with the exercise of
options (note 5b(3)) 293,099 2,931 1,516,933
Compensation cost in connection with exercise of
options (note 5b(3)) 159,834
Treasury stock retired (2,652,163) (26,522) (166,652)
Purchase of treasury stock (72,300 shares) and options
issued as compensation for services rendered by
consultant (note 5a(3)) 68,000
Options issued as compensation for services rendered by
consultant (note 5b(3)) 9,959
Loans granted to stockholders
Accrued interest on notes receivable from stockholders 102,215
Realization of gain on available-for-sale securities
Loss (10,017,618)
---------- ------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 - forward 14,257,508 142,575 57,341,451 (26,890,958)
UNREALIZED
GAIN ON NOTES
AVAILABLE RECEIVABLE
FOR SALE TREASURY FROM
SECURITIES STOCK STOCKHOLDERS TOTAL
------------ ---------- -------------- -------
U.S. DOLLARS
-----------------------------------------------------
BALANCE AT JANUARY 1, 1995 (146,187) (1,370,280) 19,002,674
CHANGES DURING 1995:
Shares issued in connection with the exercise of 109,967
options
Purchase of treasury stock (8,700 shares) (46,987) (46,987)
Accrued interest on notes receivable from stockholders (77,291) (77,291)
Payments of interest and principal on notes receivable
from stockholders 24,629 24,629
Unrealized gain on available-for-sale securities 29,048 29,048
Loss (13,221,058)
------------ ---------- -------------- ------------
BALANCE AT DECEMBER 31, 1995 29,048 (193,174) (1,422,942) 5,820,982
CHANGES DURING 1996:
Shares issued in a public offering (note 5a(1)) 21,600,147
Shares issued in a private placement (note 5a(2)) 9,935,791
Shares issued in connection with the exercise of
options (note 5b(3)) (1,465,978) 53,886
Compensation cost in connection with exercise of
options (note 5b(3)) 159,834
Treasury stock retired 193,174
Purchase of treasury stock (72,300 shares) and options
issued as compensation for services rendered by
consultant (note 5a(3)) (456,394) 815,046 426,652
Options issued as compensation for services rendered by
consultant (note 5b(3)) 9,959
Loans granted to stockholders (94,131) (95,131)
Accrued interest on notes receivable from stockholders (102,215)
Realization of gain on available-for-sale securities (25,891) (25,891)
Loss (10,017,618)
------------ ---------- -------------- ------------
BALANCE AT DECEMBER 31, 1996 - forward 3,157 (456,394) (2,270,220) 27,869,611
6
(CONCLUDED) - 2
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNREALIZED
GAIN ON
ADDITIONAL AVAILABLE
COMMON STOCK PAID-IN ACCUMULATE FOR SALE
------------------------
SHARES AMOUNT CAPITAL DEFICIT SECURITIES
---------- -------- ---------- ---------- ------------
U. S. D O L L A R S
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 - forward 14,257,508 142,575 57,341,451 (26,890,958) 3,157
CHANGES DURING 1997:
Shares issued in connection with the exercise
of options (note 5b(3)) 32,953 330 36,552
Treasury stock retired (72,300) (723) (455,671)
Options issued as compensation for services
rendered by consultant (note 5b(3)) 9,000
Loans granted to stockholders
Payment of interest and principal on note
receivable from stockholders
Accrued interest on notes receivable from
stockholders 146,376
Realization of gain on available-for-sale (2,721)
securities
Loss (9,129,499)
---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 14,218,161 142,182 57,077,708 (36,020,457) 436
========== ========== ========== ========== ==========
NOTES
RECEIVABLE
TREASURY FROM
STOCK STOCKHOLDERS TOTAL
--------- ------------ ---------
U. S. D O L L A R S
-------------------------------------------
BALANCE AT DECEMBER 31, 1996 - forward (456,394) (2,270,220) 27,869,611
CHANGES DURING 1997:
Shares issued in connection with the exercise
of options (note 5b(3)) 36,882
Treasury stock retired 456,394
Options issued as compensation for services
rendered by consultant (note 5b(3)) 9,000
Loans granted to stockholders (38,395) (38,395)
Payment of interest and principal on note
receivable from stockholders 14,096 14,096
Accrued interest on notes receivable from
stockholders (146,376)
Realization of gain on available-for-sale (2,721)
securities
Loss (9,129,499)
--------- ----------- ----------
BALANCE AT DECEMBER 31, 1997 -- (2,440,895) 18,758,974
========= =========== ==========
/(1)/ Net of $ 2,774,853 - offering expenses.
