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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO ______.
COMMISSION FILE NUMBER: 0-23336
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ELECTRIC FUEL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4302784
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
632 BROADWAY, NEW YORK, NEW YORK 10012
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(Address of principal executive offices) (Zip Code)
(646) 654-2107
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None Not applicable
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of June 30, 2002 was approximately
$23,078,843 (based on the last sale price of such stock on such date as reported
by The Nasdaq National Market).
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date: 35,146,261 AS OF 3/15/03
Documents incorporated by reference: NONE
PRELIMINARY NOTE
This annual report contains historical information and forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 with respect to our business, financial condition and results of
operations. The words "estimate," "project," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those contemplated in such
forward-looking statements. Further, we operate in an industry sector where
securities values may be volatile and may be influenced by economic and other
factors beyond our control. In the context of the forward-looking information
provided in this annual report and in other reports, please refer to the
discussions of risk factors detailed in, as well as the other information
contained in, our other filings with the Securities and Exchange Commission.
Electric Fuel(R) is a registered trademark and Arotech(TM) is a
trademark of Electric Fuel Corporation. All company and product names mentioned
may be trademarks or registered trademarks of their respective holders. Unless
otherwise indicated, "we," "us," "our" and similar terms refer to Arotech and
its subsidiaries.
PART I
ITEM 1. BUSINESS
GENERAL
We are a world leader in primary and refuelable Zinc-Air fuel cell
technology, engaging directly and through our subsidiaries in the use of
Zinc-Air battery technology for defense and security products and other military
applications and for electric vehicles, in car armoring, and in interactive
multimedia use-of-force simulators. We have been doing business since February
2003 under the name "Arotech Corporation." We operate in two business units:
-- we develop, manufacture and market defense and security
products, including advanced hi-tech multimedia and
interactive digital solutions for training of military, law
enforcement and security personnel and sophisticated
lightweight materials and advanced engineering processes to
armor vehicles; and
-- we pioneer advancements in Zinc-Air battery technology for
defense and security products and other military applications
and for electric vehicles.
BACKGROUND
We began work in 1990 on the research, development and
commercialization of an advanced Zinc-Air battery system for powering electric
vehicles, work that continues to this day. Beginning in 1998, we also began to
apply our Zinc-Air fuel cell technology to the defense industry, by receiving
and performing a series of contracts from the U.S. Army's
Communications-Electronics Command (CECOM) to develop and evaluate advanced
primary Zinc-Air fuel cell packs. This effort culminated in 2002 in our receipt
of a National Stock Number, a Department of Defense catalog number assigned to
products authorized for use by the U.S. military, and our subsequent receipt of
$2.54 million and $1.6 million delivery orders for our newly designated
BA-8180/U military batteries.
We further enhanced our capabilities in the defense industry through
our purchase in the third quarter of 2002 of two new subsidiaries: IES
Interactive Training, Inc., which provides specialized "use of force" training
for police, homeland security personnel and the military, and MDT Protective
Industries, which is engaged in the use of sophisticated lightweight materials
and advanced engineering processes to armor vehicles.
Between 1998 and 2002, we were also engaged in the design, development
and commercialization of our proprietary Zinc-Air fuel cell technology for
portable consumer electronic devices such as cellular telephones, PDAs, digital
cameras and camcorders. In October 2002, we discontinued retail sales of our
consumer battery products because of the high costs associated with consumer
marketing and low volume manufacturing.
We were incorporated in Delaware in 1990, and we have been doing
business under the name "Arotech Corporation" since February 2003. We anticipate
changing our corporate name to Arotech Corporation at our next annual
shareholders' meeting later in 2003. Unless the context requires otherwise, all
references to us refer collectively to Electric Fuel Corporation (Arotech) and
Arotech's wholly-owned Israeli subsidiary, Electric Fuel (E.F.L.) Limited (EFL),
its majority-owned Israeli subsidiary, MDT Protective Industries, and its
wholly-owned Delaware subsidiaries, Electric Fuel Transportation Corp. and IES
Interactive Training, Inc.
For financial information concerning the business segments in which we
operate, see Note 16 of the Notes to the Consolidated Financial Statements. For
financial information about geographic areas in which we engage in business, see
Note 16.c of the Notes to the Consolidated Financial Statements.
DEFENSE AND SECURITY PRODUCTS
Interactive Use-of-Force Training
Through our wholly-owned subsidiary, IES Interactive Training, Inc.
(IES), we provide specialized "use of force" training for police, homeland
security personnel and the military. We offer products and services that allow
organizations to train their personnel in safe, productive, and realistic
environments. We believe that our training systems offer more functionality,
greater flexibility, unprecedented realism and a wider variety of user interface
options than competing products. Our systems are sold to corporations,
government agencies, military and law enforcement professionals around the
world. The simulators are currently used by some of the worlds leading training
academies, including (in the United States) the Secret Service, the Bureau of
Alcohol, Tobacco and Firearms, the Houston Police Department, the Customs
Service, the Border Patrol, the Bureau of Engraving and Printing, the Coast
Guard, the Federal Law Enforcement Training Centers, the California Department
of Corrections, the Detroit Police Department, the Washington DC Metro Police
and international users such as the Israeli Defense Forces, the German National
Police, the Royal Thailand Army, the Hong Kong Police, the Russian Security
Police, and over 400 other training departments worldwide.
Our interactive training systems range from the powerful Range 3000
use-of-force simulator system to the multi-faceted A2Z Classroom Training
system. The Range 3000 line of simulators addresses the entire use of force
training continuum in law enforcement, allowing the trainee to use posture,
verbalization, soft hand skills, impact weapons, chemical spray, low-light
electronic weapons and lethal force in a scenario based classroom environment.
The A2Z Classroom Trainer provides the trainer with real time electronic
feedback from every student through wireless handheld keypads. The combination
of interactivity and instant response assures that learning takes place in less
time with higher retention.
Vehicle Armoring
Through our majority-owned MDT Protective Industries (MDT), we
specialize in using state-of-the-art lightweight ceramic materials, special
ballistic glass and advanced engineering processes to fully armor vans and cars.
MDT is a leading supplier to the Israeli military, Israeli special forces and
special services. MDT's products are proven in intensive battlefield situations
and under actual terrorist attack conditions, and are designed to meet the
demanding requirements of governmental and private sector customers worldwide.
ELECTRIC FUEL BATTERIES
We have been engaged in research and development in the field of
Zinc-Air electrochemistry and battery design for over ten years, as a result of
which we have developed our current technology and its applications. We have
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successfully applied our technology to our high-energy battery packs for
military and security applications. We have also applied our technology to the
development of a refuelable Zinc-Air fuel cell for powering zero-emission
electric vehicles. Through these efforts, we have sought to position ourselves
as a world leader in the application of Zinc-Air technology to innovative
primary and refuelable power sources.
We believe that our Zinc-Air batteries provide the highest energy and
power density combination available today in the defense market, making them
particularly appropriate where long missions are required and low weight is
important.
Military Batteries
Our line of existing battery products for the military and defense
sectors includes Advanced Zinc-Air Power Packs (AZAPPs) utilizing our most
advanced cells (which have specific energy of 400 watt-hours per kilogram), a
line of super-lightweight AZAPPs that feature the same 400 Wh/kg cell technology
in smaller cells, and our new, high-power Zinc-Air Power Packs (ZAPPs), which
offer extended-use portable power using our commercial Zinc-Air cell technology.
Our AZAPPs have received a National Stock Number (a Department of Defense
catalog number assigned to products authorized for use by the U.S. military),
making our AZAPPs available for purchase by all units of the U.S. Armed Forces.
