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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, 1998
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) 829-5536
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 February 9, 1999 was approximately
$20,573,472 (based on the last sale price of such stock as reported by The
Nasdaq National Market).
As of February 9, 1999, 14,303,387 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", "Electric Fuel", or the "Company") is
engaged in the design, development and commercialization of its proprietary
zinc-air technology for electric vehicles, portable consumer electronic devices
and defense applications.
The Company's technology has grown out of an intensive research and
development program conducted for over eight years into the field of zinc-air
electrochemistry. Through these efforts, Electric Fuel has sought to position
itself as a major world leader in the application of zinc-air technology to
innovative, primary and refuelable battery systems.
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, the Company operates three segments: Consumer Batteries, Electric
Vehicles, and Defense and Safety Products.
The Consumer Batteries division was formed to pursue the increasing market
interest in a primary, single use battery as a substitute for the current lower
performance, more expensive, rechargeable batteries. The first product is aimed
at the cellular phone market and is expected to be available to consumers in May
1999. Other applications are expected to include batteries for camcorders,
laptop computers and other portable consumer electronic devices.
The Electric Vehicle division is continuing to focus on fleet applications
of the zinc-air battery system with its partners in Europe and the United
States. Pursuant to an agreement with the US Department of Transportation, the
division is developing an all-electric transit bus in cooperation with General
Electric, for the US transit market. The Company is also considering development
of an electric scooter battery for the Far East market.
The Defense and Safety Products division was formed to continue to expand
the development of other advanced uses of the battery technology, including a
high-power zinc-oxygen battery for 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) 829-5536.
The Company's R&D and production activities are primarily carried out by
EFL at its facility in Beit Shemesh, Israel. The Company has also a small
battery research and development facility in Auburn, Alabama, 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:
consumer batteries, electric vehicles and defense and safety products.
In its consumer battery division, the Company intends to manufacture zinc-
air cells and assemble batteries for use in consumer electronic devices,
although it may outsource part of this work. The Company plans to work with
distributors and strategic partners on marketing, sales and distribution, in
addition to direct sales via the Internet. Strategic partners for cell phone
batteries may include cell phone manufacturers, battery producers and
assemblers, cellular accessory distributors, cellular phone service providers
and consumer goods distributors.
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In its electric vehicle division, 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, and enacted and proposed
legislation create significant incentives for fleet operators to use zero
emission electric vehicles, and that the Electric Fuel Electric Vehicle System
is particularly suitable to such fleet operations. Governmental action continues
in the United States, and the Company believes this will create incentives for
fleet operators (primarily bus and mass transit operators) to introduce electric
vehicles into their fleets. In the Far East, proposed anti-pollution 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 safety products, the Company intends to continue to work with OEM's
and distributors that specialize in this market. The Company is currently
introducing a new water activated battery for use in marine life jackets which
comply with recently enacted, more stringent International Maritime Organization
and European Union regulations.
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.
CONSUMER BATTERY DIVISION
The Consumer Battery division is pursuing the increasing market interest in
a primary disposable battery as a substitute for the current lower performance,
more expensive, rechargeable batteries. Applications include batteries for
cellular telephones, camcorders, laptop computers and other portable consumer
electronic devices.
To date, the Company has focused its development efforts on the cellular
phone application. The Company believes that this is the most attractive entry
for the Company's products, due to the fast growth in subscribers world-wide,
and the need for a more convenient power source than a rechargeable battery
offers. In January 1999, the Company introduced its products to the market at
the Consumer Electronics Show (CES) in Las Vegas, NV. At the show, the Company
also announced its first distributor agreement with Wireless Solutions Inc., a
wholly-owned subsidiary of Tessco Technologies.
According to Herschel Shosteck 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 as a back-up
for their rechargeable batteries. Consumer acceptance of a primary battery for
cell phones is expected to increase as more cell phone networks become digital,
and cell phones' power requirements decrease. Based on a digital cellular
network with a new generation lower power cell phone, Company tests have
demonstrated that Electric Fuel batteries could provide up to 30 days of talk
and standby time.
PRODUCTS
The Company is currently developing a series of primary, disposable,
prismatic, zinc-air cells for use in battery packs for cell phones. The
Company's standard cell size has a rated capacity of 2,900 mAh, and the "ultra"
capacity cell has a rated capacity of 4,500 mAh. The Company expects to offer
five battery models in 1999, which fit most of the popular phone models. This
includes a standard battery and an ultra-capacity battery for the Motorola
MicroTAC series; an auxiliary battery for the Motorola StarTAC series; standard
batteries for the Ericsson 600 & 800 series, and a standard battery for the
Nokia 5100 & 6100 series. The Company believes these batteries will offer
competitive advantages in performance, convenience, price and safety.
MAJOR BENEFITS
Battery Performance - Up to 30 days talk & standby time
Electric Fuel Zinc-Air batteries deliver a unique combination of high-
energy density and high power density which provides superior performance in
cell phones. The Company believes it can achieve an improvement factor of 3-4
times versus comparable rechargeable batteries made for these products. In
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lab tests, the Company has demonstrated an energy density which would translate
into 30 days of standby time.
Convenience -- Freedom from charging
Electric Fuel Zinc-Air batteries are expected to provide the same kind of
convenience for cellphones and notebook PCs that "AA" batteries provide to
walkman-type cassette/CD players and pagers. A typical user should 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 available through
multiple retail channels. With an expected two year shelf life, the Company's
batteries can be kept in a briefcase, purse, desk drawer, etc. and always be
fully charged and ready to use.
Price
The Company believes that the Electric Fuel Zinc-Air batteries, when
produced in commercial quantities, could retail between $6.95 - $9.95 depending
on the cell phone model and capacity of the battery.
Safety & Recycling
Zinc-air is a proven, safe battery chemistry. Disposable zinc-air batteries
are used in pagers and hearing aids devices worn in direct contact with a
person. Being a disposable battery, the Electric Fuel battery avoids the
complications and hazards associated with recharging such as overcharge and over
discharge. In the case of Li-Ion, overcharge and in some cases over discharge
could lead to fire or explosion. Protecting against these hazards requires
electronic circuitry and protective devices which take up valuable space within
the battery pack. In the case of Nickel-Metal Hydride, overcharge can result in
significant performance loss. Nickel-Cadmium suffers from "memory effect" which
occurs if a battery is not fully discharged before recharging. All rechargeable
chemistries suffer from some capacity loss with repetitive cycling. Disposable
zinc-air has no capacity degradation; every battery is fresh and fully charged.
The Electric Fuel Zinc Air batteries are designed to be fully recyclable.
DISTRIBUTION
The Company intends to be involved in the distribution of batteries to the
consumer through distributors of cellular accessories, direct-mail catalogs and
via the Internet. Batteries will be distributed via third party distributors who
sell to retailers from mass merchants to regional and local supermarkets and
convenience stores, and specialty retailers (such as airport shops). Cell phone
batteries will also be 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.
At the end of 1998, the Company entered into a distribution agreement with
Wireless Solutions Inc. a wholly-owned subsidiary of Tessco Technologies. The
agreement requires Wireless Solutions to make an initial purchase offer for the
second quarter of 1999 and to forecast purchases for the balance of 1999 and
into the year 2000. The planned product launch with Wireless Solutions is
scheduled to begin during May of 1999, targeted at their dealer base. Later in
1999, as the Company's production capacity increases, batteries will be offered
to Wireless Solution's carrier customers as well. In January 1999, the Company
received its first purchase order for delivery to Tessco beginning in the second
quarter of 1999.
Following the CTIA Wireless show in February 1999, the Company received an
initial purchase order from InTouch USA to sell batteries through their wireless
rental business as well as over the Internet to be delivered during the second
quarter of 1999.
Marketing for batteries, both primary and rechargeable, has evolved and
expanded during the past year. Large alkaline battery companies are entering
the mass channels of distribution with branded name rechargeable batteries for
cell phones. As retailers begin selling these rechargeable batteries for cell
phones, the Company believes there will be a similar opportunity to market a
primary battery with performance characteristics like the Company's battery for
cell phones 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
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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, and have recognized brand
names and established distribution channels. However, the Company believes its
batteries will offer competitive advantages in performance, convenience, price,
safety and recycling.
Alkaline batteries are a consumer branded product. Wireless communication
devices such as cellular phones have not become a major application for alkaline
batteries as the power requirements do not currently allow for a mass-market
level alkaline product which is competitive with rechargeable batteries.
Nevertheless, several companies are now offering an alkaline battery pack for
cellphone users.
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 and Europe.
THE 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 similar to conventional
vehicles.
The Electric Fuel zinc-air battery system for powering electric vehicles
offers certain advantages over other electric vehicle batteries which makes 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 has demonstrated
the commercial viability of the battery system by regularly driving 300 to 400
km in actual drive cycles. In 1996, a 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 4,950 feet (1,500 meters) to reach the summit at 6,874 feet (2,083
meters), using only 65% of the battery's capacity. In November 1997, an
electric Mercedes-Benz MB410 van was driven 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.
MAJOR PROGRAMS
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.
ITALY - EDISON
In May 1993, the Company entered into an exclusive license agreement with
Edison SpA ("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.
Edison is conducting marketing activities with electric vehicles powered by
the Electric Fuel battery system. Edison has built, and is operating, a
demonstration regeneration facility in Trofarrelo, near Turin, Italy.
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An Edison Fiat Ducato van powered by the Electric Fuel System has been in
service at the Polyclinic hospital in Milan. The van was used to distribute
cargo from the hospital's central pharmacy. Based on the success of the test
program, Edison plans to add 10 new vehicles that will be used in Turin, Italy
to carry both passengers and cargo powered by Electric Fuel electric vehicle
batteries. The Company would provide the batteries. In order to meet the demands
of the additional vehicles, the existing zinc-air regeneration facility will be
tripled in operating capacity. Design plans for the expansion are already
underway and the fleet is projected to be in place with all vehicles operating
by fall of 1999. The demonstration program is projected to receive financial
support by the Italian Research Ministry.
THE DOT-FTA ZINC-AIR ALL ELECTRIC TRANSIT BUS PROGRAM
A consortium of the Company, the Center for Sustainable Technology, L.L.C.
(CST), and the Regional Transportation Commission of Clark County Nevada
received in November 1998 approval for $2 million in federal funding for a cost-
shared $4 million Zinc-Air Electric Transit Bus Program. The Department of
Transportation funding is allocated from the Federal Transit Administration R&D
1998 budget.
The Zinc-Air Electric Transit Bus Program, which includes General Electric
Company and Nova Bus Corporation as project partners, will seek to demonstrate
the ability of the Electric Fuel battery system to power a full size, all
electric transit bus, providing a full day's range for heavy duty city and
suburban routes, under all weather conditions.
The bus prototype called for under the program is a standard 40-foot
transit bus manufactured by Nova with the capacity of 40 seated and 37 standing
passengers and a gross vehicle weight of 39,500 lbs. General Electric will
provide the power train, including the traction motor, controllers, AC/DC
inverters, hardware and software interfaces. The program requires Electric Fuel
to provide a 320kWh zinc-air battery to be integrated into the bus with the
assistance of GE and Nova. Other project partners include the Community College
of Southern Nevada and the Desert Research Institute.
The program provides that the bus will utilize the new all-electric,
battery/battery hybrid propulsion system being jointly developed by Electric
Fuel and General Electric with funding from the Israeli-U.S. Bi-National
Industrial Research and Development (BIRD) Foundation. The all-electric hybrid
system consists of a main power source, an Electric Fuel zinc-air battery, and
an auxiliary battery. The vehicle draws cruising energy from the zinc-air
battery, and supplementary power for acceleration, merging into traffic and hill
climbing from the auxiliary battery.
Transit buses require a large energy storage battery to power the vehicle
while attending to passenger needs such as air-conditioning, handicapped access,
etc. The test program is designed to prove that an all-electric bus can meet
these and all other Los Angeles and New York Municipal Transit Authority mass
transit requirements including performance, speed, acceleration, and hill
climbing.
Diesel engine transit buses operate in large urban areas where congestion
is a fact of life and traffic is largely stop-and-go. As a result, they are the
leading contributor to inner city toxic emissions, and are a major factor for
those U.S. cities that have been designated as in "non-attainment" with respect
to air quality standards.
Mass transit is an especially appropriate application of the zinc-air
technology because transit buses must operate for up to 12 hours a day on a
single battery charge. Electric buses represent a major market for electric
vehicles in the United States.
Under the 18-month project, the Community College of Southern Nevada will
operate and maintain the zinc-air bus as part of its automotive technology and
alternative fuels curriculum. The program also includes partnering with other
appropriate public and private organizations as well as plans to develop a
regeneration facility to support additional on-road vehicle demonstrations.
The Center for Sustainable Technology develops and commercializes emerging
technologies in renewable energy, energy management, the environment and
transportation and was founded by the Electric Power Research Institute and
Bechtel National, Inc.
ALL-ELECTRIC HYBRID PROPULSION SYSTEM FOR TRANSIT BUSES AND HEAVY DUTY VEHICLES
- THE BIRD PROGRAM
The Company and General Electric Company are jointly developing an all-
electric, battery/battery hybrid propulsion system for powering electric buses
and heavy duty trucks. The first
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application for the system will be an all electric, zero emission, full size
transit bus, in a program funded by the Federal Transit Administration of the US
Department of Transportation.
In July 1998 the two companies were awarded funding from the Israeli-U.S.
Bi-National Industrial Research and Development (BIRD) Foundation for the joint
development of the electric propulsion system.
Weighing approximately 20 tons with a passenger capacity of 90, the all
electric transit bus is expected to be capable of running a full 8-10 hour shift
without recharging. The program requires the bus to meet all power and
performance levels required by U.S. transportation authority standards,
including the operation of energy consuming accessories such as air-conditioning
and handicap lifts.