/(2)/ Net of $ 64,211 - issuing expenses.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
(CONTINUED) - 1
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
----------- ------------ -----------
U.S. DOLLARS
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss (9,129,499) (10,017,618) (13,221,058)
Adjustments required to reconcile loss to net cash
used in operating activities:
Share in loss of investee company 52,134
Depreciation and amortization 866,327 951,955 506,895
Amortization of net premium (discount) on
marketable debt securities (44,591) 278,455
Capital loss (gain) from disposal of fixed assets 6,405 7,145 (3,786)
Capital loss from disposal of marketable debt
securities, net 30,991 348
Liability for employee rights upon retirement - net 701,719 585,122 260,775
Waiver of loan to stockholder 358,652
Compensation cost in connection with exercise
of options 159,834
Issue of stock options as compensation for
services rendered by consultants 9,000 77,959
Interest accrued on notes and loan to stockholders (77,291)
Changes in operating asset and liability items:
Decrease (increase) in accounts receivable (233,457) 118,619 268,712
Decrease (increase) in inventories 376,350 (379,824) (403,458)
Increase (decrease) in accounts payable and
accruals 570,656 (4,516,367) 5,718,556
Changes in related parties - net 10,141
Increase (decrease) in advances from customers 88,349 (3,296,467) 4,164,945
----------- ------------ -----------
Net cash used in operating activities (6,788,741) (15,919,999) (2,444,632)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (507,882) (2,225,459) (5,333,875)
Investment grant relating to fixed assets 355,137
Loans granted to stockholders (38,395) (94,131)
Amounts carried to other asset and deferred charges (710,552)
Proceeds from disposal of fixed assets 19,731 9,559
Sale or redemption of (purchase of) marketable
debt securities - net 6,393,080 (7,137,746) 12,448,903
----------- ------------ -----------
Net cash provided by (used in) investing activities 5,846,803 (9,082,468) 6,414,035
----------- ------------ -----------
Forward (941,938) (25,002,467) 3,969,403
8
(CONCLUDED) - 2
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
1997 1996 1995
----------- ------------ ------------
U.S. DOLLARS
-----------------------------------------
Forward (941,938) (25,002,467) 3,969,403
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of share capital (including additional paid
in capital), net of offering expenses 32,246,490
Proceeds from exercise of options 36,882 53,886 109,967
Payment on note receivable from stockholders 14,096 24,629
Purchase of treasury stock (46,987)
----------- ------------ ------------
Net cash provided by financing activities 50,978 32,300,376 87,609
----------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (890,960) 7,297,909 4,057,012
BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 12,662,776 5,364,867 1,307,855
----------- ------------ ------------
BALANCE OF CASH AND CASH EQUIVALENTS AT END
OF YEAR 11,771,816 12,662,776 5,364,867
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE YEAR FOR:
Interest 30,001 28,247 48,810
=========== ============ ============
Income taxes 49,563 92,483 65,448
=========== ============ ============
SUPPLEMENTARY INFORMATION ON ACTIVITIES NOT INVOLVING CASH FLOWS:
1. As to the writedown, in 1997, of equipment in the amount of $ 2.2
million, see note 1a(4).
2. As to transaction, in 1996, whereby the Company purchased shares of
its common stock from a stockholder, see note 5a(3).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis,
are as follows:
A. GENERAL:
1) Nature of operations
Electric Fuel Corporation ("EFC") - a Delaware corporation -
together with its subsidiaries, is referred to as the
Company. Almost all operating assets of the Company are
situated at, and operations of the Company are primarily
carried out by, Electric Fuel (E.F.L.) Ltd. ("EFL") - an
Israeli wholly-owned subsidiary. The Company is engaged in
one business segment - design, development, and
commercialization of innovative advanced zinc-air batteries.
The Company's products have not reached the commercial
stage. Until commencement of commercial product sales
occurs, the Company plans to meet its funding requirements
through fees from potential users of its technology, sales
of pre-production battery systems and equipment, grants from
various programs from the State of Israel's Ministry of
Industry and Trade and the funds raised from sale of EFC's
shares.
The other active subsidiaries are:
Electric Fuel B.V. - a Netherlands company, wholly-owned by
EFL.
Electric Fuel GmbH - a German company, wholly owned by EFL.
2) Investee company - Coatec Ltd., an Israeli company (3.9%
owned as of December 31, 1997 and 1996).
3) Accounting principles
The financial statements are prepared in accordance with
U.S. generally accepted accounting principles ("GAAP").
4) Use of estimates in the preparation of financial statements
The preparation of the financial statements in conformity
with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those
estimates.
10
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
In accordance with Statement No. 121 of the U.S. Financial
Accounting Standards Board ("FASB"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", the Company records impairment losses on
long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and
the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amounts of those
assets. Based on the Company's estimate of future
undiscounted cash flows, the Company expects to recover the
carrying amounts of its remaining fixed assets.
During the year ended December 31, 1997, the Company
recorded a writedown of equipment relating to the Field Test
in Germany in the amount of $ 2.2 million. This writedown
was charged against the provision for anticipated program
losses established in prior years (see note 4a(1)).
B. FUNCTIONAL CURRENCY OF SUBSIDIARIES
The Company's management considers the United States dollar to be
the currency of the primary economic environment in which EFL
operates and, therefore, EFL has adopted and is using the United
States dollar as its functional currency. Further, the Company
believes that the operations of EFL's subsidiaries are an
integral part of the Israeli operations. While a significant
proportion of EFL's revenues have been denominated in German
marks as a result of its involvement in the Field Test, based on
the Company's historical experience and the Company's strategic
objectives, management continues to consider the United States
dollar to be the currency of the primary economic environment in
which EFL operates. Furthermore, revenues not related to the
field test are primarily in dollars. Transactions and balances
originally denominated in dollars are presented at their original
amounts. Gains and losses arising from non-dollar transactions
and balances are included in net income.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EFC
and its subsidiaries. Intercompany balances and transactions have
been eliminated.
D. MARKETABLE DEBT SECURITIES
These securities are classified as available-for-sale.
Accordingly, these securities are stated at fair market value and
the changes in their value are carried directly to Stockholders'
Equity. Realized gains and losses are carried to the statements
of loss.
11
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
E. INVENTORIES
Composed mainly of raw materials and supplies valued at the lower
of cost or market. Cost is determined on the "first-in, first-
out" basis.