Electric Vehicle
Our Electric Vehicle effort, conducted through our subsidiary Electric
Fuel Transportation Corp., continues to focus on obtaining and implementing
demonstration projects in the U.S. and Europe, and on building broad industry
partnerships that can lead to eventual commercialization of the Zinc-Air energy
system. This approach supports our long-term strategy of achieving widespread
implementation of the Electric Fuel Zinc-Air energy system for electric vehicles
in large commercial and mass transit vehicle fleets. Our all-electric bus,
powered by our Zinc-Air fuel cell technology, has demonstrated a world-record
127-mile range under rigorous urban conditions, and we have successfully
demonstrated our vehicle in "on-the-road" programs in Germany, Sweden, Italy,
Israel and the United States, most recently in public tests in Las Vegas, Nevada
in November 2001, and in Washington, D.C., on Capitol Hill, with the
participation of certain members of the United States Senate, in March 2002. We
intend to strengthen existing relationships and to develop new networks of
strategic alliances with fleet operators, companies engaged in energy production
and transportation, automobile manufacturers and others in order to establish
the infrastructure necessary for further development and commercialization of
the Electric Fuel Zinc-Air system.
Lifejacket Lights
We produce water-activated lifejacket lights for commercial aviation
and marine applications based on our patented water-activated magnesium-cuprous
chloride battery technology. We intend to continue to work with OEMs,
distributors and end-user companies to expand our market share in the aviation
and marine segments. We presently sell four products in the safety products
group, two for use with marine life jackets and two for use with aviation life
vests. All four products are certified under applicable international marine and
aviation safety regulations.
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FACILITIES
Our principal executive offices are located at 632 Broadway, New York,
New York 10012, and our telephone number at our executive offices is (646)
654-2107. Our corporate website is WWW.AROTECH.COM. Our periodic reports to the
Securities Exchange Commission, as well as recent filings relating to
transactions in our securities by our executive officers and directors, that
have been filed with the Securities and Exchange Commission in EDGAR format are
available through hyperlinks located on the investor relations page of our
website, at HTTP://WWW.AROTECH.COM/COMPRO/INVESTOR.HTML. Reference to our
websites does not constitute incorporation of any of the information thereon or
linked thereto into this annual report.
The offices and facilities of our two of our principal subsidiaries,
EFL and MDT, are located in Israel (in Beit Shemesh and Lod, respectively, both
of which are within Israel's pre-1967 borders). We conduct research and
development activities through EFL, and most of our senior management is located
at EFL's facilities. We also conduct development and production activities at
IES's offices in Littleton, Colorado, and at our new production facility in
Auburn, Alabama, which builds and tests advanced batteries for the defense
market.
INTERACTIVE USE-OF-FORCE TRAINING
We conduct our interactive training activities through our subsidiary
IES Interactive Training, Inc. ("IES"), a Delaware corporation based in
Littleton, Colorado. IES is a leading provider of interactive, multimedia, fully
digital training simulators for law enforcement, homeland security, military and
similar applications. With a customer base of over 500 customers in over thirty
countries around the world, IES is a leader in the supply of simulation training
products to military, law enforcement and corporate client communities. We
believe, based on our general knowledge of the size of the interactive
use-of-force market, our specific knowledge of the extent of our sales, and
discussions we have held with customers at trade shows, etc., that IES provides
more than 40% of the worldwide market for government and military judgment
training simulators.
INTRODUCTION
IES offers consumers the following interactive training products and
services:
-- Range 3000 - providing use of force simulation for military
and law enforcement. We believe that the Range 3000 is the
most technologically advanced judgmental training simulator in
the world.
-- A2Z Classroom Trainer - a state-of-the-art computer based
training (CBT) system that allows students to interact with
realistic interactive scenarios projected life-size in the
classroom.
-- Summit Training International - providing relevant,
cost-effective professional training services and interactive
courseware for law enforcement, corrections and corporate
clients.
-- IES Studio Productions - providing cutting edge multimedia
video services for law enforcement, military and security
agencies, utilizing the newest equipment to create the
training services required by the most demanding authorities.
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Our products feature state of the art all digital video formats,
ultra-advanced laser-based lane detection for optimal accuracy and performance,
customer-based authoring of training scenarios, and 95% COTS (commercial
off-the-shelf)-based system.
In January 2003, IES was awarded a $2.6 million contract to supply
simulation training systems to the largest regional police division in Germany.
The contract calls for delivery of several separate interactive training
systems, with delivery dates ranging from April to September 2003 and payment
dates due following delivery, testing and ascertainment of appropriate run
capability of each system.
IES's revenues during 2000, 2001 and 2002 were approximately $3.4
million, $3.5 million and $5.1 million, respectively.
PRODUCTS
Below is a description of each of the core products and services in the
IES line.
Range 3000 "Use of Force" Simulator
We believe that the Range 3000, which IES launched in late 2002,
combines the most powerful operational hardware and software available, and
delivers performance unobtainable by any competing product presently on the
market.
The Range 3000 simulator allows training with respect to the full "Use
of Force" continuum. Training can be done on an individual basis, or as many as
four members of a team can participate simultaneously and be scored and recorded
individually. Topics of training include (but are not limited to):
-- Officer's Presence and Demeanor - Picture-on-picture digital
recordings of the trainee's actions allows visual review of
the trainee's reaction, body language and weapons handling
during the course of the scenario, which then can be played
back for debriefing of the trainee's actions.
-- Verbalization - Correct phrases, timing, manner and sequence
of an officer's dialogue is integrated within the platform of
the system, allowing the situation to escalate or de-escalate
through the officer's own words in the context of the scenario
and in conjunction with the trainer.
-- Less-Than-Lethal Training - Training in the use of non-lethal
devices such as Taser, OC (pepper spray), batons and other
devices can be used with the video training scenarios with
appropriate reactions of each.
-- Soft Hand Tactics - Low level physical controlled tactics with
the use of additional equipment such as take-down dummies can
be used.
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-- Firearms Training and Basic Marksmanship - Either utilizing
laser based training weapons or in conjunction with a
live-fire screen, the use of "Live Ammunition" training can be
employed on the system.
The interactive training scenarios are projected either through single
or multiple screens and projectors, allowing IES to immerse a trainee in
-true-to-life training scenarios and incorporating one or all the above training
issues in the "Use of Force" continuum.
A2Z Classroom Trainer
The A2Z is a state-of-the-art Computer Based Training (CBT) system that
allows students to interact with realistic interactive scenarios projected
life-size in the classroom.
Using individual hand-held keypads, the students can answer true/false
or multiple choice questions. Based on the student's performance, the scenario
will branch and unfold to a virtually unlimited variety of different possible
outcomes of the student's actions. The system logs and automatically scores each
and every trainee's response and answer. At the end of the scenario, the system
displays a session results summary from which the trainer can debrief the class.
The advanced A2Z Courseware Authoring Tools allow the trainer easily to
create complete interactive courses and scenarios locally.
The Authoring Tools harness the latest advances in digital video and
multimedia, allowing the trainer to capture video and graphics from any source.
The A2Z allows the trainer to combine his or her insight, experience and skills
to recreate a realistic learning environment. The A2Z Training System is based
on the well-known PC-Pentium technology and Windows XPTM operated. The
easy-to-use menu and mouse operation renders to A2Z user-friendly.
The individual keypads are connected "wirelessly." The system is
completely portable and therefore not location dependent, allowing a complete
setup within a matter of minutes.
Key advantages:
-- Provides repeatable training to a standard based on
established policy
-- Quick dissemination and reinforcement of correct behavior and
policies
-- Reduces liability
-- More efficient than "traditional and redundant" role-playing
methods
-- Realistic scenarios instead of outdated "play-acting"
-- Interactive training of up to 250 students simultaneously with
wireless keypads
-- Easy Self-Authoring of interactive training content
-- PC-Pentium ensures low cost of ownership
-- Easy to use Windows XP-based software
-- Easy to deploy in any classroom
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Summit Training International
Summit Training International (STI) is a wholly-owned subsidiary of IES
Interactive Training. STI provides relevant, cost-effective professional
training seminars, consulting services, and interactive courseware for law
enforcement, corrections, and corporate clients. STI's emphasis and goal is to
create a "total training" environment designed to address the cutting edge
issues faced today. STI provides conferences throughout the United States, and
develops courseware dealing with these important topics. The incorporation of
IES Interactive Systems creates an intense learning environment and adds to the
realism of the trainee's experience.