The hybrid system consists of a main power source, an Electric Fuel zinc-
air battery, and an auxiliary battery. The vehicle draws cruising energy from
the zinc-air battery, and supplementary power for acceleration, merging into
traffic and hill climbing from the auxiliary battery. When stopping or slowing
down, the bus retarding system is designed to act as an energy-generator
recharging the auxiliary battery.
The new propulsion system will incorporate a General Electric drive system
with GE's energy management systems, adapted specifically for this application.
The unique zero-emission electric hybrid system is expected to offer
significant economic advantages over other alternative-fuel solutions, by
greatly lowering vehicle maintenance cost with reduced brake wear-and-tear and
virtually eliminating engine/transmission maintenance. The bus's driving range
is also expected to be expanded by up to 25%, enhancing energy efficiency and
further reducing operating costs.
VATTENFALL (SWEDEN)
In April 1997, the Company completed a Rights Agreement with Vattenfall,
the largest electric utility in Sweden, 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. 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. Execution of the definitive license agreement will be
decided upon by Vattenfall by December, 2000.
KEMA (THE NETHERLANDS)
Electric Fuel is working on a program for the Province of Gelderland, the
largest province in the Netherlands, to utilize the Electric Fuel Electric
Vehicle System in passenger "train-taxis". The program is managed by KEMA, an
international consulting and management organization, and the electric utility
NUON. A Mercedes-Benz Vito passenger van has been equipped with Electric Fuel
batteries and was demonstrated in Holland in 1998. Kema, Nuon and the Company
are in discussions regarding various cooperation programs.
DEUTSCHE POST
In a field test managed by the German postal service, the Electric Fuel
Electric Vehicle System was tested by Deutsche Post in vehicles powered by the
Electric Fuel battery (the "Field Test"). The Field Test, which was successfully
completed in May 1998, was managed by Deutsche Post to conduct a representative
operating test of the Electric Fuel Electric Vehicle System. Initiated in
Bremen, Germany, in 1996, the Field Test involved the use of postal vans powered
by the Electric Fuel zinc-air battery system and the establishment of the
infrastructure for regenerating the batteries. Deutsche Post has stated that it
is interested in adopting emission-free vehicles once such technology is
available in large-scale production.
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, liquefied 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
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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.
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.
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. Significant investments in this technology have been made
by major automobile companies.
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 DOT/FTA and its alliances with the GE, Nova, Edison,
Vattenfall and KEMA. The Company also intends to seek support of government
agencies, electric utilities and zinc manufacturers.
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 an
advanced portable zinc-air battery for the US Army. This division also oversees
the Company's water-activated lifejacket lights for commercial aviation and
marine applications, and will pursue further development of the safety products
business.
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 and revenue base, while allowing it to exploit the technology
synergies between these development projects and the Company's other zinc-air
battery development programs.
MAJOR PROJECT - CECOM
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 original $398,000 contract was to run from January 1, 1998
through June 30, 1999. The contract has since been extended through September
30, 1999, and total funding has been increased to approximately $487,000.
Under the terms of the modified contract, the Company is to deliver a total
of 30 prototype battery packs of at least 400 watt-hours each. CECOM has set 400
watt-hours per kilogram as the desired specific
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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 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.
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 based on 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 in military
applications for the Company's products following the development stages. 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 by
the lithium batteries than for zinc batteries. 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 and lithium-manganese 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 military for
applications such as the CECOM forward field charger.
Primary zinc-air development contracts have also been awarded by 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.
Zinc anodes for zinc-silver oxide batteries are produced by numerous
manufacturers using conventional zinc electrowinning techniques. The Company's
anodes are produced using its patented electrowinning process. The Company's
anodes have been shown in zinc-silver oxide cell stack discharge tests to
provide superior power and energy densities than competitors' anodes.
SAFETY PRODUCTS
In 1996, the Company began to produce and market products for the aviation
and marine safety and emergency markets.
PRODUCTS
At present the Company has a product line consisting of four lifejacket
light models, each one approved by one or more regulatory agencies under various
safety regulations.
9
For the aviation market, the model WAB-H12 Survivor Locator Light (SLL) is
a battery-powered light used to locate survivors of airplane accidents in the
water. The battery itself is activated by immersion in water, and therefore is
called a water-activated battery. 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 more
than 8 hours.
The Company manufactures, assembles and packages the SLL in its factory in
Beit Shemesh, Israel. The Company also manufactures a marine version of the
WAB-H12 light with US Coast Guard (USCG) approval.
Having received regulatory certification of a new aviation light, the Model
WAB-H18, in early 1999, the Company intends to initiate production of this new
model during 1999. The WAB-H18 light is similar in form and function to the WAB-
H12, but is lighter in weight.
At the end of 1998 the Company received certification of a new product for
the marine market, where new certification requirements took effect (See
Certification). This new product, designated the model WAB-MX8 lifejacket light,
utilizes two batteries of a type similar to that used in 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. The Company
has begun manufacturing the WAB-MX8 lifejacket light in the first quarter of
1999.
The Company expects to continue to develop additional products for the
marine safety market, including products based on the Company's water-activated
battery technology, as well as products based on conventional, commercially
available batteries.
CERTIFICATION
The Company's Model WAB-H12 Survivor Locator Light received certification
by the US Federal Aviation Administration (FAA) under Technical Specification
Order (TSO) C-85a 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's Model WAB-H18 Survivor
Locator Light received TSO C-85a approval in early 1999. The Company is
obligated to manufacture both lights with a quality assurance system approved by
CAAI, and approval of the Company's Quality Assurance system for lifejacket
lights was also granted in 1996. Each shipment of TSO-certified lights must be
accompanied by a CAAI-issued Certificate of Airworthiness, and this means that
every shipment from the Company is preceded by an inspection visit from the CAAI
Airworthiness Division.
For use in the marine market, approval by bodies such as the US Coast Guard
are required. The Company received approval from the USCG in 1997 for the WAB-
H12 light. However, in 1996 new SOLAS (Safety at Life at Sea) Convention
regulations were approved, calling for a change in the functional requirements.
As a result, the Company's SOLAS approval for the WAB-H12 light expired on June
30, 1998, while the USCG approval for lakes and inland waterways extends to
2002.
The Company received SOLAS approval for a new lifejacket product, the model
WAB-MX8 lifejacket light, in 1998. The Company manufactures the WAB-MX8 light in
its Beit Shemesh factory, under the auspices of its CAAI-approved Quality
Assurance system.
Starting January 1, 1999, marine safety equipment sold in European Union
(EU) states is required under Council Directive 96/98/EC, known as the Marine
Equipment Directive (MED), to bear the Ship's Wheel Mark as an indication of
certification by a notified body as adhering to the requirements of the MED. The
Ship's Wheel Mark, which is the equivalent of the "CE" mark for marine
equipment, allows companies to sell products throughout European Union member
states without having to gain individual approval from each state. The Company's
Model WAB-MX8 light was approved to carry the Ship's Wheel Mark by Lloyd's
Register, a notified body, early in 1999.
10
MARKETING
The annual market for lifejacket lights is estimated at as many as 3
million units worldwide, of which about 50% is in Europe and another 33% in the
United States. Less than 20% of the sales are in the aviation market, and the
other 80% in the marine market. Recent economic developments in the Asian
markets have led to a flattening or slight reduction in the aviation market over
the last year, and this is anticipated to continue for at least another year.
The marine market has seen tremendous growth over the last year, in part because
of new IMO SOLAS regulations expanding the categories of ships and ferries that
are required to carry lifejacket lights, and in part because of the EU's
adoption of IMO SOLAS regulations as EU directives. In addition, the average
wholesale selling price of a marine lifejacket light has grown by more than 50%
following the adoption of the 1998 SOLAS specification, which generally requires
larger and more powerful batteries and more efficient lamps than the previous
requirements.
The marine safety market is characterized by several differentiable
channels: lifejacket manufacturers, shipping companies, chandlers/distributors,
and distributors to the retail market. There are over 200 manufacturers of
lifejackets for the marine market, and many companies active in the other
distribution channels. The Company markets its lights to the commercial
aviation industry in the United States exclusively through The Burkett Company
(TBC) of Houston, Texas, which receives a commission on sales.
The Company intends to establish its own network of distributors in Europe,
South America and elsewhere in Asia and Africa, using a marketing and sales
organization based in the Company's Beit Shemesh facility in Israel. The Company
intends to use TBC as a non-exclusive distributor in the marine market in North
America, the Commonwealth of Independent States (CIS, i.e., the former USSR) and
Japan.
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 USCG-approved lifejacket lights, and a primary LiSO2 battery 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 LiSO2 based lights for the marine
market. McMurdo has several primary LiSO2 battery based products meeting the new
SOLAS regulations.
Other significant competitors in the marine market include Daniamant Aps of
Denmark, and EJE Translite of Canada, both of whom use primary lithium batteries
in their SOLAS-approved products.
REGULATORY AND ENVIRONMENTAL MATTERS
The Company believes that its zinc-air batteries as currently produced are
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 any over-the-road transport of Electric Fuel in the United States will
require manifesting and placarding.
11
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.
The Company's zinc-air disposable battery for cellular phones is similar to
commercial zinc-air button cells. Accordingly, the Company's cellular phone
battery, like those products, is not expected to be regulated as to transport
and is expected to be exempt from dangerous goods regulations. Furthermore,
consistent with state-of-the-art zinc alkaline cells which must be mercury and
cadmium free (required for disposal purposes), the Company's product is also
completely free of toxic mercury and cadmium additives.
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 its batteries through
ongoing research and development programs.
The Company has been filing patents on its zinc-air battery system for
electric vehicles since 1990. These applications have resulted in 32 unexpired
US patents, and 9 corresponding European patents. These patents cover various
aspects of the Electric Fuel System technology, including the overall system,
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.
The Company also holds two unexpired US patents covering its high-power
zinc-oxygen battery for torpedoes, two more covering the use of Electric Fuel's
zinc in other alkaline batteries, and one covering the Company's water-activated
magnesium-cuprous chloride batteries.
In early 1998, building on the development work that began at EFL in late
1996 on smaller zinc-air cells for consumer batteries, EFL began filing new
patent applications specifically covering its consumer batteries. To date, 13
such applications have been filed, and the Company expects to file an additional
12-15 applications in 1999. The consumer battery patent applications cover all
aspects of the cell and battery pack, including cell components and design, pack
components and design, and air access management.
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
confidentiality and non-disclosure agreements with customers, suppliers,
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, 1996, 1997, and 1998, the Company's
gross research and product development expenditures, including costs of
revenues, of prototype batteries and components of the Electric Fuel System,
were $13.1 million, $12.2 million and $10.0 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 $1.5 million, $2.4 million
and $447,000, respectively. During 1998 the Israel-US Binational Industrial
Research and Development Foundation ("BIRD") also began participating in the
research and development efforts of the Company by sponsoring a joint project to
develop a hybrid propulsion system for transit buses with General Electric
Corporate Research and Development. The project began towards the end of 1998
and consequently only $43,000 of grants were recognized in 1998.
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 sales of products developed from projects funded by the Chief
Scientist for the first three years of sales, increasing thereafter, up to 5%.
The Company currently pays royalties at the rate of 3% of Electric Vehicle
revenues. The obligation to make
12
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 through
royalty payments 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.
Under the terms of the grants from BIRD the Company is obligated to pay
royalties at the rate of 2 1/2% of the first year's gross sales, and, in
succeeding years, at the rate of 5% of Gross Sales until 100% of the Grant has
been repaid, whereupon the repayment rate shall decrease to 2 1/2 % of the
Gross Sales. The total amount to be repaid reaches a maximum of 150% of the
grant if it takes five years or longer for the grant to be repaid. Should any
portion of the technology developed be sold outright to a third party, one-half
of all proceeds of the sale shall be applied as received on account of
royalties. The repayment obligation is in U.S. dollars linked in value to the
U.S. Consumer Price Index.
EMPLOYEES
As of February 9, 1999, the Company had in its Israeli subsidiary 107 full-
time employees, of whom 10 hold doctoral degrees and 42 hold other advanced
degrees. Of the total, 40 employees were engaged in product research and
development, 46 were engaged in production and operations, and the remainder in
general and administrative functions. The Company also had 3 employees at its
Auburn, Alabama research facility. 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.
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.
13
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
administrative facilities, constituting approximately 7,500 square feet, are
located in Jerusalem, Israel and held under a lease agreement expiring in March
2000. The Company's research ,development and 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. The
original lease expired on December 31, 1997. The Company extended the lease for
a period of ten years with the ability to terminate the lease every two years
beginning December 31, 1999 upon three months written notice. Moreover, the
Company may 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 Company is presently negotiating an extension of the terms of the lease.
The Company intends to transfer the production facilities currently located in
Beit Shemesh to a new facility in Jerusalem, once it is constructed as more
fully described below.
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 established a regeneration plant to operate vehicles for the Deutsche
Post Field Test. With the completion of the Field Test, EFGmbH is in the
process of closing the facility and terminating the lease, which it expects to
do by April, 1999. EFGmbH is presently leasing office space on a quarterly
basis.
The aggregate rental payments under the only long term lease (Jerusalem
facility), at rates in effect at December 31, 1998, are approximately $124,000
and $31,000 in the years ended December 31, 1999 and 2000 respectively. The
rental payments in Israel are payable in Israeli currency linked to the Israeli
Consumer Price Index.
The Company has been looking for additional land to construct larger
premises near its Jerusalem facilities. In January 1999, the Company received a
letter from the Israel Ministry of Industry and Trade authorizing the allocation
to the Company of approximately 5.9 dunam (approximately 1.5 acres) with rights
to construct facilities of up to approximately 95,000 square feet in Jerusalem,
near its existing facilities. The Company has paid the Jerusalem Land
Development Authority approximately $171,000 in development fees related to this
site to complete its obligations in this regard. The Company has yet to enter
into a formal lease agreement for the site with the Israel Land Authority at
which time a capitalized lease fee will be due in the approximate amount of $1.2
million. If an agreement is not reached, 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.