F. FIXED ASSETS
These assets are stated at cost, net of related investment grant.
The assets are depreciated by the straight-line method, on the
basis of their estimated useful life.
Annual rates of depreciation are as follows:
%
---
Machinery and equipment 10;25
(mainly 10)
Computers and related equipment 20
Office furniture and equipment 6;10
Vehicles 15
Leasehold improvements are amortized by the straight-line method
over the term of the lease, which is shorter than the estimated
useful life of the improvements.
G. OTHER ASSETS
Other assets represent know-how purchased in 1994 and an
investment in an Israeli company (see note 1a(2)). The know-how
is stated at cost and amortized over five years. The investment
is stated at cost, as from July 1995 (formerly accounted by the
equity method).
H. REVENUE RECOGNITION
Revenues in respect of contracts for prototype equipment,
technical assistance, services, etc. are recognized upon the
delivery of the equipment or as the services are performed.
Payment from technology licenses is recognized upon sale of the
license.
If such payment is uncertain, revenue is recognized to the extent
of non-refundable fees received.
Revenue and costs in connection with the Company's contractual
program commitments (see note 4a(1)) are recognized on the
"percentage of completion" method. The percentage of completion
is determined according to the ratio of amounts already expended
to estimated total cost as projected at balance sheets dates.
Full provision is made for losses arising from these commitments
upon their anticipation.
12
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
I. RESEARCH AND DEVELOPMENT
Research and development expenses are included under "Research
and development expenses and cost of revenues". Because of the
nature of the Company's operations, management is of the opinion
that it is not meaningful to segregate these costs. Research and
development expenses, are charged to operations as incurred.
Government participations are recognized as a reduction of
expense as the related costs are incurred (see also note 4b).
J. DEFERRED INCOME TAXES
The Company uses the liability method of accounting for income
taxes, as set forth in Statement No. 109 of the FASB, "Accounting
for Income Taxes". Under this method, deferred income taxes are
provided on the basis of the differences between the financial
reporting and income tax bases of assets and liabilities at the
statutory rates enacted for future periods.
K. CASH EQUIVALENTS
The Company considers all highly liquid debt instruments,
purchased with a maturity of three months or less, to be cash
equivalents.
L. DERIVATIVES
In order to hedge foreign currency exposure on firm commitments,
the Company periodically enters into foreign currency forward
contracts. Gains and losses from these contracts are deferred and
included as part of the measurement of the results from the
underlying hedged transaction.
M. CONCENTRATION OF CREDIT RISKS
Most of the Company's cash and cash equivalents and marketable
debt securities at December 31, 1997 and 1996 are deposited with
Israeli and U.S. banks and U.S. brokers. Accordingly, the Company
considers the inherent credit risks to be remote.
The Company's revenues are earned primarily in Europe, from large
institutional customers. In general, the exposure to
concentration of credit risks relating to trade receivables is
limited, due to the nature of the Company's customers.
13
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
N. RECENTLY ISSUED ACCOUNTING PRINCIPLES:
1) Loss per share
In February 1997, the FASB issued Statement No. 128,
"Earnings per share" ("Statement 128"), which is effective
as from 1997. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earning per
share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities.
Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earning per
share amounts for all periods have been presented and where
appropriate restated to conform to the Statement 128
requirements. Consequently, the loss per share for the years
ended December 31, 1996 and 1995 increased from $0.81 and
$1.55 respectively, as previously reported to $0.91 and
$1.86 as reported in these financial statements,
respectively.
2) Reporting comprehensive income
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income".("Statement 130"). Statement 130
requires the reporting and display of comprehensive income
and its components, in a full set of general-purpose
financial statements. In addition to net income,
comprehensive income includes all non-owner changes in
equity. Statement 130 is effective for financial statements
for fiscal years beginning after December 15, 1997, and
reclassification of financial statements for earlier periods
for comparative purposes is required. The adoption of
Statement 130 will have no material impact on the Company's
consolidated results of operations, financial position or
cash flows.
3) Accounting for segments of an enterprise
In June 1997, the FASB issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("Statement 131"). Statement 131 requires
publicly-held enterprises to report financial and other
information about key revenue-producing segments of the
entity for which such information is available and is
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing
performance. It also establishes standards for related
disclosures about the revenues derived from the enterprise's
products and services, about the countries in which the
enterprise earns revenues and holds assets and about major
customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are
required to be restated. The Company will adopt the new
requirement retroactively in 1998. Management has not
completed its review of the impact of Statement 131, but
anticipates that the adoption of this statement may affect
the number of segments the Company is required to report.
14
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - FIXED ASSETS:
A. COMPOSITION OF ASSETS, GROUPED BY MAJOR CLASSIFICATIONS, IS AS
FOLLOWS:
ACCUMULATED
DEPRECIATION
C O S T * AND AMORTIZATION
-------------------------- ------------------------
DECEMBER 31 DECEMBER 31
-------------------------- ------------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
U.S. DOLLARS
------------------------------------------------------
Machinery and equipment** 5,030,996 7,109,177 1,494,097 967,050
Computers and related equipment 463,710 292,770 181,582 105,001
Office furniture and equipment 334,821 249,594 80,836 58,922
Vehicles 634,430 539,788 239,213 149,237
Leasehold improvements 594,759 563,442 308,599 170,885
--------- --------- --------- ----------
7,058,716 8,754,771 2,304,327 1,451,095
* Net of related investment grant in the amount of $ 919,601 and
$925,164 as of December 31, 1997 and 1996, respectively (see also
note 6b).