CONFERENCES
STI has provided conferences throughout the United States, on such
topics as:
-- Recruiting and Retention of Law Enforcement and Corrections
Personnel
-- Ethics and Integrity
-- Issues of Hate Crimes
-- Traffic Stops and Use of Force
-- Community and Corporate Partnerships for Public Safety
-- Creating a Safe School Environment
In addition to these national and regional conferences, STI designs and
produces training to address specific department issues. STI has a distinguished
cadre of instructors that allows adaptation of programs to make them
specifically focused for a more intense learning experience. The A2Z Classroom
Trainer is incorporated into the "live" presentation creating a stimulating
interactive training experience.
COURSEWARE
STI develops courseware for use exclusively with IES Interactive
Systems. Courses are designed to addresses specific department issues, and can
be customized to fit each agency's needs. These courses are available in boxed
sets that provide the customer with a turn-key training session. The A2Z
Classroom Trainer and the Range 3000 XP-4 are used to deliver the curriculum and
create a virtual world that the trainees respond and react to. Partnerships with
high profile companies such as H&K Firearms, and Taser International, provide
customers with training that deals with cutting edge issues facing law
enforcement today. The incorporation of STI's courseware library along with
simulation systems allows training to remain consistent and effective, giving
customers more value for their training dollar.
IES Studio Productions
IES Studio Productions a division of IES Interactive Training,
providing cutting-edge multimedia video services for law enforcement, military
and security agencies, and others. IES Studio Productions creates interactive
courseware and interactive scenarios for the Range 3000, Video Training
Scenarios and all types of video production services. With the latest in media
equipment, IES Studio Productions provides all media and marketing services to
IES Interactive Training in-house.
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MARKETING
IES markets its products and services to domestic and international law
enforcement, military and other federal agencies and to various companies that
serve them, through attendance and presentations at conferences, exhibits at
trade shows, seminars at law enforcement academies and government agencies,
through its web pages on the Internet, and to its compiled database of prospect
and customer names. IES's salespeople are also its marketing team. We believe
that this is effective for several reasons: (1) customers appreciate talking
directly with salespeople who can answer a wide range of technical questions
about methods and features, (2) our salespeople benefit from direct customer
contact through gaining an appreciation for the environment and problems of the
customer, and (3) the relationships we build through peer-to-peer contact are
needed in the military, police and federal agency market.
IES also uses its web pages on the Internet for such activities as
providing product information and providing software updates.
IES markets augmentative and alternative law enforcement products
through a network of employee representatives and independent resellers. These
products include but are not limited to:
-- Bristlecone Products
-- Airmunitions Inc.
-- Taser Inc.
-- ASP Inc.
-- H&K Training Centers
At the present time IES has six sales representatives based in Denver,
eight domestic independent distributors, and fifteen independent resellers /
representatives overseas. IES also as three inside sales/support persons who
answer telephone inquiries on IES's 800 line and Internet, and who can also
provide technical support. Additional outside sales persons and independent
dealers and resellers are being actively recruited at this time.
IES participates in over thirty industry conferences, held throughout
the United States. and in other countries, that are attended by our potential
customers and their respective purchasing and budgeting decision makers. A
significant percentage of IES's sales of products, both software and hardware
are sold through leads developed at these shows.
IES and others in the industry demonstrate their products at these
conferences and present technical papers that describe the application of their
technologies and the effectiveness of their products. IES also advertises in
selected publications of interest to potential customers.
COMPETITION
IES competes against a number of established companies that provide
similar products and services, many of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources significantly
greater than ours. There are also companies whose products do not compete
directly, but are sometimes closely related. Firearms Training Systems, Inc.,
Advanced Interactive Systems, Inc., and LaserShot Inc. are IES's main
competitors.
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We believe the key factors in our competing successfully in this field
will be our ability to develop simulation software and related products and
services to effectively train law enforcement and military to today's standards,
our ability to develop and maintain a proprietary technologically advanced
hardware, and our ability to develop and maintain relationships with departments
and government agencies.
VEHICLE ARMORING
INTRODUCTION
MDT Protective Industries was established in Israel in 1989 as one of
Israel's first car armoring companies, and is Israel's leader in state-of-the
art lightweight armoring of vehicles, ranging from light tactical vehicles to
passenger vehicles. With two production lines, MDT specializes in using
state-of-the-art lightweight ceramic materials, special ballistic glass and
advanced engineering processes to fully armor vans and cars. MDT is a leading
supplier to the Israeli military, Israeli special forces and special services.
MDT's products have been proven in intensive battlefield situations and under
actual terrorist attack conditions, and are designed to meet the demanding
requirements of governmental and private sector customers worldwide.
MDT has acquired many years of battlefield experience in Israel. MDT's
vehicles have provided proven life-saving protection for their passengers in
incidents of rock throwing, handgun and assault rifle attack at point-blank
range, roadside bombings and suicide bombings. In fact, to our knowledge an
MDT-armored vehicle has never experienced bullet penetration into a vehicle
cabin under attack. MDT also uses its technology to protect vehicles against
vandalism.
MDT's revenues during 2000, 2001 and 2002 were approximately $747,000,
$6.5 million and $6.4 million, respectively.
THE ARMORING PROCESS
Armoring a vehicle involves much more than just adding "armor plates."
It includes professional and secure installation of a variety of armor
components - inside doors, dashboards, and all other areas of passenger and
engine compartments. MDT uses overlapping sections to ensure protection from all
angles, and installs armored glass in the windshield and windows. MDT has
developed certain unique features, such as new window operation mechanisms that
can raise windows rapidly despite their increased weight, gun ports, run-flat
tires, and more. MDT developed the majority of the materials that it uses
in-house, or in conjunction with renowned Israeli companies specializing in
protective materials.
In order to armor a vehicle, MDT first disassembles the vehicle and
removes the interior paneling, passenger seats, doors, windows, etc. MDT then
fortifies the entire body of the vehicle, including the roof, motor and other
critical components, and reinforces the door hinges. MDT achieves firewall
protection from frontal assault with carefully designed overlapping armor.
Options, such as air-conditioning, seating modifications and run-flat tires, are
also available. MDT fixes the armoring into the shell of the vehicle, ensuring
that the installation and finishing is according to the standards set for that
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particular model. MDT then reassembles the vehicle as close to its original
appearance as possible.
Once MDT has ensured full vehicle protection, it places a premium on
retaining the original vehicle's look and feel to the extent possible, including
enabling full serviceability of the vehicle, thereby rendering the armoring
process "invisible." MDT works with its customers to understand their
requirements, and together with the customer develops an optimized armoring
solution. A flexible design-to-cost process helps evaluate tradeoffs between
heavy and light materials and various levels of protection.
By working within the vehicle manufacturer's specifications, MDT
maintains stability, handling, center-of-gravity and overall integrity. MDT's
methods minimize impact on payload, and retain the full view from the passenger.
In most cases all the original warranties provided by the manufacturer are still
in effect.
ARMORING MATERIALS
MDT offers a variety of armoring materials, optimized to the customer's
requirements. MDT uses ballistic steel, composite materials (including
Kevlar(R), Dyneema(R) and composite armor steel) as well as special ceramics
developed by MDT, together with special armored glass. MDT uses advanced
engineering techniques and "light" composite materials, and avoids, to the
extent possible, using traditional "heavy" materials such as armored steel
because of the added weight, which impairs the driving performance and handling
of the vehicle.
All materials used by MDT meet not only all international ballistic
standards, but also the far more stringent requirements set down by the Israeli
military, the Israeli Ministries of Defense and Transport, and the Israel
Standards Institute. MDT's factory has also been granted the ISO 9002 quality
standards award.
PRODUCTS AND SERVICES
MDT armors a variety of vehicles for both commercial and military
markets. At present, MDT offers armoring for approximately thirty different
models of motor vehicles.
In the military market, MDT armors:
-- troop and personnel carriers (such as vehicles in the
Mercedes-Benz Vario and Sprinter lines)
-- front-line police and military vehicles (such as the
Mitsubishi Storm 4x4)
-- command vehicles (such as the Land Rover Defender 4x4)
-- specialty vehicles (such as HumVees).
In the commercial market, MDT armors:
-- passenger vans and sports utility vehicles (such as the
Chevrolet Savana, the General Motors Vandura and the Ford
Econoline)
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-- money and valuables carriers (such as the Volkswagen T4
Transporter)
-- luxury sedans (including a variety of models made by Mercedes,
Cadillac, Volvo, Lincoln, etc.)