14
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
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
1998
First Quarter $ 4.38 $2.38
Second Quarter 5.94 2.44
Third Quarter 5.41 2.88
Fourth Quarter 3.59 2.50
As of February 9, 1999 the Company had approximately 216 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, 1998, 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 PriceWaterhouseCoopers
International Limited. 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."
15
YEAR ENDED DECEMBER 31
1994 1995 1996 1997 1998
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 4,873 $ 4,372 $ 5,405 $ 4,526 $ 4,013
-------------------------------------------------------------------------
Research and development
expenses and costs of revenues 4,770 14,379 13,068 12,228 10,056
Less: royalty-bearing grants (699) (1,561) (1,506) (2,382) (490)
---- -------------------------------------------------------------------------
4,071 12,818 11,562 9,846 9,566
Provision for anticipated program
losses 1,500 2,600 -- -- --
Selling, general and administrative
expenses 3,365 2,752 4,693 4,440 3,675
-------------------------------------------------------------------------
Operating (loss) $(4,063) $(13,798) $(10,850) $(9,760) (9,228)
Financial income 583 664 794 775 652
-------------------------------------------------------------------------
(Loss) before taxes on income $(3,480) $(13,134) $(10,056) $(8,985) $(8,576)
Taxes on income 20 35 (38) 144 (43)
-------------------------------------------------------------------------
(Loss) from the operations of the
Company and its subsidiaries $(3,500) $(13,169) $(10,018) $(9,129) $(8,533)
=========================================================================
Share in loss of investee Company 61 52 -- -- --
-------------------------------------------------------------------------
Net (loss) (3,561) (13,221) (10,018) (9,129) (8,533)
(Loss) per share $ (0.43) $ (1.86) $ (0.91) $ (0.73) $ (0.61)
=========================================================================
Weighted average number of common
shares outstanding (in thousands) 8,319 7,104 10,962 12,502 14,013
AS AT DECEMBER 31
1994 1995 1996 1997 1998
-------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash, cash equivalents and
investments in marketable debt
securities $18,222 $ 9,580 $23,959 $16,717 $ 8,943
Receivables and other assets 2,528 4,135 3,259 3,101 2,287
Fixed assets, net of depreciation 1,989 5,986 7,304 4,754 3,435
-------------------------------------------------------------------------
Total Assets $22,739 $19,701 $34,522 $24,572 $14,665
=========================================================================
Liabilities $3,736 $13,880 $ 6,652 $ 5,813 $ 4,084
Long term debt 0 0 0 0 0
Stockholders' equity 19,003 5,821 27,870 18,759 10,581
-------------------------------------------------------------------------
Total liabilities and stockholders
equity $22,739 $19,701 $34,522 $24,572 $14,665
=========================================================================
16
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 the 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. Until the end of 1997, 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 had not demonstrated
previously anticipated levels of growth, in the latter part of 1997 the Company
began a strategic shift to expand its research and development activities into
additional applications for its zinc-air battery technology. 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.
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 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 and commercializing a primary
battery for cellular telephones. Currently the Company is only selling several
models of the Survivor Locator Light but expects to generate sales of primary
batteries for cellular telephones during 1999.
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
a limited 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
current and prior 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, 1998, 1997 and 1996, and expects to continue to incur significant
operating losses during 1999 at approximately the same levels. 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, when its
products are successfully commercialized, the Company expects to derive revenues
from the sale of batteries for portable electronic devices, components of the
Electric Fuel Electric Vehicle System, including refueling and Electric Fuel
services, defense and safety products manufactured by the Company, as well as
from licensing rights to the Electric Fuel technology to third parties. There
can be however, 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
17
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 Deutsche Post 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, 1998 and 1997
Revenues for the year ended December 31, 1998, totaled $4.0 million
compared with $4.5 million for 1997. During 1998, the Deutsche Post and the
Company agreed to extend the operations of the Field Test through May, 1998.
Following the completion of the Field Test, the Deutsche Post and the Company
agreed to mutually release each other from any financial claims regarding the
Field Test, including additional funding due the Company or repaying advances
made by the Deutsche Post to the Company with respect to Opel batteries, which
as previously disclosed, were subject to a dispute. Consequently, revenues for
1998 were principally derived from recognizing the previously deferred advances,
as well as from activities relating to the Field Test extension (reflecting
payment of expenses incurred by the Company by the Deutsche Post). Additionally,
the Company recognized revenues from the sale of additional batteries to the
Deutsche Post as well as sales of Electric Fuel Vehicle batteries to Edison
Termoelettrica, SpA ("Edison"). The Company also recognized revenues from the
sale of Survivor Locator Lights. The Company recently signed an agreement with
the United States Department of Transportation ("DOT") as part of a consortium
that will seek to demonstrate the ability of the Electric fuel battery system to
power a full size, all electric transit bus. The DOT approved $2.0 million in
federal funding for the cost-shared $4.0 million program. The Company's share
of the $4.0 million cost is approximately $3.5 million, 50% of which will be
reimbursed to the Company out of the DOT funds. The Company began recognizing
revenues from the activities related to the DOT program in the second half of
1998. Since this is a cost-shared program, expenses associated with the
Company's participation in the program will exceed the revenues to be earned
from the program. The DOT program is expected to continue until the end of 1999.
Additionally, the Company began recognizing revenues in connection with various
defense R&D contracts.
Revenues for 1997 were principally derived from fees collected in relation
to a Rights Agreement with Vattenfall AB. Additionally, the Company continued to
recognize revenues relating to its activities in the Deutsche Post Field Test
program. The Company 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.
Research and development expenses and cost of revenues totaled $10.1
million during 1998 compared with $12.2 million during 1997. The Company
believes that, given the Company's stage of development, it is not yet
meaningful to distinguish between research and development expenses and cost of
revenues. In addition to the reduction in the overall expenses, the internal
division of expenses also changed between the periods. This was principally
attributable to a reduction of expenses related to Electric Vehicle battery
development, and most particularly expenses related to the Deutsche Post Field
Test, which came to its conclusion during the second quarter of 1998. This
overall reduction was partially offset by significant increases in the costs
associated with Consumer Battery development, and production of increased
quantities of Survivor Locator Lights in the Defense and Safety Division.
Expenses also
18
included a write off of certain production equipment related to the earlier
generation Field Test version of the Electric Vehicle Battery, for a net amount
of approximately $422,000. During the fourth quarter of 1998 the Company began
dismantling the regeneration facility in Bremen. Consequently, the remaining
salvage value for the facility was reduced by $830,000 to a net book value of
zero. During the year ended December 31, 1998, the Company recorded $447,000 of
royalty-bearing grants in connection with the Company's 1998 research and
development program. 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. As previously announced, the Company has entered into an
agreement to complete development of a battery for powering transit buses, in
connection with a program to develop a new hybrid propulsion system in
conjunction with General Electric Corporate Research and Development ("General
Electric"). The program is being partially funded by the Israel - US Binational
Industrial Research and Development (BIRD) Foundation, and the Company recorded
$43,000 of royalty-bearing grants in 1998, in connection with this program. The
DOT program noted above complements the BIRD program. Accordingly, the Company
expects that, for 1999, expenditures in connection with the Electric Vehicle
battery, will increase as compared to 1998. R&D expenses and cost of operations
related to Consumer Battery and Defense and Safety applications are also
expected to continue to increase for 1999, as the Company intensifies its
efforts in these new areas.
Selling, general and administrative expenses for the year ended December
31, 1998 were $3.7 million compared with $4.4 million in 1997. This decrease was
primarily attributable to reduced salaries, professional fees and Electric
Vehicle marketing expenses during 1998. The Company expects increases in
selling, general and administrative expenses during 1999, particularly with
respect to marketing expenses in consumer battery applications, as the Company
continues to expand the applications for its technology.
Financial income, net of interest expense, exchange differentials, bank
charges, and other fees, totaled approximately $652,000 in 1998 compared to
$775,000 in 1997.
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, 1998 and 1997 and, accordingly no provision for income taxes was
required. Taxes in these entities incurred in 1998 and 1997 are primarily
composed of United States federal alternative minimum taxes. During 1998, the
Company's German subsidiary had net losses, which under the German tax code were
used to reduce previously accrued income taxes in the amount of $74,000, and
$8,000 was recorded as a provision for taxes in another European subsidiary. For
1997, the Company's European subsidiaries had net income, which arose as a
result of intercompany transactions, and they recorded a provision for income
taxes, in the amount of $106,000.
The Company reported a net loss of $8.5 million in 1998 compared with a net
loss of $9.1 million in 1997 due to the factors cited above.
In 1998, revenues were $1,181,000 for the Defense and Safety segment and
$2,792,000 for the Electric Vehicle segment. The Consumer Battery segment did
not produce any revenues in 1998. Direct expenses (including Depreciation
Expense) were $1,225,000, $5,292,000 and $3,018,000 in the Defense and Safety,
Electric Vehicle and Consumer Battery segments respectively.
Net cost of fixed assets (net of accumulated depreciation) at December 31,
1998 in the Defense and Safety, Electric Vehicle and Consumer Battery segments
was $369,000, $1,153,000 and $730,000 respectively.
In 1997, revenues were $1,129,000 for the Defense and Safety segment and
$3,397,000 for the Electric Vehicle segment. The Consumer Battery segment did
not produce any revenues in 1997. Direct expenses (including Depreciation
Expense) were $730,000, $9,106,000 in the Defense and Safety, Electric Vehicle
and Consumer Battery segments respectively.
Net cost of fixed assets (not of accumulated depreciation) at December 31,
1997 in the Defense and Safety, Electric Vehicle and Consumer Battery segments
was $339,000, $3,013,000 and $43,000 respectively.
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
19
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
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)4 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.
20
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.
In 1997, revenues were $1,129,000 for the Defense and Safety segment and
$3,397,000 for the Electric Vehicle segment. The Consumer Battery segment did
not produce any revenues in 1997. Direct expenses (including Depreciation
Expense) were $730,000, $9,106,000 and $281,000 in the Defense and Safety,
Electric Vehicle and Consumer Battery segments respectively.
Net cost of fixed assets (net of accumulated depreciation) at December 31,
1997 in the Defense and Safety, Electric Vehicle and Consumer Battery segments
was $339,000, $3,013,000 and $43,000 respectively.
No segment information has been presented for 1996 because the company's
activities in that year were primarily related to Electric Vehicle activities.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. The Company considers a product to be in "Year
2000" compliance if the product's performance and functionality are unaffected
by processing of dates prior to, during and after the year 2000.
The Company has retained an outside consultant to assess the Year 2000
compliance of the Company's computer hardware and software, and other equipment
of the Company with embedded chips that may be date-sensitive. The consultant
completed its initial assessment of the Company's systems in March 1999. Based
on the initial review of the consultant, the Company believes that its core
computer systems and equipment are Year 2000 compliant, and that the Year 2000
issue will not materially affect the Company's operations or business.
Management expects that the expenses incurred and to be incurred in connection
with the Year 2000 issue will not materially exceed amounts budgeted for such
matters.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash, cash equivalents and
financial investments of approximately $8.9 million compared with $16.7 million
as of December 31, 1997.
The Company used available funds in 1998 primarily for continued research
and development expenditures, and other working capital needs. The Company
increased its investment in fixed assets by $986,000 during the year ended
December 31, 1998. Following the reduction in the salvage value of the Bremen
facility and a write off of certain production equipment related to the earlier
generation Field Test version of the Electric Vehicle Battery, fixed assets
amounted to $6.3 million as at year end.
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 $180,000), Additionally the
Credit Facility imposes financial and other covenants on EFC and EFL and
presently expires on March 31, 1999, 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
$913,000), which can be used as credit support for various obligations of EFL.
As of December 31, 1998, the bank had issued letters of credit and bank
guarantees totaling approximately $409,000.
The Company has no long term debt outstanding, and is using its cash
reserves and revenues from operations primarily to continue development of
batteries for consumer electronic devices, as well as to participate in the BIRD
& DOT Electric Vehicle programs. Furthermore, in 1999, the Company is planning
to establish a commercial production line and prepare for market penetration of
its new zinc-air battery for cellular telephones. Accordingly, the Company is
seeking additional funding, including through the issuance of equity or debt
securities, and is pursuing other options, such as joint ventures or other
21
strategic relationships. However, there can be no assurance that the Company
will obtain any such additional funding. If additional funding is not secured,
the Company will have to modify, reduce, defer or eliminate certain of its
anticipated future commitments and/or programs, in order to continue reduced
operations.
Approximately 48.6% 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 1998, EFL
had 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.
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 in 1998
were in Deutsche Marks, primarily related to the Field Test. The Company does
not expect a significant amount of Deutsche Mark revenues in 1999. 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 the past two years, inflation in Israel has been more
than fully compensated by the devaluation of the NIS, and, accordingly, the
dollar cost of the Company's NIS expenses has decreased. Even if the recent
trend is reversed (as was the case in previous years) 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, 1996, 1997 and in 1998, the annual rates of
inflation in Israel were 10.6%, 7.0%, and 8.6% respectively, compared to the
devaluation of the NIS against the dollar during such periods of 3.7%, 8.8%, and
17.6% respectively.
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 seven 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, 1998 and 1997 and,
accordingly no provision for income taxes was required. Taxes in these entities
paid in 1998 and 1997 are primarily composed of United States federal
alternative minimum taxes. During 1998, the Company's German subsidiary had net
losses, which under the German tax code were carried back, causing a reduction
in previously accrued income taxes. For 1997, the Company's European
subsidiaries had net income, which arose as a result of intercompany
transactions, and they recorded a provision for income taxes.