** Including residual value of equipment relating to the Field Test
in Germany in the amount of $ 953,909 and $ 3,153,909 as of
December 31, 1997 and 1996, respectively (see also notes 1a(4)
and 4a(1)).
B. As to liens on fixed assets, see note 6b(1)(c).
15
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - EMPLOYEE RIGHTS UPON RETIREMENT:
a. Israeli law generally requires payment of severance pay upon dismissal
of an employee or upon termination of employment in certain other
circumstances. EFL's severance pay liability to its Israeli employees,
based upon the number of years of service and the latest monthly
salary (see also note 4d), is partly covered by purchase of insurance
policies and by deposits with severance pay and pension funds.
The amounts accrued and the portion funded primarily by purchase of
insurance policies (plan assets) for Israeli employees of EFL are
composed as follows:
December 31
--------------------------------
1997 1996
------------ -------------
U. S. d o l l a r s
--------------------------------
Accrued severance pay 2,726,520 1,803,944
L e s s - plan assets 883,771 662,914
---------- ----------
Unfunded balance* 1,842,749 1,141,030
========== ==========
* Reflects primarily obligations of the Company in connection with
employment agreements with certain senior employees (see note
4d).
EFL may only make withdrawals from the funds for the purpose of paying
severance pay.
b. Expenses included for employee rights upon retirement for each of the
years ended December 31, 1997, 1996 and 1995 amounted to approximately
$ 1,036,000, $ 1,140,000 and $ 470,000, respectively.
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES:
A. AGREEMENTS RELATING TO THE COMPANY'S TECHNOLOGY:
1) Field Test with German Postal Authority - Deutsche Post AG
("Deutsche Post").
In 1994, EFL signed agreements with Deutsche Post and other
partners for the purpose of conducting a Field Test using EFL's
technology ("the Field Test"), which reached completion in 1997.
The anticipated cost of the Company's share in the Field Test was
greater than anticipated revenues and accordingly the Company
recorded a provision for anticipated losses in prior years. The
balance of the provision for anticipated losses amounted to $ 2.2
million as of December 31, 1996. This amount was applied against
the writedown of equipment relating to the Field Test (see notes
1a(4) and 2a).
16
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
In 1996, Deutsche Post requested that the Company refund
approximately DM 1.8 million (approximately $ 1.0 million) which
is the subject of a dispute between Deutsche Post and the
Company. The Company does not believe it is required to refund
any of this amount. However, until resolution of this issue, the
Company has deferred recognizing this amount in revenues.
In 1997, the Company and Deutsche Post agreed to extend the Field
Test through May 1998. Deutsche Post will cover the operating
expenses of the extension program.
The Field Test extension will enable Deutsche Post to test a
series of vans powered by zinc-air technology, which were ordered
in September 1997.
Deutsche Post has also notified the Company that it seeks to
exercise its option granted in the September 1994 agreement for a
non-exclusive license for use of the Company's technology.
The license would allow Deutsche Post to use vehicles powered by
the Electric Fuel System and to operate all refueling and
regeneration facilities for its fleet. The license does not
include production of such equipment but does, however, allow
Deutsche Post to offer refueling and regeneration services to
third parties, provided that agreed upon royalties are paid to
Electric Fuel.
2) Edison
Pursuant to agreements between the Company, through its Dutch
subsidiary, and a major Italian energy company (Edison
Termoelettrica subsidiary of Edison S.P.A., hereafter "Edison"),
the Company has provided batteries and related equipment and
technical assistance in respect of the Company's technology. The
Company has also granted Edison a sublicense for its technology
in certain areas in Europe until the year 2008 and will be
entitled to royalties of 3% to 5% of sales in excess of $ 10
million.
3) Vattenfall AB
During 1997, EFL signed a rights agreement with Vattenfall AB,
(Vattenfall), a Swedish utility company. Vattenfall excercised
its right for a license to establish and operate regeneration
facilities and sell Electric Fuel in the Nordic region. Although
a final agreement has not been signed, the rights agreement
covers the main elements of a 25 year license in consideration of
royalties and other considerations to the Company. It is
currently anticipated that a final agreement will be decided only
after the completion of the field test in May 1998.
17
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
4) Israel Electric Corporation
During 1996, EFL signed an agreement with the Israel Electric
Corporation (hereafter "IEC'') granting a license for production,
distribution and marketing of Electric Fuel in Israel and certain
Middle East countries.
The agreement called for a payment of $ 960,000 to the Company
which was included in 1996 revenues. IEC has also agreed to pay
royalties of 3% to 5%, based on future gross revenues from the
sale, lease or any revenue, in connection with the EFL
technology.
5) Other
(a) The Company is currently developing, in cooperation with a
German defense and marine industry contractor, a high power
zinc-oxygen battery for torpedoes. The Company has granted
the contractor exclusive rights to sell torpedoes with the
Company's zinc-oxygen batteries until 2001, subject to
automatic extension if full-scale production commences, as
well as certain rights with respect to the application of
the Company's proprietary technology for batteries.
(b) The Company has also developed Survivor Locator Light
("SLL"), a signal light powered by a water activated
magnesium-cuprous chloride battery, used to locate survivors
of airplane or boat accidents in the water. The Company
received an initial order to produce 60,000 SLLs over a two
year period commencing in August 1996. The Company fulfilled
the balance of this order during 1997.