-- ambulances (such as those made by Chevrolet).
SALES AND MARKETING
Most of MDT's business comes from Israel, although MDT has armored
vehicles under contracts from companies in Yugoslavia, Mexico, Colombia, South
Africa and Singapore. MDT's principal customer at present is the Israeli
Ministry of Defense. Other customers include Israeli government ministries and
agencies, private companies, medical services and private clients.
MDT markets its vehicle armoring through Israeli vehicle importers,
both pursuant to marketing agreements and otherwise, and directly to private
customers. Most sales are through vehicle importers.
MDT holds exclusive armoring contracts with Israel's sole General
Motors and Chevrolet distributors. This means that these distributors will
continue to honor the original vehicle warranty on armored versions of vehicles
sold by them only if the armoring was done by MDT.
COMPETITION
The global armored car industry is highly fragmented. Major suppliers
include both vehicle manufacturers and aftermarket specialists. As a highly
labor-intensive process, vehicle armoring is numerically dominated by relatively
small businesses. Industry estimates place the number of companies doing vehicle
armoring in the range of around 500 suppliers globally. While certain large
companies may armor several hundred cars annually, most of these companies are
smaller operations that may armor in the range of five to fifty cars per year.
In 2002, MDT armored over 130 vehicles against weapons and explosives, and
another approximately 300 vehicles against vandalism.
Among vehicle manufacturers, Mercedes-Benz has the largest
vehicle-armoring market share, estimated at around 7% of the global market.
Among aftermarket specialists, the largest share of the vehicle-armoring market
is held by O'Gara-Hess & Eisenhardt. Other aftermarket specialists include
International Armoring Corp. Lasco, Texas Armoring and Chicago Armor (Moloney).
Many of these companies have financial, technical, marketing, sales,
manufacturing, distribution and other resources significantly greater than ours.
We believes the key factors in our competing successfully in this field
will be our ability to penetrate new military and paramilitary markets outside
of Israel, particularly in North and South America and in Europe.
ELECTRIC FUEL BATTERIES FOR DEFENSE AND HOMELAND SECURITY
We base our strategy in the field of military batteries on the
development and commercialization of our next-generation Zinc-Air fuel cell
technology, as applied in our batteries that we produce for the U.S. Army's
Communications and Electronics Command (CECOM). We will continue to seek new
applications for our technology in defense projects, wherever synergistic
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technology and business benefits may exist. We intend to continue to develop our
battery products for defense agencies, and plan to sell our products either
directly to such agencies or through prime contractors.
Since 1998 we have received and performed a series of contracts from
the U.S. Army's Communications-Electronics Command (CECOM) to develop and
evaluate advanced primary Zinc-Air fuel cell packs. The terms of the current
extension of a contract initially issued in 2001 call for us to deliver 500
prototype battery packs, and procure and install certain production equipment.
The 12/24 volt, 800 watt-hour battery pack for battlefield power, which is based
on our Zinc-Air fuel cell technology, weighs only about five pounds and has
approximately twice the energy capacity per pound of the U.S. Army's standard
lithium-sulfur dioxide battery packs.
In the second half of 2002, our five-year program with the US Army's
Communications Electronics Command (CECOM) to develop a Zinc-Air battery for
battlefield power culminated in the assignment of a National Stock Number and a
$2.54 million delivery order for the newly designated BA-8180/U battery.
The BA-8180/U battery is our first defense battery product to go into
mass production. We are developing other military batteries and related products
that we hope to get into production in 2003 and 2004.
ADVANCED ZINC-AIR POWER PACK (AZAPPS)
BA-8180/U
Advanced Zinc-Air power packs (AZAPPs) are lightweight, low-cost
primary Zinc-Air batteries with up to twice the energy capacity per pound of
primary lithium (LiSO2) battery packs, which are the most popular batteries used
in the US military today. Zinc-Air batteries are inherently safe in storage,
transportation, use, and disposal.
The BA-8180/U is a 12/24 volt, 800 watt-hour battery pack approximately
the size and weight of a notebook computer. The battery is based on a new
generation of lightweight, 30 ampere-hour cells developed by us over the last
five years with partial funding by CECOM. Each BA-8180/U battery pack contains
24 cells.
The battery has specific energy of up to 350 Wh/kg, which is
substantially higher than that of any competing disposable battery available to
the defense and security industries. By way of comparison, the BA-5590, a
popular LiSO2 battery pack, has only 175 Wh/kg. Specific energy, or energy
capacity per unit of weight, translates into longer operating times for
battery-powered electronic equipment, and greater portability as well. Because
of lower cost per watt-hour, the BA-8180/U can provide substantial cost savings
to the Army when deployed for longer missions, even for applications that are
not man-portable.
During the second half of 2002, CECOM assigned a National Stock Number
(NSN) to our Zinc-Air battery, making it possible to order and stock the battery
for use by the Armed Forces. During the fourth quarter, CECOM assigned the
designation BA-8180/U to our Zinc-Air battery, the first time an official US
Army battery designation was ever assigned to a Zinc-Air battery.
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Also during the fourth quarter of 2002, CECOM provided us with a $2.54
million letter contract for delivery of BA-8180/U batteries and associated
electrical interface adapters. The contract calls for order releases during the
first three calendar quarters of 2003, with a current order ceiling of
$2,543,250. Under the terms of the letter contract, a formal contract is to be
entered into during the first quarter of 2003.
In April 2003, we announced that we had received an additional $1.6
million order from CECOM for a delivery order of advanced Zinc-Air batteries,
with deliveries anticipated to take placed from September through November 2003.
Based on extensive contacts with the US and foreign military agencies,
we believe that we will be able to develop a significant market for the
BA-8180/U both in the US Armed Forces and abroad.
Other AZAPP Products
The BA-8180/U was the first battery approved for military use based on
our 30Ah Zinc-Air cell. We have also developed, with partial funding from CECOM,
a 12-cell, 12 volt battery using the same 30Ah Zinc-Air cell. This battery,
called the AZAPP FB, is currently in limited production for field testing
purposes.
We are also working on two additional cell sizes. The first of these, a
20Ah cell, was developed for the Army's Land Warrior program, and some battery
prototypes incorporating these cells have already been delivered to the Army
under the terms of a Land Warrior subcontract that we received and completed in
2002.
We have also completed the conceptual design of a 40Ah cell and a
24-cell battery pack incorporating such a cell. We hope to complete the design
of this cell in 2003 and put it into production either in late 2003 or early
2004.
Ancillary products
In order to provide compatibility between the BA-8180/U and various
items of military equipment, we will supply three types of electrical interface
adapters for the BA-8180/U, including equipment-specific adapters for the
AN/PRC-119 SINCGARS and SINCGARS ASIP tactical radio sets, and a generic
interface for items of equipment that were designed to interface with a BA-5590
or equivalent battery. Each of the three interfaces was also assigned a national
stock number (NSN) by CECOM. We will continue to develop interface adapters that
for our batteries as the need arises.
We have also developed interface adapters for other items of equipment
which require higher power than the BA-8180/U can provide by itself. For
example, we have developed a hybrid battery system comprising a BA-8180/U
battery pack and two small rechargeable lead-acid packs. Even with the weight of
the lead-acid batteries, this hybrid system powers a satellite communications
terminal for significantly longer than an equivalent weight of BA-5590 LiSO2
battery packs. We have also developed experimental hybrid systems incorporating
other rechargeable technologies, such as lithium-ion batteries and
ultracapacitors.
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UAV/MAV
We are currently under contract with the U.S. military and an Israeli
security agency, to demonstrate the feasibility of Zinc-Air batteries for both
unmanned aerial vehicles (UAV) and micro-air vehicles (MAV) platforms,
respectively.
Short-term development goals include the optimization and integration
of cell components for performance and manufacturability. System-level
objectives include refinement of battery envelope design and vehicle interfaces,
and actual flight testing. We anticipate that the first fieldable batteries can
be ready in 2004.