As of December 31, 1998 the Company has U.S. net operating loss carry
forwards of approximately $231,000 which are available to offset future taxable
income, expiring primarily in 2009 and foreign net operating loss carry forwards
of approximately $43 million which are available to offset future taxable
income, indefinitely.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors................................................. F-2
Consolidated Balance Sheets at December 31, 1997 and 1998...................... F-3
Consolidated Statements of Loss for the Three Years in the Period
Ended December 31, 1998.............................................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the Three Years
in the Period Ended December 31, 1998................................ F-6
Consolidated Statements of Cash Flows for the Three Years in the Period
Ended December 31, 1998.............................................. F-8
Notes to Consolidated Financial Statements..................................... F-10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
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, 1998, are as follows:
NAME Age Position with the Company
---- --- -------------------------
Robert S. Ehrlich 60 Chairman of the Board of Directors and Chief
Financial Officer
Yehuda Harats 47 President, Chief Executive Officer and
Director
Joshua Degani 51 Executive Vice President - Technical
Operations, Chief Operating Officer
Stewart Edelman/(1)/ 38 Treasurer and Principal Accounting Officer
Dr. Jay M. Eastman 50 Director
Jack E. Rosenfeld 60 Director
Harvey M. Krueger 69 Director
Lawrence M. Miller 52 Director
Leon S. Gross 92 Director
___________
/(1)/ Mr. Edelman's employment with the Company terminated on February 28,
1999. Mr. Benjamin Koretz was elected Treasurer and Mr. Evan Fishman was
elected Controller and Principal Accounting Officer.
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 2001 and until their successors are elected and
qualified; Messrs. Rosenfeld and Miller are designated Class II directors
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 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 December
1987 until July 1992 and again since April 1997, Mr. Ehrlich was Chairman of the
Board of PSC Inc (PSCX). 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. 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
24
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 develops 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.
STEWART EDELMAN'S employment with the Company was terminated on February
28, 1999. Prior to that Mr. Edelman was Treasurer since March 1995. Mr.
Edelman was 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 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 PSCX, a New York Corporation, a manufacturer and marketer of hand-
held laser diode bar code scanners, since April 1996 and served as Senior Vice
President of Strategic Planning from December 1995 through October 1997. Dr.
Eastman is also a director of Chapman Instruments, Inc., which develops
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 is also a director of Maurice Corporation and a director of PSCX.
Since April 1998 Mr. Rosenfeld is President and Chief Executive Officer of
Potpourri Collection Inc., a specialty catalog direct marketer. 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.
HARVEY M. KRUEGER was elected to the Board of Directors in February 1996.
Mr. Krueger is Vice Chairman of Lehman Brothers Inc., an investment banking
firm, and the lead manager of the Company's recent equity offering. Mr. Krueger
has been with Lehman Brothers 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 Internation Telecommunications Data
Systems, Inc. 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.
25
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 PriceWaterhouseCoopers International Limited.
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 and Harats 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 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.
On June 8, 1998, the Company issued 2,000 shares to each of Lawrence M.
Miller and Jack E. Rosenfeld, directors of the Company, at a price of $2.6875
per share, for services performed on behalf of the Company. The shares were not
registered under the Securities Act of 1933, as amended (the "Act"), and were
issued in reliance on the exemption from registration under Section 4(2) of the
Act as a transaction not involving a public offering. The recipients, by virtue
of their relationship with the Company, had access to information about the
Company and are each "accredited investors" as defined under the Act.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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 any failure to file by these dates during 1998.
To the Company's knowledge, there were only two instances during 1998 where such
"reporting persons" failed to file the required reports on or before the
specified dates: Mr. Leon Gross filed one late report, and Red Lion
Enterprises, Inc. an affiliate of Mr. Robert Ehrlich, filed one late report.
26
Significant Employees
The Company's significant employees and their ages as of December 31, 1998
are as follows:
NAME Age Position with the Company
---- --- -------------------------
Dr. Inna Gektin 55 Senior Research Associate
Menachem Givon 51 Project Manager Regeneration
Dr. Jonathan Goldstein 52 Chief Scientist
Binyamin Koretz 41 Vice President - Strategic Planning
Dr. Neal Naimer 40 Vice President - Battery Technology
Jonathan Whartman 44 Vice President - Marketing
Evan Fishman 36 Controller and Principal Accounting
Officer
Yair Ein Ely 32 Head of Electrochemistry/Chemistry &
Material
Zvi Rozenberg 47 Project Manager
Robert Dopp 52 Director of Research, New Products
Ron Putt 51 Director of Technology, New Products
Yoel Gilon 45 Director, Electric Vehicle
Technologies
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 December 1994, and with the termination
of Mr. Edelman's employment in February 1999, was re-elected Treasurer. 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 MBA 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 BA in Economics and a MBA from
the Hebrew University, Jerusalem, Israel.
27
EVAN FISHMAN was Assistant Controller of the Company from August 1998,
until his appointment as Controller in February 1999 upon the termination of Mr.
Edelman's employment. Prior to joining Electric Fuel, Mr. Fishman spent eight
years at the Jerusalem Report magazine, and was its CFO for the last three
years. Mr. Fishman worked in international audit firms in Tel Aviv and
Johannesburg for five years before leaving the auditing profession for commerce.
Mr. Fishman is a Certified Public accountant in Israel and a Chartered
Accountant in South Africa. He holds a B.Comm and a B.Acc degree from the
University of the Witwatersrand in Johannesburg.
YAIR EIN ELY is the Head of Electrochemistry, Chemistry and Material Groups
at the Company. Dr. Ein-Eli joined the Company in September 1998. Previously,
he spent more than three years at Covalent Associates Inc. where he was
responsible for the Li and Li-ion battery groups. Dr. Ein Eli also held a post-
doctoral position at Covalent for a period of 18 months. Dr. Ein Eli holds a
Ph.D. degree in chemistry and electrochemistry from Bar-Ilan University in Tel
Aviv.
ZVI ROSENBERG is a Project Manager responsible for cell development and the
integration between the battery and the phone. Previously, Mr. Rosenberg spent
eight years at Laser Industries where he was Project Manager of a medical laser
and Head of the Physics Department. Mr. Rosenberg holds a Ph.D. in Physics from
the Hebrew University in Jerusalem.
ROBERT DOPP is Director of Research, New Products at the Company's Marietta
Laboratory. He has been with Electric Fuel since December 1997. From February
1997 until November 1997, Mr. Dopp was Manager of Advanced Components
Development at AER Energy Resources. Previous to that he was Principal
Engineer, Zinc Air Development at Rayovac Corporation from December 1979 to
February 1997. Mr. Dopp holds a B.S. in Biology from the University of
Wisconsin.
RON PUTT is Director of Technology, New Products at the Company's Auburn
R&D Facility since April 1997. From October 1995 until April 1997, Mr. Putt
worked as a consultant for Auburn University and Electro-Energy Inc. Previous to
that, Mr. Putt was Vice President at MATSI, Inc. from April 1990 to October
1995. Mr. Putt holds Bachelors and Masters Degrees in Chemical Engineering from
the University of Delaware and University of California at Berkeley.
YOEL GILON is Director, Electric Vehicle Technologies at the Company's Beit
Shemesh facility. He joined the Company in 1994. From 1991 to 1994, Mr. Gilon
was Project Development Manager at Ormat Industries. Previous to that, Mr.
Gilon was Vice President of System Engineering Development at Luz Industries.
Mr. Gilon holds a B.Sc. in Mathematics and Physics and a M.Sc. in Mathematics
from the Hebrew University of Jerusalem. He also holds a BA in Fine Arts from
the Bezalel Academy in Jerusalem.
28
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid and accrued by the Company
for services rendered for 1996, 1997 and 1998 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, 1998 (collectively the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------------------
AWARDS
NAME AND PRINCIPAL SECURITIES
POSITION AT OTHER ANNUAL UNDERLYING ALL OTHER
DECEMBER 31, 1998 YEAR SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION
----------------- ---- ------ ----- ------------ ----------- ------------
YEHUDA HARATS/(1)/ 1998 $118,246 $50,000/(2)/ $ 15,942/(4)/ 368,177 $146,386/(5)/
President, Chief 1997 154,968 50,000/(3)/ 10,691 0 280,748
Executive Officer 1996 145,220 47,000 127,558 150,000 372,875
and Director
ROBERT EHRLICH/(1)/ 1998 $118,246 $50,000/(2)/ $ 14,536/(4)/ 372,577 $202,030/(6)/
Chairman and Chief 1997 154,968 50,000/(3)/ 14,193 0 264,501
Financial Officer 1996 145,238 47,000 75,890 150,000 166,628
JOSHUA DEGANI/(1)/ 1998 $109,497 $14,250/(2)/ $ 6,241/(4)/ 185,071/(9)/ $ 41,996/(8)/
Executive Vice 1997 59,105 15,062/(7)/ 3,449/(3)/ 122,500 51,906
President, Chief
Operating Officer
____________________________
(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) No cash bonuses were paid for fiscal year 1998. However, the Company has
accrued bonuses for the named executive officers as per their contracts.
The Compensation Committee is considering granting options in lieu of a
bonus, the amount and terms of which have yet to be determined.
(3) In lieu of a cash bonus of $50,000 for fiscal year 1997, the Compensation
Committee granted to each of Messrs. Ehrlich and Harats performance options
to acquire 66,500 shares of the Company's Common Stock, at an exercise
price of $2.50 per share, the fair market value of the Company's Common
Stock on the date of grant. The options granted become exercisable as
follows: 1/3 of such options become exercisable when the closing sale price
of the Company's Common Stock has been at least $3.25 per share for a
period of 20 consecutive trading days on The Nasdaq National Market
("NASDAQ"); 1/3 of such options become exercisable when the closing sale
price of the Company's Common Stock has been at least $4.25 per share for a
period of 20 consecutive trading days on NASDAQ, and the final 1/3 of such
options become exercisable when the closing sale price of the Company's
Common Stock has been at least $5.50 per share for a period of 20
consecutive trading days on NASDAQ; provided, that such options shall, in
all events, become exercisable seven years from the date of grant.
(4) Represents the costs of taxes paid by the Executive officer and reimbursed
by the Company.
(5) Of this amount, $13,572 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, ($96,441)
represents the Company's reduction of the accrual for sick leave and
vacation redeemable by Mr. Harats, $114,406 consisted of payments to Mr.
Harats in lieu of vacation and sick leave, $74,608 represents compensation
expense recorded in relation to the
29
sale of shares to the Company, $12,388 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,
$35,907 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, $(16,163) represents the reduction of the Company's accrual
to fund Mr. Harats' pension and education funds as well as provide him with
certain other post-termination benefits, and $8,109 represents the value
charged for tax purposes for the use of a car provided by the Company.
(6) Of this amount, $81,110 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, $18,461 represents
the Company's accrual for sick leave and vacation redeemable by Mr.
Ehrlich, $35,194 represents compensation expense recorded in relation to
the sale of shares to the Company, $(664) represents a reduction of 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 $35,715 represents the Company's payments
and accruals to pension and education funds. Additionally, $25,482
represents the Company's accrual to fund Mr. Ehrlich's pension fund as well
as provide him with certain other post-termination benefits, and $6,732
represents the value charged for tax purposes for the use of a car provided
by the Company.
(7) In lieu of cash of $10,000 for part of his bonus for fiscal year 1997, Dr.
Degani was granted options to acquire an aggregate of 6,826 shares of the
Company's Common Stock, at an exercise price of $2.50 per share, the fair
market value of the Company's Common Stock on the date of grant.
(8) Of this amount, $11,500 represents the Company's accrual for additional
severance pay which would be payable to Dr. Degani if terminated by the
Company, $1,775 represents the Company's accrual for vacation redeemable by
Dr. Degani, $1,123 represents the Company's accrual for severance pay which
would be payable to Dr. Degani under the laws of the State of Israel upon
the termination of his employment by the Company, and $21,048 represents
the Company's payments and accruals to pension and education funds.
Additionally, $6,550 represents the value charged for tax purposes for the
use of a car provided by the Company.
(9) Includes 122,500 stock options received by Dr. Degani in 1997 whose
exercise price was adjusted in 1998.
30
The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 1998.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE OF ASSUMED ANNUAL
RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM
----------------------------------------------------------------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) DATE 5% ($) 10% ($)
----------------------------------------------------------------------------------------------------------
Yehuda Harats 66,500/(1)/ 3.75% $2.50 22-Apr-05 $ 67,743 $157,893
26,977/(2)/ 1.52% $2.50 22-Apr-05 $ 27,481 $ 64,053
160,000/(3)/ 9.01% $3.38 28-Oct-08 $339,956 $861,719
6,010/(4)/ 0.34% $2.50 29-Dec-08 $ 9,459 $ 23,977
108,690/(5)/ 6.12% $2.50 29-Dec-08 $171,064 $433,612
Robert Ehrlich 66,500/(1)/ 3.75% $2.50 22-Apr-05 $ 67,743 $157,893
26,977/(2)/ 1.52% $2.50 22-Apr-05 $ 27,481 $ 64,053
89,400/(6)/ 5.04% $2.69 29-Dec-03 $ 45,025 $119,780
75,000/(3)/ 4.22% $3.38 28-Oct-08 $159,354 $403,931
6,010/(4)/ 0.34% $2.50 29-Dec-08 $ 9,459 $ 23,977
108,690/(5)/ 6.12% $2.50 29-Dec-08 $171,064 $433,612
Joshua Degani 10,000/(7)/ 0.56% $3.25 27-Jan-08 $ 20,453 $ 51,841
6,826/(8)/ 0.38% $2.50 22-Apr-05 $ 6,954 $ 16,207
4,170/(9)/ 0.23% $2.50 22-Apr-05 $ 4,248 $ 9,901
5,575/(10)/ 0.31% $2.50 29-Dec-08 $ 8,774 $ 22,241
36,000/(11)/ 2.03% $2.50 29-Dec-08 $ 56,659 $143,620
(1) In lieu of a cash bonus for fiscal year 1997, the Compensation Committee
granted to each of Messrs. Ehrlich and Harats performance options at an
exercise price equal to the fair market value of the Company's Common Stock
on the date of grant. The options granted become exercisable as follows:
1/3 of such options become exercisable when the closing sale price of the
Company's Common Stock has been at least $3.25 per share for a period of 20
consecutive trading days on NASDAQ; 1/3 of such options become exercisable
when the closing sale price of the Company's Common Stock has been at least
$4.25 per share for a period of 20 consecutive trading days on NASDAQ, and
the final 1/3 of such options become exercisable when the closing sale
price of the Company's Common Stock has been at least $5.50 per share for a
period of 20 consecutive trading days on NASDAQ; provided, that such
options shall, in all events, become exercisable seven years from the date
of grant. During 1998 the first two milestones were reached and the options
are now 2/3 vested.