B. ROYALTY COMMITMENTS
Since its inception, EFL has received royalty-bearing research
and development ("R&D") grants from the Chief Scientist's Office
("Chief Scientist") of the Israeli Ministry of Industry and
Trade. Pursuant to the terms of these grants, EFL is obligated to
pay royalties to the Chief Scientist on proceeds from the sale of
products in the R&D of which the Chief Scientist participated.
Royalties in connection with the grants received are payable at a
rate of 3%-5% of net sales (up to 100% of grants received). In
the case of approved transfer of technology out of Israel, the
rate of payment may be accelerated and total payments may reach
300% of the amount granted.
Total commitments to pay royalties to the Chief Scientist at the
100% rate (if the R&D projects are successful) are in the
approximate amount of $ 7.1 million as of December 31, 1997.
At the time the grants were received, successful development of
the related products was not assured.
18
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
C. LEASE COMMITMENTS
The Company has entered into various non-cancellable operating lease
agreements for the premises it occupies. The leases will expire in
2000.
The rental payments under the above leases, at rates in effect at
December 31, 1997, are as follows:
U.S. DOLLARS IN
THOUSANDS
---------------
Year ending December 31:
1998 242
===========
1999 174
===========
2000 39
===========
The rental payments are primarily payable in Israeli currency linked
to the Israeli Consumer Price Index ("CPI").
As security in connection with these agreements, the Company has given
a lessor a letter of credit in the approximate amount of $ 58,000.
Rental expenses totaled approximately $ 515,000, $ 525,000 and $
360,000 in 1997, 1996 and 1995, respectively.
D. EMPLOYMENT CONTRACTS:
1) Two senior employees (related parties) have employment agreements
with the Company expiring in 2000. Base salary presently payable
by the Company under these agreements amounts to $ 301,000
annually, with further amounts payable as bonuses of not less
than 50% of base salary or in the aggregate 5% of net income as
defined, subject to certain conditions, including attainment of
the Company's budgeted goals. Base salaries are to be adjusted
for the increase in the Israeli inflation rate over the
devaluation of the shekel, but not less than 3% per annum.
The employees are entitled to other usual benefits and are to
receive a termination payment equal to 36 times monthly base
salary - in addition to the usual severance pay required by
Israeli law -upon fulfillment of the contractual terms. These
employees are entitled to an additional bonus payment upon
termination based upon past bonuses paid to such employees, and a
vesting schedule as stipulated in the agreements. The Company has
fully provided for all vested benefits under the employee
agreements.
19
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
2) In 1997, the Company decided to terminate the employment of a
senior employee holding an employment agreement similar to those
described in (1) above. Subsequent to December 31, 1997 the
Company reached an agreement with the employee regarding the
terms of the termination. Management is of the opinion that
amounts provided both in prior years and in 1997, will fully
cover all amounts which will ultimately be paid to this
employee.
NOTE 5 - STOCKHOLDERS' EQUITY:
A. CAPITAL TRANSACTIONS:
1) In February and March 1996, the Company completed a public
offering of 3,750,000 shares of its common stock of par value of
$ 0.01 per share, at an offering price of $ 6.50 per share.
2) In October 1996, the Company issued 1,538,462 shares of its
common stock of $ 0.01 par value in a private placement at an
offering price of $ 6.50 per share.
3) During 1996, the Company purchased 72,300 shares of its common
stock from a consultant, in consideration of the following:
a) Partial waiver of a loan granted to the consultant in 1994
in the amount of $ 720,000, bearing 6% interest per annum
and payable on December 31, 1996.
b) Sale to the consultant of the Company's 80% interest in
Erbato GmbH in consideration of DM 1.
c) Granting to the consultant 5-year options to purchase 20,000
shares of the Company's stock at $ 6.25 per share.
As a result of the aforementioned transactions, the Company
recorded additional treasury stock in the amount of $ 456,394 -
determined based on the market price of the Company's share on
the transaction date, and the balance - approximately $ 460,000 -
was charged to selling, general and administrative expenses in
the Company's 1996 financial statements.
4) In 1993, the purchase of approximately 1,500,000 shares of common
stock by related parties, upon exercise of employee options, was
financed by the Company's acceptance of non-recourse notes due in
January 1998.
Subsequent to December 31, 1997 the terms of the notes were
extended and they were converted into recourse notes.
20
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (continued):
B. COMMON STOCK OPTION PLANS:
1) The Company has adopted the following stock option plans
whereunder options may be granted for purchase of the Company's
common stock:
(a) 1991 Employee Plan - 2,115,600 shares reserved for issuance.
(b) 1993 Employee Plan - as amended - 2,700,000 shares reserved
for issuance.
Under the terms of the employee plans, the Board of Directors or
the designated committee will grant options and will determine
the vesting period and the exercise terms.
(c) 1995 Non-Employee Director Plan - 500,000 shares reserved
for issuance. Non-employee directors will receive an initial
grant of options to purchase 15,000 shares of the Company's
common stock and thereafter will receive options to purchase
5,000 shares of Common Stock per year of service to the
Board. All such options will be granted at fair market
value.
2) As of December 31, 1997, the total number of options authorized
under the plans is 5,315,600, and 1,721,848 options are available
for future grant. Under these plans, options usually expire no
later than 10 years from the date of grant.