UAVs
Man-portable UAVs are considered to be an increasingly important
battlefield tool for reconnaissance and surveillance of enemy positions. At
present, power sources available to the military provide only marginally
adequate operating times for these UAVs. For example, the Marine Corps'
DragonEye system, operating off primary lithium batteries, can run for 30 to 60
minutes. We expect to achieve a cruise time of at least two hours using an
equivalent weight of Zinc-Air cells.
MAVs
Development of electrically propelled MAVs has been hampered by the
lack of a satisfactory battery solution. Achievement of our development targets
will enable a Zinc-Air battery to power a typical 5-oz. MAV for as long as 30
minutes.
ZINC-AIR POWER PACKS (ZAPPS)
During 2002 we developed a family of 12V batteries built around our
high-power 4Ah metal cell. These batteries are aimed at the Homeland Security
market and are designed to provide back-up power for portable 12V equipment such
as handheld chemical or biological sensors. The first battery in this family to
become ready for production is the ZAPP-48, which is a 14Ah battery capable of
working at a continuous current of 2.5A.
MARKET/APPLICATIONS
Being an external alternative to the popular lithium based BA-5590/U,
the BA-8180 can be used in many applications operated by the 5590. The BA-8180/U
can be used for a variety of military applications, including:
-- Tactical radios
-- SIGINT systems
-- Training systems
-- SATCOM radios
-- Nightscope power
-- Guidance systems
-- Surveillance systems
-- Sensors
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COMPETITION
The BA-8180/U is the only Zinc-Air battery to hold a US Army battery
designation. It does, however, compete with other primary (disposable)
batteries, and primarily lithium based batteries. In some cases, primarily in
training missions, it will also compete with rechargeable batteries.
Zinc-Air batteries are inherently safer in storage, transportation,
use, and disposal, and are more cost effective. They are lightweight, with up to
twice the energy capacity per pound of primary lithium battery packs. Zinc-Air
batteries for the military are also under development by Rayovac Corporation.
Rayovac's military Zinc-Air batteries utilize cylindrical cells, rather than the
prismatic cells that we developed. While cylindrical cells may provide higher
specific power than our prismatic cells, we believe they will generally have
lower energy densities and be more difficult to manufacture.
The most popular competing primary battery in use by the US Armed
Forces is the BA-5590, which uses lithium-sulfur dioxide (LiSO2) cells. The
largest suppliers of LiSO2 batteries to the US military are believed to be Saft
America Inc and Eagle Picher Technologies LLC. The battery compartment of most
military communications equipment, as well as other military equipment, is
designed for the x90 family of batteries, of which the BA-5590 battery is the
most commonly deployed. Another primary battery in this family is the BA-5390,
which uses lithium-manganese dioxide (LiMnO2) cells. LiMnO2 batteries are most
commonly supplied by Ultralife Batteries Inc,. Saft and Eagle Picher.
Rechargeable batteries in the x90 family include lithium-ion and
nickel-metal hydride batteries which may be used in training missions in order
to save the higher costs associated with primary batteries. Because of the short
usage time per charge cycle, rechargeable batteries are not considered suitable
for use in combat.
Our BA-8180 does not fit inside the battery compartment of any military
equipment, and therefore is connected externally using an interface adapter that
we also sell to the Army. Our battery offers greatly extended mission time,
along with lower total mission cost, and these significant advantages often
greatly outweigh the slight inconvenience of fielding an external battery.
TECHNOLOGY
All batteries convert chemical energy to electrical energy through two
separate electrochemical reactions: one consuming electrons (at the cathode) and
the other releasing them (at the anode). These half-cell reactions are
physically separated within the battery, allowing ions to flow between them, but
not electrons. It is this separation that allows a battery to produce electrical
power: The electrons are made to do work on their journey to the other side of
the battery by passing across an electrical load, such as a light bulb, motor,
or other electrically powered component or device.
Our Zinc-Air battery's superiority over other battery technologies lies
in the underlying electrochemical make-up of a Zinc-Air cell. While other
battery cells must carry the cathodic reagent - the active material that
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`consumes' the electrons freed at the anode - within the weight and volume of
the battery, a Zinc-Air cell consumes oxygen that it extracts from the
atmosphere.
On the anode side, the reaction in the Zinc-Air cell is the same as
that of the common alkaline battery, wherein zinc, the active anodic material,
is converted to zinc-oxide by reaction with hydroxyl ions present in the
electrolyte.
On the cathode side, the reaction in both the Zinc-Air and alkaline
batteries involves the reduction of oxygen to create those hydroxyl ions. In the
case of the alkaline battery, an oxidizing material (manganese dioxide) is
deployed inside the cell to provide the oxygen. The Zinc-Air cell, on the other
hand, employs an air-permeable, hydrophobic, catalytic membrane which extracts
oxygen from the atmosphere.
Thus, Zinc-Air has a weight and volume advantage over most other
battery technologies, because one of its two active reagents, i.e., oxygen, adds
no weight or volume within the cell. This frees up a lot of space inside the
cell, which means that the zinc anode, our cell's energy storehouse, makes up
most of the cell's weight and volume.
In addition to outstanding performance, Zinc-Air technology boasts two
additional features that make it extremely attractive for military and security
use:
-- SAFETY: A Zinc-Air battery is an inherently safe battery, in
storage, transportation, use, and disposal. The danger of
fire, explosion or personnel exposure to hazardous materials
is lower than in any other battery technology.
-- ENVIRONMENT-FRIENDLINESS: Zinc-Air cells contain no added
mercury or other hazardous elements such as lead or cadmium
that are often used in batteries, and in fact Zinc-Air
batteries can be disposed of with household trash.
MANUFACTURING
We have established a battery factory at our new location in Auburn,
Alabama, where we have leased 15,000 square feet of light industrial space from
the city of Auburn. We also have production capabilities for some battery
components at the facility of EFL, our Israeli subsidiary, in Beit Shemesh,
Israel.
ELECTRIC VEHICLES
INTRODUCTION
We believe that environmental concerns and current and proposed
legislation create incentives for fleet operators to use zero emission electric
vehicles, and that the Electric Fuel Zinc-Air Energy System for electric
vehicles is particularly suitable for use by such fleet operations. We believe
the U.S. government will continue to use us as a subcontractor to develop
electric vehicles, and we hope this support will create incentives for fleet
operators (primarily bus and mass transit operators) to introduce electric
vehicles into their fleets. We further believe that recent government interest
in hydrogen fuel cells is to our benefit, since we believe that an examination
of the advantages and disadvantages offered by both hydrogen fuel cells and the
Electric Fuel Zinc-Air Energy System for electric vehicles demonstrates that our
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system offers a mature technology that is ready to be implemented in a short
time frame, unlike hydrogen fuel cells, which we believe are decades away from
being a practical and economic alternative to traditional petroleum-based fuel
sources. Moreover, a recent study that we commissioned from consulting firm
Arthur D. Little projected significant life cycle cost benefits for Zinc-Air
when compared with hydrogen fuel cell technology over a five to ten year period.
THE ELECTRIC FUEL ZINC-AIR ENERGY SYSTEM FOR ELECTRIC VEHICLES
The Electric Fuel Zinc-Air Energy System consists of:
-- an in-vehicle, Zinc-Air fuel cell unit consisting of a series
of Zinc-Air cells and refuelable zinc-fuel anode cassettes;
-- a battery exchange unit for fast vehicle turn-around that is
equivalent to the time needed to refuel a diesel-based bus
refueling;
-- an automated battery refueling system for mechanically
replacing depleted zinc-fuel cassettes with charged cassettes;
and
-- a regeneration system for electrochemical recycling and
mechanical repacking of the discharged fuel cassettes.
With its proprietary high-power air cathode and zinc anode
technologies, our Zinc-Air fuel cell delivers a unique combination of
high-energy density and high-power density, which together power electric
vehicles with speed, acceleration, driving range and driver convenience similar
to that of conventionally powered vehicles.
We believe that our Zinc-Air fuel cell system for powering electric
vehicles offers numerous advantages over other electric vehicle batteries that
make 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, could
fulfill the needs of transit operators in all weather conditions, with fast,
cost-effective refueling. An all-electric, full-size bus powered by the Electric
Fuel system can provide to transit authorities a full day's operating range for
both heavy duty city and suburban routes in all weather conditions.