(2) Messrs Ehrlich and Harats agreed, that for 1998, they would waive 25% of
their base salary or $38,820 for the calendar year. In lieu of the amount
waived, Messrs. Ehrlich and Harats were each granted options at an exercise
price equal to the fair market value of the Company's Common Stock on the
date of grant. The options were fully vested by the end of 1998.
(3) Messrs Ehrlich and Harats were each granted fully vested options, at an
exercise price equal to the fair market value of the Company's common stock
on the date of grant. The options were granted to partially replace shares
that were sold by Messrs. Ehrlich and Harats back to the Company in 1998.
(4) Messrs Ehrlich and Harats were each granted fully vested options, at an
exercise price equal to the fair market value of the Company's common stock
on the date of grant in lieu of additionally waived salary during 1999
totaling $2,404.
31
(5) Messrs Ehrlich and Harats agreed, that for 1999, they would each waive
approximately 27% of their base salary, for a total of $43,476 for the
calendar year. The number of options granted are based on a variety of
factors considered by the Board of Directors of the Company. In lieu of the
amount waived, Messrs. Ehrlich and Harats were each granted options at an
exercise price equal to the fair market value of the Company's Common Stock
on the date of grant. 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 calendar quarter. Any unvested options would immediately
be forfeited. Furthermore, while their base salary was decreased, their
social benefits and 1999 bonuses, will still be calculated on the full base
salary that they are entitled to by contract.
(6) Grant of fully vested options. These options were granted in acknowledgment
that the grantee had failed to exercise $0.82 options that had expired.
(7) The options granted become exercisable as follows: 4,000 options on January
27, 2000, and 3,000 options each on January 27, 2001 & 2002.
(8) In lieu of cash for part of his bonus for fiscal year 1997, Dr. Degani was
granted fully vested options at an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant.
(9) Dr. Degani agreed, that for 1998, he would waive $500 per month of his base
salary, or $6,000 for the calendar year. In lieu of amount waived, Dr.
Degani was granted options at an exercise price equal to the fair market
value of the Company's Common Stock on the date of grant.
(10) Dr. Degani was granted fully vested options, at an exercise price equal to
the fair market value of the Company's common stock on the date of grant in
lieu of additionally waived salary during 1998 totaling $2,230.
(11) Dr. Degani agreed that for 1999, he would waive $1,200 per month of his
base salary, or $14,400 for the calendar year. In lieu of the amount
waived, Dr. Degani was granted options at an exercise price equal to the
fair market value of the Company's Common Stock on the date of grant. The
options vest 1/12th per month over the calendar year. Dr. Degani may cancel
the arrangement upon two weeks notification to the Company prior to the
beginning of each quarter. Any unvested options would immediately be
forfeited. Furthermore, while his base salary was decreased, the social
benefits and 1999 bonuses, will still be calculated on his full base
salary.
32
The table below sets forth information for the Named Executive Officers with
respect to fiscal 1998 year-end option values.
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT FISCAL YEAR VALUE OF UNEXERCISED IN-THE-MONEY
END OPTIONS FISCAL-YEAR-END (1)
-------------------------------------------------------------------------
EXERCISABLE UNEXERCISABLE
NAME (NUMBER) (NUMBER) EXERCISABLE ($) UNEXERCISABLE ($)
-------------------------------------------------------------------------
Yehuda Harats 331,720 280,857 24,918 32,714
Robert S. Ehrlich 237,320 280,857 19,330 32,714
Joshua Degani 68,838 116,233 17,209 26,558
- ----------------------
(1) In-the-money options are options for which the fair market value of the
underlying securities exceeds the exercise or base price of the option.
REPORT ON REPRICING OF OPTIONS/SAR'S
The table below sets forth information for all Executive Officers with
respect to repricing of Options for the past 10 years.
TEN-YEAR OPTION SAR REPRICINGS
NUMBER OF MARKET LENGTH OF
SECURITIES PRICE OF EXERCISE ORIGINAL
UNDERLYING STOCK AT PRICE AT OPTION TERM
OPTIONS/ TIME OF TIME OF REMAINING AT
SARS REPRICING OR REPRICING OR NEW DATE OF
REPRICED OR AMENDMENT REPRICED EXERCISE REPRICING OR
NAME DATE AMENDED ($) ($) PRICE ($) AMENDMENT
- ---------------------------------------------------------------------------------------------------------------------
STEWART EDELMAN 27-Jan-98 1,667 3.25 5.875 3.25 0.53(1)
Treasurer and 27-Jan-98 1,000 3.25 5.750 3.25 1.90(1)
Controller 27-Jan-98 5,000 3.25 7.125 3.25 2.34(1)
27-Jan-98 5,000 3.25 5.875 3.25 8.79
JOSHUA DEGANI 22-Apr-98 122,500 2.50 5.500 2.50 9.05
Executive Vice
President, Chief
Operating Officer
- ----------------------
(1) On June 8, 1998 the expiration dates of these options were extended by
five years from their original expiration dates.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Each of Messrs. Ehrlich, and Harats are parties to similar 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. Each of the Employment Agreements end
December 15, 2000. The Employment Agreements provide for a base salary of
$11,736 per month for each of Messrs. Ehrlich, and Harats (the "Base Salary").
On January 1, of each year, 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 the currency of Israel
compared to the US Dollar; in each case during the immediately preceding year.
Accordingly, Base Salary for each of Messrs. Ehrlich and Harats is, as of
January 1, 1999, $13,330 per month. The Employment Agreements provide for
bonuses to be paid to each of Messrs. Ehrlich and Harats in an amount of (a) not
less than 50%
33
of Base Salary or (b) 2% 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 sets qualitative goals annually as a basis for paying the
bonus to each of Messrs. Ehrlich and Harats. During 1998, no cash bonuses were
paid to Messrs Ehrlich and Harats. However the Company accrued $50,000 for each
of them, as per their contracts. In lieu of a cash bonus, the Compensation
Committee is considering a grant of options to each of Messrs. Ehrlich and
Harats, the number and terms of which have yet to be determined. The Employment
Agreements also contain confidentiality and non-competition covenants. Pursuant
to the Employment Agreements, each of Messrs. Ehrlich, and Harats 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 as well as bonuses due for the
year in which employment is terminated. The Employment Agreements also provide
for 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. Furthermore, 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. Finally, 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 December 29,
1998, Messrs Ehrlich and Harats agreed, that for 1999, they would waive
approximately 27% of their base salary or $43,476 for the calendar year. The
Compensation Committee, in December 1998, approved a grant of 108,690 options to
each of Messrs. Ehrlich and Harats, in lieu of the amount waived at an exercise
price equal to the fair market value of the Company's Common Stock on the date
of grant. 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 calendar quarter. Any
unvested options would immediately be forfeited. Furthermore, while their base
salary has been decreased, their social benefits and 1999 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 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. During 1998, no cash bonus was paid to Dr. Degani. However the
Company accrued $14,250 for him, as per his contract. In lieu of a cash bonus,
the Compensation Committee is considering a grant of options to Dr. Degani, the
number and terms of which have yet to be determined. On December 29, 1998, Dr.
Degani agreed, that for 1999, he would waive $1,200 per month of his base
salary, or $14,400 for the calendar year. The Compensation Committee, in
December 1998, approved a grant of 36,000 options to Dr. Degani, in lieu of the
amount waived at an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant. The options vest 1/12th per month
over the calendar year. Dr. Degani has the right to cancel the arrangement upon
two weeks notification to the Company prior to the beginning of each calendar
quarter. Any unvested options would immediately be forfeited. Furthermore, while
his base salary has been decreased, his social benefits and 1999 bonuses, will
still be calculated on the full base salary that he is entitled to by contract.
On March 12, 1998, the Company and Mr. Menachem Korall (a former named
executive officer of the Company) 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
34
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.
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 1998
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.
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
February 9, 1999, 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.
35
SHARES BENEFICIALLY PERCENTAGE OF TOTAL SHARES
OWNED(1)(2) OUTSTANDING
---------------------------------------------------------------
FIVE PERCENT HOLDERS
- --------------------
Newton Becker 1,746,904/(3)/ 12.2%
2743 Aqua Verde Circle
Los Angeles, California
NAMED EXECUTIVE OFFICERS AND DIRECTORS
- --------------------------------------
Leon Gross 3,627,671/(4)(11)/ 25.3%
Robert Ehrlich 1,248,618/(5)(8)(11)/ 8.4%
Yehuda Harats 1,661,924/(6)(8)(11)/ 11.3%
Joshua Degani 80,842/(7)/ *
Dr. Jay Eastman 20,000/(9)/ *
Jack E. Rosenthal 22,000/(9)/ *
Harvey M. Krueger 23,000/(9)/ *
Lawrence Miller 23,581/(10)/ *
All Directors and Executive Officers of the 6,739,375/(4)(5)(6)(7)(8)(9)(10)(11)/ 43.52%
Company as a group (9 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 baseon 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.
(4) Based upon a Form 4 dated January 21, 1999. Includes 11,667 shares of
Common Stock issuable upon exercise of options exercisable within 60
days, and 265,000 shares held by Leon Gross and Lawrence Miller as Co-
Trustees of the Rose Gross Charitable Foundation.
(5) Includes 540,117 shares of Common Stock issuable upon exercise of
options exercisable, or potentially exercisable, within 60 days.
(6) Includes 445,717 shares of Common Stock issuable upon exercise of
options exercisable, or potentially exercisable, within 60 days.
(7) Includes 80,842 shares of Common Stock issuable upon exercise of
options exercisable within 60 days.
(8) Messrs. Ehrlich and Harats 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.
36
(9) Includes 20,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days.
(10) Includes 11,667 shares of Common Stock issuable upon exercise of
options exercisable within 60 days.
(11) 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. 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 was not renewed. As part of his
termination agreement, Mr. Korall agreed to sell shares sufficient to pay the
remaining balance of the loan. The loan balance has since been fully paid. In
June 1998, the terms of the recourse notes were amended such that the Company
would have recourse only to certain compensation due Messrs. Ehrlich and Harats
upon termination, other than for cause, in which case Messrs. Ehrlich and Harats
would continue to be personally liable on the notes. The Company's reserve
fortermination benefits to each of Messrs. Ehrlich and Harats is greater than
the outstanding amount due the Company under the Promissory Notes. Additionally,
the Company agreed to repurchase shares of the Company's Common Stock, at any
time, at current market prices, from either Messrs. Ehrlich or Harats as payment
in full for the Promissory Notes; and if the shares were sold to the Company,
that Messrs. Ehrlich and Harats would be granted new options at current market
prices to purchase the same amount of shares of the Company's Common Stock that
were sold. As of December 31, 1998, the aggregate amount outstanding pursuant to
the Promissory Notes for each of Messrs. Ehrlich, and Harats was $220,463, and
$378,422, respectively (including an aggregate of $200,685 in accrued interest
receivable), which are also the largest aggregate amounts outstanding since the
issuance of the Promissory Notes.
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 accrued 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 was
calculated, based on the original principal amount of the loan expressed in NIS.
Israel Value Added Tax ("VAT") was also being added to the interest. Both
Interest and the related VAT were payable at maturity. During July 1998, the
Company repurchased the underlying shares from each of Messrs Ehrlich and Harats
for the aggregate amount outstanding under the New Promissory Notes, which at
the time of the repurchase was $566,287 and $1,203,484 respectively (including
an aggregate of $256,696 in accrued interest and VAT receivable).
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 accrued 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 was
calculated, based on the original principal amount of the loan expressed in NIS.
VAT was added to the interest and was paid currently. Interest was payable at
maturity. During July 1998, the Company repurchased the underlying shares from
Mr. Edelman for the aggregate amount outstanding under the New Promissory Notes,
which at the time of the repurchase was $36,708 (including an aggregate of
$3,888 in accrued interest receivable).
37
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 5TH 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.
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 23.
2. Financial Statements Schedules - See Index to Financial Statements
attached hereto, page 23.
3. Exhibits - The following is a list of exhibits:
Exhibit Description
-----------
Number
- ------
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)
38
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.(8)+
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)*
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 July 17, 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)
39
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)
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.(8)
10.36 Employment Agreement dated May 13, 1997 between the Company, EFL, and
Joshua Degani.+ (8)
10.37 Termination Agreement dated March 12, 1998 between the Company, EFL
and Menachem Korall.+ (8)
10.38 Consulting Agreement dated March 12, 1998 between the Company, EFL,
and Shampi Ltd. (8)
10.39 Amendment No. 1 to the Voting Rights Agreement between the Company,
Gross, Robert Ehrlich, and Yehuda Harats dated December 10, 1997. (8)
10.40 Amendment No. 2 to the Registration Rights Agreement between the
Company, Gross, Robert Ehrlich and Yehuda Harats dated December 10,
1997. (8)
10.41 1998 Non-Executive Stock Option and Restricted Stock Purchase Plan
(9).