21
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (continued):
3) A summary of the status of the Company's plans as of December 31,
1997, 1996 and 1995, and changes during the years ended on those
dates, is presented below:
1997 1996 1995
-------------------------- ------------------------ ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
------------- ----------- ---------- ---------- ------------ -----------
$ $ $
OPTIONS OUTSTANDING AT
BEGINNING OF YEAR 1,472,381 5.24 1,173,033 4.71 1,094,348 3.60
CHANGES DURING THE YEAR:
Granted /(2)(4)/ 187,085 5.79 617,286 6.30 245,200 7.37
Exercised /(3)/ (32,953) 1.12 (293,099) 5.19 (144,560) 0.76
Forfeited or cancelled (10,150) 6.64 (24,839) 7.05 (21,955) 5.16
--------- --------- --------
OPTIONS OUTSTANDING AT
END OF YEAR 1,616,363 5.38 1,472,381 5.24 1,173,033 4.71
========= ========= =========
OPTIONS EXERCISABLE AT
YEAR-END 784,800 4.35 657,181 3.66 694,864 4.36
========= ========= =========
WEIGHTED AVERAGE FAIR VALUE
OF OPTIONS GRANTED
DURING THE YEAR/(1)/ 2.71 $3.33 $2.66
========= ========= =========
(1) The fair value of each option grant is estimated on the date of grant
using the Black & Scholes option-pricing model with the following weighted
average assumptions: Dividend yield of 0% for all years; expected standard
deviation of 55%; risk-free interest rates of 6% to 8%; and expected lives
of up to 10 years.
(2) Includes options issued to consultants as compensation for services
rendered: 1997 - 3,273 options; 1996 - 22,286 options.
The compensation cost that has been charged against income in the years
ended December 31, 1997 and 1996 is $ 9,000 and $ 77,959, respectively.
(3) Included in the options exercised during 1996, were 255,333 options
exercised by related parties. The purchase of the common stock upon
exercise of these options and the related taxes payable by the employee
were financed by the Company's acceptance of 5 year non-recourse notes
receivable due in 2001 and bearing interest at the higher of the increase
in the Israeli CPI or linkage to the dollar + 6.2% interest. The notes are
collateralized by a pledge on the shares issued. The notes receivable,
including accrued interest, are reflected as a reduction of Stockholders'
Equity in the financial statements. As a result of this transaction,
compensation in the amount of $ 159,834 was recorded in 1996.
(4) Includes 300,000 options which were granted in 1996 to related parties.
The exercise date may be accelerated based on the share price of EFC's
common stock.
22
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (continued):
4) The following table summarizes information about options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------- ------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
- -------------- -------------- -------------- ----------- -------------- -----------
$ Years $ $
--------------
0-2 263,009 0.43 0.82 263,009 0.82
4-6 781,006 6.92 5.74 386,588 5.73
6-8 562,348 6.34 6.96 135,203 7.28
8-10 10,000 9.75 9.06
----------- -------
0-10 1,616,363 5.68 5.38 784,800 4.35
=========== =======
5) Accounting treatment of stock option plans ("the plans")
The Company accounts for its plans using the treatment prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, compensation
cost for employee and director common stock option plans is
measured using the intrinsic value based method of accounting.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"). This Statement,
effective as of the 1996 financial statements, established a fair
value based method of accounting for an employee stock option or
similar equity instrument, and encourages adoption of such method
for stock compensation plans. However, it also allows companies to
continue to account for those plans using the accounting treatment
prescribed by APB 25.
The Company has elected to continue accounting for stock-based
compensation according to APB 25 and has accordingly complied with
the disclosure requirements set forth in Statement 123 for
companies electing to apply APB 25.
Accordingly, the difference, if any, between the quoted market
price of the shares on the date of the award of the options and the
exercise price of such options is charged to income over the
vesting periods. The amount of the difference is correspondingly
credited to additional paid-in surplus.
23
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (continued):
Had compensation cost for the Company's plans been determined based
on the fair value at the grant dates for awards granted during 1996
and 1997 under the plans consistent with the method of Statement
123, the Company's loss and loss per share would have been
increased to the pro-forma amounts indicated below:
1997 1996 1995
------------------------------ -------------------------------- ----------------------------
AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA
-------------- -------------- ---------------- -------------- --------------- -----------
U.S. DOLLARS U.S. DOLLARS U.S. DOLLARS
------------------------------ -------------------------------- ----------------------------
Loss 9,129,499 9,753,337 10,017,618 11,997,287 13,221,058 13,372,902
========= ========= ========== ========== ========== ==========
Loss per share - basic
and diluted 0.73 0.78 0.91 1.09 1.86 1.88
========= ========= ========== ========== ========== ==========
NOTE 6 - TAXES ON INCOME:
A. TAXATION OF U.S. PARENT (EFC)
Since EFC incurred net losses or had earnings arising from tax-exempt
income during the reported years, no provisions for income taxes were
required. Taxes are primarily composed of federal alternative minimum
taxes. The difference between the tax provision and the total tax
benefit computed by applying the statutory federal income tax rate to
pre-tax loss is the valuation allowance which was established to
eliminate the deferred tax assets.
As at December 31, 1997, EFC has operating loss carryforwards for U.S.
federal income tax purposes of approximately $ 275,000, which are
available to offset future taxable income, if any, expiring primarily
in 2009.