In field trials with major European entities, we have demonstrated the
commercial viability of our battery system by regularly driving 300 to 400 km in
actual drive cycles. In 1996, a Mercedes-Benz MB410 van powered by our Zinc-Air
fuel cell crossed the Alps, traveled from Chambray, France over the Moncenisio
Pass, and continued to the Zinc-Air regeneration plant operated by Electric
Fuel's Italian licensee, Edison Termoelettrica, SpA, 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 drove
from central London to Central Paris on a single charge - a distance of 272
miles (439 km), not including the rail transport through the English Channel
Tunnel.
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During 2002, we successfully completed Phase II of our program with the
U.S. Department of Transportation's Federal Transit Administration. Among the
items successfully tested during Phase II were ultracapacitors designed to
improve and increase the performance of our bus. During this performance
testing, our bus was driven a record-breaking 127 miles, more than 100 of them
under the rigorous stop-and-go diving conditions of the Society of Automotive
Engineers' Central Business District (CBD) cycle with a full passenger load. We
demonstrated our bus in a public demonstration in Las Vegas, Nevada in November
2001, and in Washington, D.C., on Capitol Hill, with the participation of
certain members of the United States Senate, in March 2002. In October 2002, we
received approval from the FTA to subcontract at least half of the $2 million
budget associated with the new Phase III of our Electric Transit Bus Program
(described below), with remainder of the budget shared by the partners in the
program.
MAJOR PROGRAMS
We have formed several strategic partnerships and are engaged in
demonstration programs involving the Electric Fuel Zinc-Air Energy System for
electric vehicles in various locations in the U.S. and Europe.
The Department of Transportation-Federal Transit Administration
Zinc-Air All Electric Transit Bus Program
In the United States, our Zinc-Air technology is the focus of a
Zinc-Air All Electric Bus demonstration program the costs and expenditures of
which are 50% offset by subcontracting fees paid by the U.S. Department of
Transportation's Federal Transit Administration. Phase I of the project, which
was for $4 million, was completed in July 2000. Phase II of the project, which
was for $2.7 million, was completed in July 2002, and subcontracting for Phase
III was approved in October 2002.
The program provides that the bus will utilize the new all-electric,
battery/battery/ultracapacitor-hybrid propulsion system that we are jointly
developing with General Electric's research and development center, with funding
from the Israeli-U.S. Bi-National Industrial Research and Development (BIRD)
Foundation (described below). The bus used in the program is a standard 40-foot
(12.2 meter) transit bus manufactured by NovaBus Corporation. It has a capacity
of 40 seated and 37 standing passengers and a gross vehicle weight of 39,500
lbs. (17,955 kg.). The all-electric hybrid system consists of an Electric Fuel
Zinc-Air fuel cell as the primary energy source, an auxiliary battery to provide
supplementary power and recuperation of energy when braking. Ultracapacitors
enhance this supplementary power, providing faster throughput and higher current
in both directions than the auxiliary battery can supply on its own. The vehicle
draws cruising energy from the Zinc-Air fuel cell, and supplementary power for
acceleration, merging into traffic and hill climbing, from the auxiliary battery
and ultracapacitors.
The program, which includes General Electric and the Regional
Transportation Commission of Southern Nevada (RTC) as project partners, seeks 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. In November 1998, a
consortium consisting of Electric Fuel, the Center for Sustainable Technology,
L.L.C. and RTC received approval for $2 million in federal subcontracting fees
for the $4 million Zinc-Air Electric Transit Bus Program (Phase I). Additional
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project partners included the Community College of Southern Nevada and the
Desert Research Institute. We successfully completed this phase in July 2000.
Phase II focused on conducting evaluation of the system and vehicle
performance, including track testing and limited on-road demonstrations, and
enhancing the all-electric propulsion system developed in Phase I. Phase II also
included testing and comparing the incorporation of ultracapacitors and
associated interface controls in the Zinc-Air fuel cell system. Phase II was
completed in July 2002, after successfully meeting all the original performance
designed requirements (as per the American Public Transport Association's
standard for transit buses) without addition of the ultracapacitors, and
exceeding them in tests with the introduction of ultracapacitors.
The new Phase III effort, which was announced in October 2002, focuses
on installation, testing and commissioning of new generation advanced
ultracapacitors and associated interface controls. Advanced techniques will be
used to implement control of the bus auxiliaries to optimize their efficiency
and minimize energy consumption. The entire system will be analyzed, assessed
and compared to previous configurations. Further evaluations of the system and
vehicle performance, including track testing and limited on-road demonstrations,
will also be carried out.
We are the principal participant in Phase III, with overall technical
and administrative responsibility. The responsibilities of General Electric
relate to the auxiliary control system and the ultracapacitor configuration. The
Regional Transportation Commission of Southern Nevada, which was also a project
participant in Phase II, continues its role in leading the project's peer review
committee.
A performance evaluation test is anticipated to take place in Rome, New
York in late 2003, where improvements over the previous configurations, if any,
will be measured.
We believe that electric buses represent a particularly important
market for electric vehicles in the United States. Transit buses powered by
diesel engines 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. Moreover, the U.S. Environmental Protection Agency has
identified particulate emissions from diesel engine emissions as a carcinogen.
Our Zinc-Air energy system is particularly suitable for transit buses
because transit buses must operate for up to 12 hours a day on a single battery
charge. Furthermore, transit buses require a large energy storage battery to
power the vehicle while attending to passenger needs such as air-conditioning
and handicapped access. 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 requirements relating to
performance, speed, acceleration and hill climbing.
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All-Electric Hybrid Propulsion System for Transit Buses and Heavy Duty
Vehicles - the BIRD Program
We and General Electric are also jointly developing an all-electric,
battery/battery-hybrid propulsion system for powering electric buses and
heavy-duty trucks. In July 1998 the BIRD Foundation awarded the two companies
funding for the joint development of the electric propulsion system. The first
application for the system will be an all-electric, zero-emission, full-size
transit bus, in the program subcontracted to us by the Federal Transit
Administration of the U.S. Department of Transportation referred to above. Our
portion of the project related to a mobile refueling system for the transit bus.
The refueling system, build in two standard 40" containers, was commissioned and
successfully demonstrated in the All Electric Bus project. General Electric's
portion of the project was to develop the EMS Energy Management System, which
manages and controls all the various energy suppliers and consumers of the bus.
The EMS was tested successfully as part of the integration drives completed
under phase I of the FTA project.
Germany - Consortium Project
In January 2000, we agreed to participate in a new cooperative,
all-electric hybrid vehicle development and demonstration program in Germany. A
consortium consisting of major German industrial firms such as DaimlerChrysler
AG, EPCOS and Varta Batterie AG will implement the program. The German Post,
which sponsored an extensive field test of our Zinc-Air fuel cell system for
electric vehicles from 1995 through 1998, has also joined the consortium as an
Advisory Partner. In January 2001, we received a DM 1 million ($469,000) order
for Zinc-Air fuel-cells and zinc anodes that we delivered during 2001, and we
completed this project with a successful on-road demonstration of our Zinc-Air
van in December 2002.
COMPETITION
We believe that our 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 hydrogen fuel cells, "hybrid systems" that combine an internal
combustion engine and battery technologies, and use of 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 flywheels and catalytic removal of pollutants.
These various technologies are at differing stages of development and any one of
them, or a new technology, may prove to be more cost effective, or otherwise
more readily acceptable by consumers, than the Electric Fuel Zinc-Air Energy
System for electric vehicles. In addition, the California Air Resource Board has
expressed to us concerns about the costs associated with the Zinc-Air
regeneration infrastructure as compared to battery technologies that use
electrical recharging.
The competition to develop electric vehicle battery systems and
hydrogen fuel cells and to obtain funding for the development of electric
vehicle battery systems is, and is expected to remain, intense. Our 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 ours.
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An area of increased development has been that of hydrogen fuel cell
powered vehicles, spearheaded by the Ballard Corporation's solid polymer
electrolyte hydrogen-air fuel cell program. Major automobile companies have made
significant investments in this technology. However, we believe that our
Zinc-Air fuel cell technology is more likely to be commercially viable, and more
likely to be ready for commercialization earlier, than the hydrogen fuel cell
systems, with a lower system cost and with more advantageous performance
characteristics.