10.42 Form of Distribution agreement
21 Subsidiaries.(4)
23.1 Consent of Kesselman & Kesselman (a member of PriceWaterhouseCoopers
International Limited), independent certified public accountants
in Israel.
27 Financial Data Schedule.
27.1 Amended Financial Data Schedule Nine Months Ended September 30, 1997.
(8)
27.2 Amended Financial Data Schedule Six Months Ended June 30, 1997. (8)
27.3 Amended Financial Data Schedule Three Months Ended March 31, 1997. (8)
27.4 Amended Financial Data Schedule Year Ended December 31, 1996. (8)
27.5 Amended Financial Data Schedule Nine Months Ended September 30, 1996.
(8)
27.6 Amended Financial Data Schedule Six Months Ended June 30, 1996 (8)
27.7 Amended Financial Data Schedule Three Months Ended March 31, 1996. (8)
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 1998.
- ----------------
* 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.
40
(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.
(8) Incorporated by reference to Company's Annual Report on Form 10-K for the
year ended December 31, 1997, as amended.
(9) Incorporated by reference to the Company's Registration Statement on
Form S-8 (Registration No. 333 - 74197), which became effective on March
10, 1998.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 23, 1999.
ELECTRIC FUEL CORPORATION
By /s/ Robert S. Ehrlich
----------------------------------------
Name: Robert S. Ehrlich
Title: Vice President, Chairman, Chief
Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on March 23,1999.
Signature Title
--------- -----
/s/ Yehuda Harats Chief Executive Officer, President and Director
- -------------------------------------
Yehuda Harats (Principal Executive Officer)
/s/ Robert S. Ehrlich Chief Financial Officer, Vice President and Director
- -------------------------------------
Robert S. Ehrlich (Principal Financial Officer)
/s/ Evan Fishman Controller
- -------------------------------------
Evan Fishman (Principal Accounting Officer)
/s/ Jay M. Eastman Director
- -------------------------------------
Jay M. Eastman
/s/ Leon S. Gross Director
- -------------------------------------
Leon S. Gross
/s/ Harvey M. Krueger Director
- -------------------------------------
Harvey M. Krueger
/s/ Lawrence M. Miller Director
- -------------------------------------
Lawrence M. Miller
/s/ Jack E. Rosenfeld Director
- -------------------------------------
Jack E. Rosenfeld
ELECTRIC FUEL CORPORATION
1998 CONSOLIDATED FINANCIAL STATEMENTS
ELECTRIC FUEL CORPORATION
1998 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
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 10-33
________________________
_________________________________________________
________________________
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, 1998 and
1997 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, 1998. 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, 1998 and 1997 and the results of their
operations, changes in stockholders' equity and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles in the United States.
Jerusalem, Israel Kesselman & Kesselman
February 26, 1999 Certified Public Accountants (Israel)
2
ELECTRIC FUEL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------
1998 1997
----------- ----------
U.S. DOLLARS
-----------------------
A S S E T S
CURRENT ASSETS (note 7):
Cash and cash equivalents 5,242,555 11,771,816
Marketable debt securities (note 8a) 3,700,575 3,101,846
Accounts receivable:
Trade 613,467 801,927
Other (note 8b) 1,299,056 1,711,037
Inventories 374,543 538,682
---------- ----------
Total current assets 11,230,196 17,925,308
---------- ----------
MARKETABLE DEBT SECURITIES (note 8a) 1,843,326
----------
FIXED ASSETS (note 2):
Cost 6,342,171 7,058,716
Less - accumulated depreciation and amortization 2,907,312 2,304,327
---------- ----------
3,434,859 4,754,389
---------- ----------
OTHER ASSETS, net of
accumulated amortization 49,182
---------- ----------
14,665,055 24,572,205
========== ==========
3
DECEMBER 31
----------------------------
1998 1997
----------------------------
U.S. DOLLARS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES (note 7):
Accounts payable and accruals:
Trade 1,099,352 1,169,371
Other (note 8c) 1,003,522 1,786,163
Deferred income 136,549 1,014,948
----------- -----------
Total current liabilities 2,239,423 3,970,482
LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT,
net of amount funded (note 3) 1,844,120 1,842,749
COMMITMENTS (note 4)
----------- ----------
Total current liabilities 4,083,543 5,813,231
----------- ----------
STOCKHOLDERS' EQUITY (note 5):
Common stock - $ 0.01 par value;
authorized - 28,000,000 shares as of December 31, 1998
and 1997;
issued - 14,303,387 shares as of December 31, 1998
and 14,218,161 shares as of December 31, 1997
outstanding - 14,048,054 shares as of December 31, 1998
and 14,218,161 shares as of December 31, 1997 143,034 142,182
Preferred stock -$ 0.01 par value; authorized - 1,000,000 shares,
no shares outstanding
Additional paid-in capital 57,398,814 57,077,708
Accumulated deficit (44,553,027) (36,020,457)
Accumulated other comprehensive income (loss) (1,943) 436
Treasury stock, at cost (common stock - 255,333 shares) (1,806,481)
Notes receivable from stockholders (598,885) (2,440,895)
----------- -----------
Total stockholders' equity 10,581,512 18,758,974
----------- -----------
14,665,055 24,572,205
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
1998 1997 1996
---------------------------------------------------
U.S. dollars
---------------------------------------------------
REVENUES (note 10) 4,013,263 4,526,216 5,405,303
---------- ---------- ----------
RESEARCH AND DEVELOPMENT EXPENSES
AND COST OF REVENUES
Expenses incurred (note 9a) 10,055,571 12,227,559 13,067,747
Less - royalty-bearing grants (note 4a) 489,546 2,381,777 1,505,720
---------- ---------- ----------
9,566,025 9,845,782 11,562,027
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (note 9b) 3,675,024 4,440,194 4,693,008
---------- ---------- ----------
13,241,049 14,285,976 16,255,035
---------- ---------- ----------
OPERATING LOSS (9,227,786) (9,759,760) (10,849,732)
FINANCIAL INCOME - net (note 9c) 652,042 775,111 793,853
---------- ---------- ----------
LOSS BEFORE TAXES ON INCOME (8,575,744) (8,984,649) (10,055,879)
TAXES ON INCOME (note 6) (43,174) 144,850 (38,261)
----------- ---------- ----------
LOSS (8,532,570) (9,129,499) (10,017,618)
=========== ========== ==========
LOSS PER SHARE - basic and diluted (note 1p) (0.61) (0.73) (0.91)
=========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (note 1p) 14,013,305 12,502,330 10,961,765
=========== ========== ==========
The accompanying notes are an integral part of the financial statements.
5
(Continued) - 1
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
other
Common stock Additional comprehensive
------------------------- paid-in Accumulated income
Shares Amount capital deficit (loss)
----------- ----------- -------------- -------------- ------------
U.S. dollars
------------------------------------------------------------
BALANCE AT JANUARY 1, 1996 11,328,110 113,282 24,168,108 (16,873,340) 29,048
CHANGES DURING 1996 (note 5):
Shares issued in a public offering 3,750,000 37,500 /(1)/21,562,647
Shares issued in a private placement 1,538,462 15,384 /(2)/9,920,407
Shares issued in connection with the exercise
of options 293,099 2,931 1,516,933
Compensation cost in connection with exercise
of options 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 68,000
Options issued as compensation for services
rendered by consultant 9,959
Loans granted to stockholders
Accrued interest on notes receivable from
stockholders 102,215
Realization of gain on available-for-sale
securities (25,891)
Loss (10,017,618)
---------- ------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1996 14,257,508 142,575 57,341,451 (26,890,958) 3,157
CHANGES DURING 1997 (note 5):
Shares issued in connection with the exercise of
options 32,953 330 36,552
Treasury stock retired (72,300) (723) (455,671)
Options issued as compensation for services rendered
by consultant 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 securities (2,721)
Loss (9,129,499)
---------- ------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1997 - forward 14,218,161 142,182 57,077,708 (36,020,457) 436
Notes
receivable
Treasury from
stock stockholders Total
------------------------------------------
BALANCE AT JANUARY 1, 1996 (193,174) (1,422,942) 5,820,982
CHANGES DURING 1996 (note 5):
Shares issued in a public offering 21,600,147
Shares issued in a private placement 9,935,791
Shares issued in connection with the exercise
of options (1,465,978) 53,886
Compensation cost in connection with exercise
of options 159,834
Treasury stock retired 193,174
Purchase of treasury stock (72,300 shares) and
options issued as compensation for services
rendered by consultant (456,394) 815,046 426,652
Options issued as compensation for services
rendered by consultant 9,959
Loans granted to stockholders (94,131) (94,131)
Accrued interest on notes receivable from
stockholders (102,215)
Realization of gain on available-for-sale
securities (25,891)
Loss (10,017,618)
--------- ---------- ----------
(456,394) (2,270,220) 27,869,611
BALANCE AT DECEMBER 31, 1996
CHANGES DURING 1997 (note 5):
Shares issued in connection with the exercise of options 456,394 36,882
Treasury stock retired
Options issued as compensation for services rendered
by consultant 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 securities (2,721)
Loss (9,129,499)
--------- --------- ----------
-,- (2,440,895) 18,758,974
BALANCE AT DECEMBER 31, 1997 - forward
6
(CONCLUDED) - 2
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON STOCK PAID-IN ACCUMULATED INCOME TREASURY
SHARES AMOUNT CAPITAL DEFICIT (LOSS) STOCK
------ ------ ---------- ----------- ------------- --------
U.S DOLLAR
-------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
1997 - forward 14,218,161 142,182 57,077,708 (36,020,457) 436
CHANGES DURING 1998 (note 5):
Shares issued in connection
with the exercise of options 81,226 812 90,094
Purchase of treasury stock
(255,333 shares) for notes
receivable from stockholders
and compensation costs in
connection therewith 110,302 (1,806,481)
Options issued as compensation
for services rendered by
employees 110,000
Shares issued as compensation
for services rendered by
directors 4,000 40 10,710
Loans granted to stockholders
Payment of interest and
principal on note receivable
from stockholders
Accrued interest on notes
receivable from stockholders
Unrealized loss on available
for-sale securities (2,379)
Loss (8,532,570)
---------- ------- ---------- ----------- ----- ----------
BALANCE AT DECEMBER 31, 1998 14,303,387 143,034 57,398,814 (44,553,027) (1,943) (1,806,481)
========== ======= ========== ========== ===== =========
NOTES
RECEIVABLE
FROM
STOCKHOLDERS TOTAL
------------ -----
-----------------------------
BALANCE AT DECEMBER 31,
1997 - forward (2,440,895) 18,758,974
CHANGES DURING 1998 (note 5):
Shares issued in connection 90,906
with the exercise of options
Purchase of treasury stock
(255,333 shares) for notes
receivable from stockholders
and compensation costs in
connection therewith 1,806,481 110,302
Options issued as compensation
for services rendered by
employees 110,000
Shares issued as compensation
for services rendered by
directors 10,750
Loans granted to stockholders (19,158) (19,158)
Payment of interest and
principal on note receivable
from stockholders 147,299 147,299
Accrued interest on notes
receivable from stockholders (92,612) (92,612)
Unrealized loss on available- (2,379)
for-sale securities
Loss (8,532,570)
-------- ----------
BALANCE AT DECEMBER 31, 1998 (598,885) 10,581,512
======== ==========
/(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
1998 1997 1996
--------- ---------- ----------
U.S. DOLLARS
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss (8,532,570) (9,129,499) (10,017,618)
Adjustments required to reconcile loss to net cash
used in operating activities:
Writedown of investment in an investee company 35,849
Depreciation and amortization 903,945 866,327 951,955
Amortization of net premium (discount) on
marketable debt securities 21,897 (44,591)
Capital loss from disposal of fixed assets 5,321 6,405 7,145
Capital loss from disposal of marketable debt
securities, net 150 30,991
Liability for employee rights upon retirement - net 1,371 701,719 585,122
Waiver of loan to stockholder 358,652
Compensation cost in connection with exercise
of options 159,834
Write-down of fixed assets 1,251,604
Issue of shares as compensation for services
rendered by directors 10,750
Issue of stock options as compensation for services
rendered by employees 110,000
Compensation in connection with purchase of
treasury stock for notes receivable from
stockholders 110,302
Issue of stock options as compensation for
services rendered by consultants 9,000 77,959
Interest accrued on notes and loan to stockholders (92,612)
Changes in operating asset and liability items:
Decrease (increase) in accounts receivable 222,540 (233,457) 118,619
Decrease (increase) in inventories 164,139 376,350 (379,824)
Increase (decrease) in accounts payable and
accruals (852,660) 570,656 (4,516,367)
Increase (decrease) in deferred income (878,399) 88,349 (3,296,467)
---------- ---------- -----------
Net cash used in operating activities (7,518,373) (6,788,741) (15,919,999)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (985,507) (507,882) (2,225,459)
Investment grant relating to fixed assets 377,901 355,137
Loans granted to stockholders (19,158) (38,395) (94,131)
Proceeds from disposal of fixed assets 157,500 19,731
Sale or redemption of (purchase of) marketable
debt securities - net 1,220,171 6,393,080 (7,137,746)
---------- --------- -----------
Net cash provided by (used in) investing activities 750,907 5,846,803 (9,082,468)
---------- --------- -----------
Forward (6,767,466) (941,938) (25,002,467)
8
(CONCLUDED) - 2
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
1998 1997 1996
---- ---- ----
U.S. DOLLARS
--------------------------------------------
Forward (6,767,466) (941,938) (25,002,467)
---------- ---------- ----------
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 90,906 36,882 53,886
Payment on note receivable from stockholders 147,299 14,096
----------- ----------- ----------
Net cash provided by financing activities 238,205 50,978 32,300,376
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (6,529,261) (890,960) 7,297,909
BALANCE OF CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 11,771,816 12,662,776 5,364,867
---------- ----------- ----------
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF YEAR 5,242,555 11,771,816 12,662,776
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - CASH PAID DURING THE YEAR FOR:
Interest 1,045 30,001 28,247
========== ========== ==========
Income taxes 88,340 49,563 92,483
========== ========== ==========
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 1l.