B. ISRAELI SUBSIDIARY (EFL):
1) Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (hereinafter - the "law")
EFL's manufacturing facility has been granted "approved enterprise"
status under the above law, and is entitled to investment grants
from the State of Israel of 38% on fixed assets located in
Jerusalem and 20% on fixed assets located at its plant in Beit
Shemesh and to reduced tax rates on income arising from the
approved enterprise, as detailed below. The approved investment
program is in the approximate amount of $ 500,000. EFL
substantially placed the program into operation during 1993 and is
entitled to the tax benefits available under the law. EFL is
entitled to additional tax benefits as a "foreign investment
company", as defined by the law. Further, in 1995, EFL received
approval for a second approved enterprise program for investment in
fixed assets of approximately $ 6 million and approval for grants
at the aforementioned rates for these approved fixed assets.
24
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - TAXES ON INCOME (continued):
The main tax benefits available to EFL are:
(a) Reduced tax rates
During the period of benefits - 10 years - commencing in the
first year in which EFL earns taxable income from the approved
enterprise (provided the maximum period to which it is
restricted by law has not elapsed), a reduced corporate tax rate
of 10%-25% (depending on percentage of foreign ownership; based
on present ownership percentages - 15%) will apply, instead of
the regular tax rates (see (4) hereafter).
(b) Accelerated depreciation
EFL is entitled to claim accelerated depreciation in respect of
machinery and equipment used by the approved enterprise for the
first five years of the operation of these assets.
(c) Conditions for entitlement to the benefits
The entitlement to the above benefits is conditional upon EFL's
fulfilling the conditions stipulated by the law, regulations
published thereunder and the instruments of approval for the
specific investments in approved enterprises. In the event of
failure to comply with these conditions, the benefits may be
canceled and EFL may be required to refund the amount of the
benefits, in whole or in part, with the addition of interest.
As security for compliance with the terms attaching to the
investment grants EFL has registered floating charges on all its
assets in favor of the State of Israel.
2) Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985 (hereafter - the "inflationary
adjustments law")
Under this law, results for tax purposes are measured in real terms,
in accordance with the changes in the Israeli CPI. As explained in
note 1b, the financial statements are presented in dollars. The
difference between the change in the Israeli CPI and in the Israeli
currency/dollar exchange rate - both on annual and cumulative bases
- causes a difference between loss for tax purposes and the loss
reflected in the financial statements.
25
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - TAXES ON INCOME (continued):
3) Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969
EFL is an "industrial company" as defined by this law and as such is
entitled to certain tax benefits, mainly accelerated depreciation as
prescribed by regulations published under the inflationary
adjustments law, the right to claim public issue expenses and
amortization of know-how, patents and certain other intangible
property rights as deductions for tax purposes.
4) Tax rates applicable to income from other sources
Income not eligible for approved enterprise benefits mentioned in
(1) above is taxed at the regular rate of 36% applicable in 1996 and
thereafter (1995 - 37%).
5) Tax rates applicable to income distributed as dividends by EFL
The effective tax on income distributed by EFL to its parent, EFC,
would be increased as a result of the Israeli withholding tax
imposed upon such dividend distributions. The overall effective tax
rate on such distribution would be 28% in regard of income arising
from EFL's approved enterprise and 44% regarding other income. EFL
does not have any earnings available for dividend distribution nor
does it intend to distribute any dividends in the foreseeable
future.
6) Tax loss carryforwards
As at December 31, 1997, EFL has operating loss carryforwards for
Israeli tax purposes of approximately $ 40 million, which are
available, indefinitely, to offset future taxable income.
C. EUROPEAN SUBSIDIARIES
Income of the European subsidiaries, which arises as a result of
intercompany transactions, is taxed based upon tax laws in their
countries of residence.
26
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - TAXES ON INCOME (continued):
D. DEFERRED INCOME TAXES:
DECEMBER 31
---------------------------
1997 1996
------------ ------------
U.S. DOLLAR
---------------------------
DOMESTIC INCOME TAXES:
Deferred tax asset 80,000 50,000
L e s s - valuation allowance (80,000) (50,000)
---------- ----------
-- --
========== ==========
FOREIGN INCOME TAXES:
Deferred tax asset* 6,000,000 4,700,000
L e s s - valuation allowance (6,000,000) (4,700,000)
---------- ----------
-- --
========== ==========
* Mainly in respect of loss carryforwards, deductible expenditures
reported as a reduction of the proceeds from issuing capital stock,
accrued employee rights upon retirement and depreciation on fixed
assets.
E. TAXES ON INCOME INCLUDED IN THE STATEMENTS OF LOSS:
These represent current income taxes, as follows:
1997 1996 1995
------ ------ ------
U.S. DOLLARS
-----------------------------
U.S. 39,000 30,000 52,010
Israeli ( in respect
of prior years) (68,261)
European 105,000 (16,800)
------- ------ ------
144,850 (38,261) 35,210
======= ====== ======
F. TAX ASSESSMENTS:
1) EFL received final assessment through the year ended December 31,
1994.
2) EFC and its other subsidiaries have not been assessed for tax
purposes since incorporation.