We believe that vehicles based on hydrogen fuel cells are many years
away from commercialization, with significant issues of hydrogen production and
storage. We feel that storing hydrogen in containers on board vehicles may be
risky and involves major investments in infrastructure for highly-pressurized
hydrogen, and that using methanol for making hydrogen on board vehicles is
highly complex, costly and risky.
We believe that competing Zinc-Air technologies, such as those offered
by Metallic Power (Carlsbad, California) and Powerzinc Electric (City of
Industry, California), 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. We are not aware
of a competing Zinc-Air development effort that could yield a product that is
superior to ours in terms of vehicle performance or life-cycle cost.
MARKETING
We plan to seek to expand our existing strategic alliances in Europe,
the United States and the Far East, benefiting from experience gained in
connection with the DOT/FTA and our alliances with General Electric and other
key players in this market. We also intend to seek support of government
agencies, electric utilities and zinc manufacturers.
LIFEJACKET LIGHTS
In 1996, we began to produce and market lifejacket lights built with
our patented magnesium-cuprous chloride batteries, which are activated by
immersion in water (water-activated batteries), for the aviation and marine
safety and emergency markets. At present we have a product line consisting of
four lifejacket light models, all of which work in both freshwater and seawater.
Each of our lifejacket lights is certified for use by relevant governmental
agencies under various U.S. and international regulations. We manufacture,
assemble and package all our lifejacket lights in our factory in Beit Shemesh,
Israel.
MARKET AND MARKETING STRATEGIES
The market for aviation lifejacket lights has been declining because of
extended maintenance cycles in the industry, and the events of September 11,
2001, exacerbated this trend. We market our lights to the commercial aviation
industry in the United States exclusively through The Burkett Company of
Houston, Texas, which receives a commission on sales.
The annual market for marine lifejacket lights is estimated at one to
two million units worldwide, of which about 50% is in Europe and less than 25%
is in the United States. We market our marine safety products through our own
network of distributors in Europe, the United States, Asia and Oceania.
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COMPETITION
Two of the largest manufacturers of aviation and marine safety
products, including TSO and SOLAS-approved lifejacket lights, are ACR
Electronics Inc. of Hollywood, Florida, and Pains Wessex McMurdo Ltd. of
England. Other significant competitors in the marine market include Daniamant
Aps of Denmark, and SIC of Italy.
BACKLOG
We generally sell our products under standard purchase orders. Orders
constituting our backlog are subject to changes in delivery schedules and are
typically cancelable by our customers until a specified time prior to the
scheduled delivery date. Accordingly, our backlog is not necessarily an accurate
indication of future sales. As of December 31, 2001 and 2002, our backlog for
the following year was approximately $1.0 million and $7.2 million,
respectively, divided among our product lines as follows:
PRODUCT LINE 2001 2002
------------ ---- ----
Electric vehicle......................... $ 381,000 $ 420,000
Water-activated batteries................ - 300,000
Security and defense batteries........... 300,000 2,700,000
Car armoring............................. - 1,040,000
Interactive use-of-force training........ - 2,690,000
Other.................................... - -
- -
TOTAL:.............................. $ 681,000 $ 7,150,000
============== =============
REGULATORY AND ENVIRONMENTAL MATTERS
We believe that our 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 our Zinc-Air fuel cell, including zinc and potassium hydroxide. We have
obtained the necessary permits under the Israel Dangerous Substances Law,
5753-1993, required for the use of zinc metal, potassium hydroxide and certain
other substances in our facilities in Israel.
The presence of potassium hydroxide as an electrolyte in our 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. Our 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 spillable potassium hydroxide in the United States
would require manifesting and placarding.
The EPA, the Occupational Safety and Health Administration and other
federal, state and local governmental agencies would have jurisdiction over
operations of our 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 our products.
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PATENTS AND TRADE SECRETS
We rely on certain proprietary technology and seek to protect our
interests through a combination of patents, trademarks, copyrights, know-how,
trade secrets and security measures, including confidentiality agreements. Our
policy generally is to secure protection for significant innovations to the
fullest extent practicable. Further, we continuously seek to expand and improve
the technological base and individual features of our products through ongoing
research and development programs.
We have been filing patents on our Zinc-Air fuel cell system for
electric vehicles and on other aspects of our technology since 1990. These
applications have resulted in 42 unexpired U.S. patents and 15 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, as well as our high-power zinc-oxygen battery
for torpedoes, the use of our zinc in other alkaline batteries, and our
water-activated magnesium-cuprous chloride batteries. These patents expire
between 2007 and 2018.
In addition to patent protection, we rely on the laws of unfair
competition and trade secrets to protect our proprietary rights. We attempt to
protect our trade secrets and other proprietary information through
confidentiality and non-disclosure agreements with customers, suppliers,
employees and consultants, and through other security measures. However, we may
be unable to detect the unauthorized use of, or take appropriate steps to
enforce our intellectual property rights. Effective patent, trademark, copyright
and trade secret protection may not be available in every country in which we
offer or intend to offer our products and services to the same extent as in the
United States. Failure to adequately protect our intellectual property could
harm or even destroy our brands and impair our ability to compete effectively.
Further, enforcing our intellectual property rights could result in the
expenditure of significant financial and managerial resources and may not prove
successful. Although we intend to protect our rights vigorously, there can be no
assurance that these measures will be successful.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 2000, 2001 and 2002, our gross
research and product development expenditures were approximately $5.5 million,
$4.2 million and 2.2 million, respectively, including research and development
in discontinued operations. During these periods, the Office of the Chief
Scientist of the Israel Ministry of Industry and Trade (the "Chief Scientist")
participated in our research and development efforts relating to our consumer
battery business, thereby reducing our gross research and product development
expenditures in the amounts of approximately $763,000, $705,000 and $49,000, for
the years 2000, 2001 and 2002, respectively. During 1998 the Israel-U.S.
Binational Industrial Research and Development Foundation (BIRD) also began
participating in our research and development efforts by sponsoring a joint
project to develop a hybrid propulsion system for transit buses with General
Electric Corporate Research and Development. We received grants from BIRD
totaling approximately $195,000, $0 and $0 during the years ended December 31,
2000, 2001 and 2002, respectively.
23
Under the terms of the grants from the Chief Scientist and current
Chief Scientist regulations, we are 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 3.5%. We
currently pay royalties at the rates of 3.5% of Electric Vehicle revenues. The
obligation to make such royalty payments ends when 100% of the amount granted
(in New Israeli Shekels (NIS) linked to the U.S. dollar, plus interest (with
respect to grants after January 1, 1999, at the LIBOR rate)) is repaid. The
Government of Israel does not acquire 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
to transfer 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 between 120% and 300% of the amount granted, depending on
the extent of the manufacturing to be conducted outside of Israel, and that an
increased royalty rate of up to 5% will be applied. Through 2002, we have
received an aggregate of $9.9 million from grants from the Chief Scientist.
Under the terms of the grants from BIRD, we are 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, at which point the repayment rate decreases to 2 1/2% of 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 we sell any
portion of the technology developed outright to a third party, one-half of all
proceeds of the sale are 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. Through 2002, we have received an aggregate of $772,000 from grants
from BIRD.
EMPLOYEES
As of February 28, 2003, we had 152 full-time employees worldwide. Of
these employees, 3 hold doctoral degrees and 20 hold other advanced degrees. Of
the total, 18 employees were engaged in product research and development, 110
were engaged in production and operations, and the remainder in general and
administrative functions. Our success will depend in large part on our ability
to attract and retain skilled and experienced employees.