2. As to transaction, in 1996, whereby the Company purchased shares of
its common stock from a stockholder, see note 5a(4).
3. As to 1998 purchase of treasury stock for notes receivable from
stockholders, see note 5a(6).
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 (see also e. below):
a. GENERAL:
1) Nature of operations
Electric Fuel Corporation ("EFC") - a Delaware corporation -
together with its subsidiaries, is referred to as the Company.
Substantially 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 also maintains a small battery research
and development facility in the United States.
The Company is involved in the research, development and
commercial exploitation of zinc-air electrochemical technology
for primary and reusable battery systems. The Company operates in
three business segments: consumer batteries, electric vehicles
and defense and safety products. As more fully reflected in note
10, the Company's defense and safety products have achieved
commercial sales. Other segments, however, have yet to reach the
stage of commercial sales; revenues are derived primarily from
the sale of pre-production prototype systems and technology
contracts.
Until commencement of commercial product sales, the Company plans
to meet its funding requirements through fees from potential
users of its technology, continued sales of prototype systems,
grants from various U.S. and Israeli governmental and quasi-
governmental agencies and its available capital. For the Company
to meet its projected level of activity however, the Company will
require additional funding via the issuance of equity or debt
securities or via the formation of joint venture or other
strategic relationships. Should the Company be unsuccessful in
obtaining additional funding, management of the Company intends
to modify, reduce, defer or eliminate certain of its anticipated
programs in order to continue reduced operations.
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) Accounting principles
The financial statements are prepared in accordance with U.S.
generally accepted accounting principles ("GAAP").
10
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
3) 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 years. Actual results could differ
from those estimates.
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 market value and the changes in their
market value are carried directly to a separate component of
Stockholders' Equity, under other comprehensive income (loss).
Realized gains and losses are carried to the statements of loss.
e. INVENTORIES
Composed mainly of raw materials and supplies valued at the lower of
cost or market. Cost is determined as per 1998 on the moving average
basis (previously -first-in, first-out). The effect of this change is
immaterial.
11
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 fully amortized
through 1998 and an investment in an Israeli company (3.9% owned) that
was written-off in 1998.
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 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. Participation by
governmental or quasi-governmental agencies is recognized as a
reduction of expense as the related costs are incurred (see also note
4a).
j. DEFERRED INCOME TAXES
The Company uses the liability method of accounting for income taxes,
as set forth in Statement No. 109 of the U.S. Financial Accounting
Standards Board ("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. IMPAIRMENT IN VALUE OF FIXED ASSETS
In accordance with Statement No. 121 of the 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 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 10e(1)).
During 1998, the Company completed its Field Test in Germany and
recorded a writedown relating to these assets in the approximate
amount of $ 830,000.
During 1998, the Company recorded a writedown of certain production
equipment in Israel in the approximate amount of $ 420,000.
13
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
m. CONCENTRATION OF CREDIT RISKS
Most of the Company's cash and cash equivalents and marketable debt
securities at December 31, 1998 and 1997 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 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.
n. COSTS INCURRED RELATING TO THE YEAR 2000 ISSUE
The Company charges the costs incidental to adaptation of its
software, in accordance with its operating plan, to income as
incurred.
o. ADVERTISING COSTS
Advertising costs are charged to income as incurred.
p. 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 incremental shares from
assumed exercise of options 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
stock options.
q. COMPREHENSIVE INCOME
In 1998, the Company adopted FAS No. 130, "Reporting Comprehensive
Income" which was issued in June by the FASB.
FAS 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 (loss), comprehensive income includes all
non-owner changes in equity ("other comprehensive income (loss)")
which, as applicable to the Company, include unrealized gain on
marketable securities available for sale.
14
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):
r. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued FAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities". FAS 133 established a new model
for accounting for derivatives and hedging activities. FAS 133
requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. FAS 133 is effective for calendar-year
companies as from January 1, 2000.
The Company is currently evaluating the impact FAS 133 will have on
its financial statements; however, since the use of derivatives by the
Company is limited (see also note 8d), it expects that the adoption of
FAS 133 will have no material impact on its consolidated results of
operations, financial position or cash flows.
NOTE 2 - FIXED ASSETS:
a. COMPOSITION OF ASSETS, GROUPED BY MAJOR CLASSIFICATIONS, IS AS
FOLLOWS:
ACCUMULATED
DEPRECIATION
COST* AND AMORTIZATION
-------------------- ----------------------
DECEMBER 31 DECEMBER 31
-------------------- ----------------------
1998 1997 1998 1997
---------- -------- ---------- ----------
U.S. DOLLARS
--------------------------------------------
Machinery and equipment 4,408,687 5,030,996 1,868,107 1,494,097
Computers and related equipment 513,142 463,710 269,381 181,582
Office furniture and equipment 300,570 334,821 70,273 80,836
Vehicles 659,768 634,430 273,619 239,213
Leasehold improvements 460,004 594,759 425,932 308,599
--------- --------- --------- ---------
6,342,171 7,058,716 2,907,312 2,304,327
========= ========= ========= =========
* Net of related investment grant in the amount of $ 989,036 and
$919,601 as of December 31, 1998 and 1997, respectively (see also
note 6b).
b. Depreciation and amortization of fixed assets totalled $ 893,940,
$856,327 and $ 941,955 in 1998, 1997 and 1996, respectively.
c. 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 4c), is partly covered by purchase of insurance
policies and by deposits with severance pay and pension funds.
The amounts funded by EFL for the purchase of insurance policies for
its employees are reflected as plan assets since substantially all
employees are entitled to irrevocably receive such funds by the terms
of employment contract or Company policy and these insurance policies
cannot ordinarily be withdrawn by EFL.
The amounts accrued and the portion funded for Israeli employees of
EFL are composed as follows:
DECEMBER 31
------------------------
1998 1997
----------- -----------
U.S. DOLLARS
------------------------
Accrued severance pay 2,578,585 2,726,520
L e s s - plan assets (primarily
insurance policies) 734,465 883,771
--------- ---------
Unfunded balance* 1,844,120 1,842,749
========= =========
* Reflects primarily obligations of the Company in connection with
employment agreements with certain senior employees (see note 4c).
The amounts of accrued severance pay as above cover the Company's
severance pay liability in accordance with labor agreements in force
and based on salary components which, in management's opinion, create
entitlement to severance pay.
b. The Change in accrued severance pay for 1998 is comprised of increase
in liability of approximately $156,000 less benefits paid of
approximately $304,000 (1997-increase in liability of approximately
$993,000 less benefits paid of approximately $70,000).
The change in plan assets for 1998 is comprised of contributions of
approximately $217,000, benefits paid of approximately $187,000 and
loss on plan assets of approximately $180,000 (1997 is comprised of
contributions of approximately $216,000, benefits paid of
approximately $63,000 and return on plan assets of approximately
$69,000).
Expenses included in employee rights upon retirement for the year 1996
amounted to approximately $1,140,000. Detailed information is not
readily available for this year.
16
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - COMMITMENTS:
- ----
a. ROYALTY COMMITMENTS:
1) 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.
2) The Company in cooperation with a U.S. participant has received
approval from the Israel U.S. Binational Industrial Research and
Development Foundation (BIRD) for 50% funding of a project for the
development of a hybrid propulsion system for transit buses. The
maximum approved cost of the project is approximately $1.8 million
and the Company's share in the Project costs is anticipated to
amount to approximately $1.1 million, which will be reimbursed by
BIRD at the aforementioned 50% rate.
Royalties at rates from 2.5%-5% of sales are payable up to a
maximum of 150% of the grant amounts - linked to the U.S. consumer
price index. Accelerated royalties are due under certain
circumstances.
3) At the time the grants were received, successful development of
the related products was not assured. In the case of failure of a
project that was partly financed by the aforementioned royalty
bearing participations, the Company is not obligated to pay any
such royalties.
As of December 31, 1998, total commitments to pay royalties are as
follows: Chief Scientist (at 100%) - approximately $7.5 million.
BIRD (at 150%) -approximately $ 64,000.
b. LEASE COMMITMENTS
The Company has entered into various non-cancelable 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, 1998, are as follows:
U.S. DOLLARS
IN
THOUSANDS
------------
Year ending December 31:
1999 124
=======
2000 31
=======
The rental payments are primarily payable in Israeli currency linked
to the Israeli Consumer Price Index ("Israeli CPI").
Rental expenses totaled approximately $ 470,000, $ 525,000 and
$360,000 in 1998, 1997 and 1996, respectively.
17
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - COMMITMENTS (continued):
c. EMPLOYMENT CONTRACTS
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 $ 320,000 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.
d. OTHER - see note 10e(5).
NOTE 5 - STOCKHOLDERS' EQUITY:
a. CAPITAL TRANSACTIONS:
1) The Company's common stock are traded in the United States on the
NASDAQ under the Symbol "EFCX". On December 31, 1998, the closing
price of one share was $ 2.75.
2) In 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.
3) In 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.
4) During 1996, the Company purchased 72,300 shares of its common
stock from a consultant, in consideration of partial waiver of a
loan of $ 720,000 granted to the consultant, sale to the
consultant of the Company's 80% interest in Erbato GmbH in
consideration of DM 1 and granting of 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.
18
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (CONTINUED):
5) Non-recourse notes receivable from employee-stockholders arising
from the purchase of 1,500,000 of the Company's shares matured in
1998. The notes were renewed as recourse notes, due on December
31, 2007 bearing interest of 5.5% or linked to the Israeli CPI
whichever is higher. In June 1998, the terms of the recourse notes
were amended such that the Company would have resource only to
certain termination compensation due to the employee-stockholders
(which exceeds the amounts outstanding under the notes), or if
terminated for cause the employee-stockholders would continue to
be personally liable.
Additionally, the Company agreed to purchase Company stock from
the employee-stockholders, at prevailing market prices, up to the
full amount outstanding under the notes. The Company further
agreed to grant new options at exercise prices equal to prevailing
market prices, in the amount of shares sold by the employee-
stockholder.
6) In 1996, 255,333 stock options were exercised and the purchase
price of the stock was financed by the Company's acceptance of
interest-bearing non-recourse notes receivable. In addition, the
income and other taxes due were added to the note balance. As a
result of this transaction, compensation expense in the
approximate amount of $ 160,000 was recorded in 1996.
In 1998, the Company purchased the aforementioned 255,333 shares
for the aggregate amount outstanding under the aforementioned non-
recourse notes. As a result of this transaction, compensation
expense in the approximate amount of $ 110,000 was recorded in
1998.
7) Under the common stock option plans (see b. below) 81,226, 32,953,
and 293,099 options were exercised to purchase the Company's
shares in 1998, 1997 and 1996, respectively.
8) In 1998, 4,000 shares of the Company's common stock were issued to
directors. Accordingly, the Company recorded compensation expense
of $10,710.
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.
(c) 1998 Employee Plan - 1,500,000 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.
19
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (continued):
(d) 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, 1998, the total number of options authorized
under the plans is 6,815,600, and 1,792,730 options are available
for future grant. Under these plans, options usually expire no
later than 10 years from the date of grant. Each option can be
exercised to purchase one share having the same rights as the
other common stock shares.
The options usually vest over a three year period (33.3% per
annum). As to options having accelerated vesting rights - see (3)
hereafter.
3) A summary of the status of the Company's plans and other stock
options granted as of December 31, 1998, 1997 and 1996, and
changes during the years ended on those dates, is presented below:
1998 1997 1996
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
---------- ----------- ---------- ----------- ---------- -----------
$ $ $
OPTIONS OUTSTANDING AT
BEGINNING OF YEAR 1,616,363 5.38 1,472,381 5.24 1,173,033 4.71
CHANGES DURING THE YEAR:
Granted /(2)(4)(5)/ 1,775,421 2.79 187,085 5.79 617,286 6.30
Exercised (81,226) 1.12 (32,953) 1.12 /(3)/(293,099) 5.19
Repriced:
Old exercise price (536,450) 6.16
New exercise price 536,450 3.08
Forfeited or canceled (346,303) 2.7 (10,150) 6.64 (24,839) 7.05
--------- --------- ----------
OPTIONS OUTSTANDING AT
END OF YEAR 2,964,255 3.7 1,616,363 5.38 1,472,381 5.24
========= ========= ==========
OPTIONS EXERCISABLE AT
YEAR-END 1,638,834 3.67 784,800 4.35 657,181 3.66
========= ========= ==========
WEIGHTED AVERAGE FAIR VALUE
OF OPTIONS GRANTED
DURING THE YEAR/(1)/ 1.64 2.71 3.33
======== ======== =========
/(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:
1998 1997 1996
--------- --------- ---------
Dividend yield 0% 0% 0%
Expected volatility 103% 80% 55%
Risk-free interest 4.5%-5.6% 6.1% 6%-6.7%
Expected life of up to 10 years 10 years 10 years
20
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (continued):
/(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 is $ 9,000 and $ 77,959,
respectively.
/(3)/ See a(6) above.
/(4)/ Includes 803,325 options granted to related parties in 1998, partially
in lieu of salaries or bonuses and 300,000 options which were granted in
1996 whose exercise date may be accelerated based on the share price of
the Company's common stock.
Of the aforementioned options, 495,612 options are fully vested as at
December 31, 1998 .