27
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:
DECEMBER 31, 1997
----------------------------------
ISRAELI
ISRAELI OTHER CURRENCY-
CURRENCY- NON-DOLLAR LINKED TO
UNLINKED CURRENCIES THE CPI
--------- ---------- ---------
U.S. DOLLARS
----------------------------------
ASSETS:
Current assets:
Cash and cash equivalents 634,155 174,844
Accounts receivable 1,234,995 178,378 100,815
--------- -------- ========
1,869,150 353,222 100,815
========= ======== ========
LIABILITIES -
current - accounts payable and
accruals 1,963,048 363,635
========= ========
NOTE 8 - SUPPLEMENTARY BALANCE SHEETS INFORMATION:
A. INVESTMENT IN MARKETABLE DEBT SECURITIES:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------------------------
FAIR MARKET FAIR MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
U.S. DOLLARS
-------------------------------------------------------
Commercial paper 3,927,351 3,927,350
Corporate debt securities 7,365,874 7,369,032
Obligations of states and
political subdivisions 4,944,736 4,945,172
--------- --------- ---------- ----------
4,944,736 4,945,172 11,293,225 11,296,382
L e s s - portion due in one
year or less - presented
among current assets 3,103,272 3,101,846 11,293,225 11,296,382
--------- --------- ---------- ----------
Balance - due in one to two
years 1,841,464 1,843,326 -- --
========= ========= ========== ==========
Unrealized gain in respect of these securities - at December 31, 1997
and 1996 - aggregates $ 436 and $ 3,157, respectively.
28
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
B. ACCOUNTS RECEIVABLE - OTHER:
December 31
--------------------------
1997 1996
---------- -----------
U.S. dollars
-------------------------
Israeli government departments and agencies:
Research and development grant receivable 658,055 471,028
Investment grant receivable 400,844 461,937
VAT and other receivables 155,527 180,341
Other 125,474 76,921
---------- -----------
1,339,900 1,190,227
Employees 35,994 80,139
Prepaid expenses 71,500 84,754
Interest receivable 89,451 411,972
Sundry 174,192 148,536
---------- -----------
1,711,037 1,915,628
========== ===========
C. OTHER ASSETS:
Know-how purchased 50,000 50,000
L e s s - accumulated amortization 36,667 26,667
---------- -----------
13,333 23,333
Investee Company 35,849 35,849
---------- -----------
49,182 59,182
========== ===========
D. ACCOUNTS PAYABLE AND ACCRUALS - OTHER:
Employees and employee institutions 849,327 498,465
Provision for vacation pay 286,508 252,644
Income taxes payable 125,518
Accrued expenses 505,103 545,109
Provision for anticipated program losses
(see note 4a(1)) 2,200,000
Sundry 19,707 9,376
---------- ----------
*1,786,163 *3,505,594
========== ==========
* Including related parties 105,073 234,544
========== ===========
29
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement No. 107 of the FASB "Disclosure About Fair Value of
Financial Instruments" requires disclosure of information about the
fair value of certain financial instruments for which it is
practicable to estimate that value.
The financial instruments of the Company consist of cash and cash
equivalents, marketable debt securities, accounts receivable and
accounts payable and accruals.
In view of their nature, the fair value of the financial instruments
included in working capital of the Company is usually identical or
close to their carrying value.
NOTE 9 - SELECTED STATEMENTS OF LOSS DATA:
1997 1996 1995
---------- ---------- ----------
U.S. DOLLARS
--------------------------------------------
A. REVENUES (see also note 4a)
1. Classified by geographical distribution:
Europe 4,052,966 4,358,055 4,367,827
U.S.A. 473,250 74,700
Israel 972,548 3,783
---------- ---------- ----------
4,526,216 5,405,303 4,371,610
========== ========== ==========
2. Classified by major customers:
Customer A 1,479,060 3,135,000 3,091,230
Customer B 625,017 722,655 251,288
Customer C 1,364,280 506,420
Customer D 494,825 429,414 423,732
Customer E 960,000
Others 563,034 158,234 98,940
---------- ---------- ----------
4,526,216 5,405,303 4,371,610
========== ========== ==========
B. RESEARCH AND DEVELOPMENT
expenses and cost of revenues:
Materials, subcontracted work and
consulting 3,005,443 4,307,617 8,389,716
Salaries and related expenses 6,365,241 5,706,440 3,831,004
Other 2,856,875 3,053,690 2,158,085
---------- ---------- ----------
12,227,559 13,067,747 14,378,805
========== ========== ==========
30
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SELECTED STATEMENTS OF LOSS DATA (continued):
1997 1996 1995
-------------- ----------------- --------------
U.S. dollars
---------------------------------------------------------
C. SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Salaries and related expenses 1,724,498 1,959,664 1,112,574
Consulting and professional fees 1,304,349 1,251,286 736,836
Royalties (note 4b) 106,722 28,800
Other 1,304,625 1,453,258 902,623
--------- --------- ---------
(1)(2)4,440,194 (1)(2)4,693,008 (1)(2)2,752,033
========= ========= =========
(1) Including advertising and
promotion 240,353 216,682 162,950
========= ========= =========
(2) Including related parties 43,009 11,865 5,500
========= ========= =========
D. FINANCIAL INCOME (EXPENSES) - NET:
Interest, bank charges and fees (58,159) (117,721) (142,492)
Exchange differences, net (128,871) (162,653) 26,090
Interest income 962,141 1,074,227 781,124
--------- --------- ---------
775,111 793,853 *664,722
========= ========= =========
* Including related parties 77,291
=========
E. LOSS PER SHARE:
1) Loss per share is computed based on the weighted average number of
shares outstanding (net of treasury stock) during each year.
2) Since the basic earnings per share ("EPS") represents loss per
share, the effect of including the options and warrants (see (3)
below) in EPS computation is anti-dilutive, and accordingly the
basic and diluted EPS are the same amount.
3) The shares purchased with non-recourse notes receivable from
stockholders are assumed - for per share computation - to be
warrants.
31