/(5)/ In 1998, 206,267 out-of-the-money options were extended approximately 5
years.
4) The following table summarizes information about options
outstanding at December 31, 1998:
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 1998 LIFE PRICE 1998 PRICE
- ----------- --------------- ------------ --------- --------------- --------
$ YEARS $ $
------------
0-2 2,645 2.63 0.35 2,645 0.35
2-4 2,232,838 8.12 2.84 1,246,029 2.91
4-6 314,106 4.84 5.74 292,439 5.75
6-8 404,666 6.69 6.76 94,388 7.12
8-10 10,000 8.75 9.06 3,333 9.06
----------- -----------
2,964,255 7.57 3.70 1,638,834 3.67
=========== ===========
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.
The FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation". FAS 123 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.
21
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - STOCKHOLDERS' EQUITY (continued):
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 FAS 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 capital.
The compensation cost that has been charged in the consolidated
statements of loss in respect of options to employees in 1998,
1997 and 1996 was $222,300, $-0- and $159,834 respectively.
Had compensation cost for the Company's plans been determined
based on the fair value at the grant dates for awards granted in
1996 and thereafter during 1997and 1998 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:
1998 1997 1996
------------------------ ------------------------ ------------------------
AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA
------------------------ ------------------------ ------------------------
U.S. DOLLARS U.S. DOLLARS U.S. DOLLARS
------------------------ ------------------------ ------------------------
Loss 8,532,570 11,633,365 9,129,499 9,753,337 10,017,618 11,997,287
========= ========== ========= ========= ========== ==========
Loss per share - basic
and diluted 0.61 0.83 0.73 0.78 0.91 1.09
========= ========== ========= ========= ========== ==========
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, 1998, EFC has operating loss carryforwards for U.S.
federal income tax purposes of approximately $ 231,000, which are
available to offset future taxable income, if any, expiring primarily
in 2009.
22
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - TAXES ON INCOME (continued):
b. ISRAELI SUBSIDIARY (EFL):
1) TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
INVESTMENTS, 1959 (HEREAFTER - 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.
The main tax benefits available to EFL are:
(a) Reduced tax rates
During the period of benefits - for 7 or 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.
23
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - TAXES ON INCOME (continued):
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, having regard to 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.
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%.
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 $ 43 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.
24
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6 - TAXES ON INCOME (continued):
d. DEFERRED INCOME TAXES
DECEMBER 31
-----------------------
1998 1997
----------- ---------
U.S. DOLLAR
-----------------------
DOMESTIC INCOME TAXES:
Deferred tax asset 67,000 80,000
L e s s - valuation allowance (67,000) (80,000)
----------- -----------
-,- -,-
=========== ===========
FOREIGN INCOME TAXES:
Deferred tax asset* 6,500,000 6,000,000
L e s s - valuation allowance (6,500,000) (6,000,000)
----------- -----------
-,- -,-
=========== ===========
* 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:
1998 1997 1996
-------- -------- --------
U.S. DOLLARS
--------------------------
U.S. 22,993 39,000 30,000
Israeli (in respect
of prior years) (68,261)
European (66,167) 105,850
--------- ------- --------
(43,174) 144,850 (38,261)
========= ======= ========
f. TAX ASSESSMENTS:
1) EFL received final assessments through the year ended December 31,
1996.
2) EFC and its other subsidiaries have not been assessed for tax
purposes since incorporation.
25
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:
DECEMBER 31, 1998
-------------------------------------
ISRAELI
CURRENCY-
ISRAELI OTHER LINKED TO
CURRENCY- NON-DOLLAR THE ISRAELI
UNLINKED CURRENCIES CPI
---------- ------------ -------------
U.S. DOLLARS
-------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents 218,495 180,052
Accounts receivable 606,045 187,634 36,739
---------- ------------ -------------
824,540 367,686 36,739
========== ============ =============
LIABILITIES -
current liabilities - accounts
payable and accruals 1,128,772 116,888
========== ============
NOTE 8 - SUPPLEMENTARY BALANCE SHEETS INFORMATION:
A. INVESTMENT IN MARKETABLE DEBT SECURITIES
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ----------------------
FAIR MARKET FAIR MARKET
COST VALUE COST MARKET
------- ----- ------- ------
U.S. DOLLARS
------------------------------------------------
Obligations of states and
political subdivisions 3,702,518 3,700,575 4,944,736 4,945,172
Less - portion due in one
year or less - presented
among current assets 3,702,518 3,700,575 3,103,272 3,101,846
--------- --------- --------- ---------
Balance - due in one to two
years -,- -,- 1,841,464 1,843,326
========= ========= ========= =========
Unrealized gain (loss) in respect of these securities - at December
31, 1998 and 1997 -aggregates $ (1,943) and $ 436, respectively.
26
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
b. ACCOUNTS RECEIVABLE - OTHER
DECEMBER 31
---------------------------
1998 1997
---------- ---------
U.S. DOLLARS
---------------------------
Israeli government departments and agencies:
Research and development grant receivable 356,541 658,055
Investment grant receivable 3,784 400,844
VAT and other receivables 43,107 155,527
Other 35,187 125,474
--------- ---------
438,619 1,339,900
U.S. Government 380,776
Employees 19,937 35,994
Prepaid expenses 141,321 71,500
Interest receivable 141,951 89,451
Sundry 176,452 174,192
--------- ---------
1,299,056 1,711,037
========= =========
c. ACCOUNTS PAYABLE AND ACCRUALS - OTHER
Employees and employee institutions 347,950 849,327
Provision for vacation pay 214,303 286,508
Income taxes payable 9,393 125,518
Accrued expenses 408,597 505,103
Sundry 23,279 19,707
--------- ---------
*1,003,522 *1,786,163
========= =========
* Including related parties 131,981 105,073
========= =========
d. FINANCIAL INSTRUMENTS
1) Derivative financial instruments
The Company had only limited involvement with derivative
financial instruments, in 1998 and 1997. At December 31,
1998 the Company had no involvement in derivatives. In 1996,
the Company entered into a limited number of forward
exchange contracts, in order to hedge foreign currency
exposure on firm commitments. Gains and losses from these
contracts were deferred and included as part of the
measurement of the results from the underlying hedged
transactions.
27
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):
2) Fair value of financial instruments
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.
The marketable debt securities - not included among working
capital - are also presented at their fair market value.
NOTE 9 - SELECTED STATEMENTS OF LOSS DATA:
a. RESEARCH AND DEVELOPMENT EXPENSES AND COST OF REVENUES
1998 1997 1996
---------- ---------- ----------
U.S. DOLLARS
----------------------------------
Materials, subcontracted work and
consulting 2,527,183 3,005,443 4,307,617
Salaries and related expenses 4,366,995 6,365,241 5,706,440
Other 3,161,393 2,856,875 3,053,690
---------- ---------- ----------
10,055,571 12,227,559 13,067,747
========== ========== ==========
28
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - SELECTED STATEMENTS OF LOSS DATA (CONTINUED):
1998 1997 1996
--------------- -------------------- -----------------
U.S. DOLLARS
---------------------------------------------------------
b. SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
Salaries and related expenses 1,608,743 1,724,498 1,959,664
Consulting and professional fees 544,525 1,304,349 1,251,286
Royalties (note 4a) 114,385 106,722 28,800
Other 1,407,371 1,304,625 1,453,258
--------- ---------- ----------
/(1)(2)/3,675,024 /(1)(2)/4,440,194 /(1)(2)/4,693,008
========= ========== ==========
/(1)/ Including advertising and
promotion 255,520 240,353 216,682
========= ========== ==========
/(2)/ Including related parties 38,404 43,009 11,865
========= ========== ==========
c. FINANCIAL INCOME (EXPENSES) - NET
Interest, bank charges and fees (29,485) (58,159) (117,721)
Exchange differences, net (34,154) (128,871) (162,653)
Interest income 715,681 962,141 1,074,227
--------- ---------- ----------
/(1)/652,042 775,111 793,853
========= ========== ==========
/(1)/ Including related parties 92,612
=========
NOTE 10 - SEGMENT INFORMATION:
a. GENERAL INFORMATION
The company adopted in 1998 FAS 131 (Disclosures about Segments
of an Enterprise and Related information) which was issued in
June 1997 by the FASB.
1) Factors management used to identify the enterprise's
reportable segments:
The company's reportable segments are strategic business
units that offer different products. They are managed
separately because each business requires different
marketing strategies.
2) Description of the types of products from which each
reportable segment derives its revenues:
The company is involved in the research, development and
commercial exploitation of zinc-air electrochemical
technology for primary and reusable battery systems. The
Company operates in three business segments: consumer
batteries, electric vehicles and defense and safety
products.
29
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SEGMENT INFORMATION (CONTINUED):
b. INFORMATION ABOUT REPORTED SEGMENT GAINS AND LOSSES AND ASSETS:
The accounting policies of the segments are the same as those
described in the significant accounting policies. The Company
evaluates performance based on gross profit or loss.
DEFENSE
ELECTRIC AND SAFETY CONSUMER ALL
VEHICLES PRODUCTS BATTERIES OTHER TOTAL
---------------- -------------- ------------- --------------- -------------
U.S. DOLLARS
1998:
- -----
Revenues from external customers 2,792,000 1,181,000 40,000 4,013,000
Depreciation expense (526,000) (37,000) (7,000) (324,000) (894,000)
Direct expenses /(1)/(4,766,000) (1,188,000) (3,011,000) /(2)/(3,338,000) (12,303,000)
---------- ---------- ---------- ---------- -----------
Segment gross loss (2,500,000) (44,000) (3,018,000) (3,622,000) (9,184,000)
========== ========== ========== ==========
Financial income, net 652,000
-----------
Loss (8,532,000)
===========
(1) Including non-cash expense arising from writedown of fixed assets of $1.25 million.
(2) Including selling, general and administrative expenses and income taxes.
Segment assets 1,153,000 369,000 730,000 1,183,000 3,435,000
========== ========== ========== ========== ===========
Expenditures for segment assets 75,000 67,000 694,000 149,000 985,000
========== ========== ========== ========== ===========
1997:
- -----
Revenues from external customers 3,397,000 1,129,000 4,526,000
Depreciation expense (556,000) (17,000) (283,000) (856,000)
Direct expenses (8,550,000) (713,000) (281,000) (1)(4,030,000) (13,574,000)
========== ========== ========== ========== ===========
Segment gross loss (5,709,000) 399,000 (281,000) (4,313,000) (9,904,000)
========== ========== ========== ==========
Financial income, net 775,000
-----------
Loss (9,129,000)
(1) Including selling, general and administrative expenses and income taxes.
Segment assets 3,013,000 339,000 43,000 1,359,000 4,754,000
========== ========== ========== ========== ===========
Expenditures for segment assets 395,000 56,000 -,- 57,000 508,000
========== ========== ========== ========== ===========
1996:
- -----
The Company's 1996 operations were substantially in the Electric Vehicle segment
(84% of total revenues) and it is not practical for the Company to prepare
segment information for 1996.
30
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SEGMENT INFORMATION (CONTINUED):
c. GEOGRAPHIC INFORMATION
Information about geographic areas, classified by EFC's country
of domicile and by foreign countries - based on the location of
the customers, is as follows:
1998 1997 1996
---------- ---------- -----------
U.S. DOLLARS
----------------------------------
Revenues from external
customers:
U.S.A. 1,374,261 473,250 74,700
Germany 2,138,690 3,558,141 3,928,641
Italy 295,937 494,825 429,414
Israel 204,375 972,548
---------- --------- ----------
4,013,263 4,526,216 5,405,303
---------- --------- ----------
As discussed in Note 2, the Company had a pilot plant in Germany.
Substantially all other long-lived assets are located in Israel.
d. REVENUES FROM MAJOR CUSTOMERS
1998 1997 1996
---------- ---------- -----------
Electric vehicles
-----------------
Customer A 51% 33% 58%
Customer B 7% 30% 8%
Customer C 11%
Customer D 18%
Defense and safety products
---------------------------
Customer A 14% 13%
31
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SEGMENT INFORMATION (continued):
e. 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. In 1997, the Company and the Deutsche
Post agreed to an extension program in respect of the Field
Test through mid-1998.
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 note 1l) in 1997.
In 1996, Deutsche Post requested that the Company refund
approximately DM 1.8 million (approximately $ 1.0 million)
which was the subject of a dispute between Deutsche Post and
the Company. The Company did not believe it is required to
refund any of this amount. However, until resolution of this
issue, the Company deferred recognizing this amount in
revenues.
Upon completion of the extension program and the signing of
general waivers between the Company and the Deutsche Post,
the Company recorded the aforementioned disputed amount in
its 1998 revenues.
2) Edison
Pursuant to agreements between the Company 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.
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ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SEGMENT INFORMATION (continued):
3) Vattenfall AB
During 1997, EFL signed a rights agreement with Vattenfall AB,
(Vattenfall), a Swedish utility company. Vattenfall exercised 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.
4) Israel Electric Corporation
During 1996, EFL signed an agreement with the Israel Electric
Corporation granting a license for production, distribution and
marketing of Electric Fuel in Israel and certain Middle East
countries in consideration of royalty payments.
5) U.S. Government:
(a) In 1998, the Company in cooperation with U.S. participants,
received approval from the U.S. Government (Department of
Transportation -Federal Transit Administration) for 50%
funding of a project for the construction and operation of a
passenger bus using the Company's technology. The maximum
approved cost of the project is approximately $ 4 million.
The Company's share in the Project costs is anticipated to
amount to approximately $ 3.5 million, which will be
reimbursed by the U.S. Government at the aforementioned 50%
rate.
(b) In 1998, the Company was awarded a contract from the U.S.
Army's Communications-Electronics Command to develop and
deliver prototype battery packs using the Company's zinc-air
technology. The total contract is approximately $ 487,000.
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