We and the employees are not parties to any collective bargaining
agreements. However, as many of our employees are located in Israel and employed
by EFL or MDT, 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 and MDT'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;
additionally, some of our senior employees have special severance arrangements,
24
certain of which are described under "Item 11. Executive Compensation -
Employment Contracts," below. We currently fund our 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 15.6% of wages, of which the
employee contributes approximately 62% and the employer contributes
approximately 38%. The majority of the permanent employees of EFL, and about a
quarter of the permanent employees of MDT, are covered by "managers' insurance,"
which provides life and pension insurance coverage with customary benefits to
employees, including retirement and severance benefits. We contribute 14.33% to
15.83% (depending on the employee) of base wages to such plans and the permanent
employees contribute 5% of their 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., a pension fund
managed by the Histadrut. We subsequently reached an agreement with Mivtachim
with respect to providing coverage to certain production employees and bringing
ourselves into conformity with the court decision. The agreement does not
materially increase our pension costs or otherwise materially adversely affect
its operations. Mivtachim has agreed not to assert any claim against us with
respect to any of our past practices relating to this matter. Although the
arrangement does not bind employees with respect to instituting claims relating
to any nonconformity by us, we believe that the likelihood of the assertion of
claims by employees is low and that any potential claims by employees against
us, if successful, would not result in any material liability to us.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since February 1994, our common stock has been traded on the Nasdaq
National Market. Our Nasdaq ticker symbol is currently "ARTX"; prior to February
2003, our Nasdaq ticker symbol was "EFCX." The following table sets forth, for
the periods indicated, the range of high and low closing prices of our common
stock on the Nasdaq National Market System:
YEAR ENDED DECEMBER 31, 2002 HIGH LOW
---- ---
Fourth Quarter.......................... $ 1.06 $ 0.61
Third Quarter........................... $ 1.59 $ 0.83
Second Quarter.......................... $ 1.68 $ 0.73
First Quarter........................... $ 2.20 $ 1.42
YEAR ENDED DECEMBER 31, 2001
Fourth Quarter.......................... $ 2.43 $ 1.30
Third Quarter........................... $ 2.75 $ 1.30
Second Quarter.......................... $ 3.95 $ 2.30
First Quarter........................... $ 8.00 $ 3.50
As of February 28, 2003 we had approximately 300 holders of record of
our common stock.
Our stock price has generally been trading below $1.00 since October
18, 2002. On December 6, 2002, Nasdaq notified us of our failure to meet the
continued listing standards, and informed us that unless our stock closes for
ten consecutive trading days with a bid price in excess of $1.00 prior to March
6, 2003 (subsequently extended, as a result of an amendment to Nasdaq's listing
regulations, to June 4, 2003), Nasdaq would notify us of intent to delist our
stock from the Nasdaq National Market. Should Nasdaq notify us of its intent to
delist our stock, we would have the opportunity to appeal this notification,
although there can be no assurances that this appeal would be resolved
favorably.
There can be no assurance that our common stock will remain listed on
the Nasdaq National Market. If our common stock were to be delisted from the
Nasdaq National Market, we might apply to be listed on the Nasdaq SmallCap
market; however, there can be no assurance that we would be approved for listing
on the Nasdaq SmallCap market, which has the same $1.00 minimum bid and other
similar requirements as the Nasdaq National Market. If we were to move to the
Nasdaq SmallCap market, current Nasdaq regulations would give us the opportunity
to obtain an additional 180-day grace period and an additional 90-day grace
period after that if we meet certain net income, shareholders' equity or market
capitalization criteria. While our stock would continue to trade on the
over-the-counter bulletin board following any delisting from the Nasdaq, any
such delisting of our common stock could have an adverse effect on the market
price of, and the efficiency of the trading market for, our common stock. Also,
if in the future we were to determine that we need to seek additional equity
capital, it could have an adverse effect on our ability to raise capital in the
public equity markets. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - If our shares were to be
delisted, our stock price might decline further and we might be unable to raise
additional capital," below.
26
DIVIDENDS
We have never paid any cash dividends on our common stock. The Board of
Directors presently intends to retain all earnings for use in our business. Any
future determination as to payment of dividends will depend upon our financial
condition and results of operations and such other factors as the Board of
Directors deems relevant.
RECENT SALES OF UNREGISTERED SECURITIES
In December 2002, we issued and sold to three institutional investors
(i) an aggregate $3,500,000 principal amount of 9% Secured Convertible
Debentures due June 30, 2005; and (ii) Warrants to purchase an aggregate of
3,500,100 shares of our common stock. In April 2003, we repriced the conversion
price of the debentures and the exercise price of the warrants in lieu of the
payment of liquidated damages for failing to register the shares of common stock
underlying the debentures and the warrants by March 31, 2003. As a result of the
repricing, the debentures are convertible at the option of the holders into an
aggregate of 5,468,750 shares of our common stock at a conversion price of $0.64
per share, and the warrants are exercisable at an exercise price of $0.64 per
share and may be exercised at any time prior to December 31, 2007. If we default
under the provisions of the debentures, including (but not limited to) the
default of an interest payment, failure to have an effective registration
statement covering the resale of common shares upon conversion declared
effective by January 1, 2004, and failure to remain listed on the Nasdaq
(National Market or SmallCap), the principal amount of the Debenture may at the
option of the holders thereof become immediately due and payable.
We issued these securities in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act as transactions by
an issuer not involving a public offering.
ANNUAL SHAREHOLDERS MEETING
We held our 2002 annual meeting of shareholders on June 12, 2002. Our
2003 Annual Meeting of Stockholders will be held on Monday, September 15, 2003
commencing at 10:00 a.m., local time, in the Ballroom of the Shelburne Murray
Hill Hotel, 303 Lexington Avenue, New York, New York.
In light of the foregoing and in accordance with Rules 14a-5(f) and
14a-8(e)(2) under the Securities Exchange Act of 1934, as amended, we will
consider stockholder proposals submitted in connection with our 2003 Annual
Meeting to have been submitted in a timely fashion if such proposals are
received by us at our principal offices no later than April 8, 2003. If a
proposal is received after April 8, 2003, the proxies designated by the Board of
Directors of the Company will have discretionary authority to vote on the
proposal under circumstances consistent with the proxy rules of the Securities
and Exchange Commission.
We expect to mail our Annual Report to Shareholders for the year ended
December 31, 2002 along with the Notice and Proxy Statement of the 2003 Annual
Meeting on or about August 6, 2003.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve inherent risks and uncertainties. When used in this discussion, the
words "believes," "anticipated," "expects," "estimates" and similar expressions
are intended to identify such forward-looking statements. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, but not limited to, those set forth elsewhere in this report. Please
see "Risk Factors," below, and in our other filings with the Securities and
Exchange Commission.
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements contained in Item 8 of this report,
and the notes thereto. We have rounded amounts reported here to the nearest
thousand, unless such amounts are more than 1.0 million, in which event we have
rounded such amounts to the nearest hundred thousand.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate our estimates and judgments, including those
related to revenue recognition, allowance for bad debts, and impairment of
intangible assets. We base our estimates and judgments on historical experience
and on various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Under different assumptions or conditions, actual results may
differ from these estimates.
We believe the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
REVENUE RECOGNITION AND BAD DEBT
We generate revenues primarily from sales of multimedia and interactive
digital training systems and use-of-force simulators specifically targeted for
law enforcement and firearms training and from service contracts related to such
sales, from providing lightweight armoring services of vehicles, and, to a
lesser extent, from sale of zinc-air battery products for defense applications
and from development services and long-term arrangements subcontracted by the
U.S government. We recognize revenues in respect of products when, among other
things, we have delivered the goods being purchased and we believe
collectibility to be reasonably assured. We do not grant a right of return to
our customers. We perform ongoing credit evaluations of our customers' financial
condition and we require collateral as deemed necessary. An allowance for
28
doubtful accounts is determined with respect to those accounts that we have
determined to be doubtful of collection. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances would be required, and this might cause a
revision of recognized revenues.
Revenues from development services are recognized using contract
accounting on a percentage of completion method, based on completion of
agreed-upon milestones and in accordance with the "Output Method" or based on
the time and material basis. Provisions for estimated losses on uncompleted
contracts are recognized in the period in which the likelihood of such losses is
determined.
INVENTORIES
We state our inventories at the lower of cost or market value.
Inventory write-offs and write-down provisions are provided to cover risks
arising from slow-moving items or technological obsolescence. Our reserves for
excess and obsolete inventory are primarily based upon forecasted demand for our
products, and any change to the reserves arising from forecast revisions would
be reflected in cost of sales in the period the revision is made.
GOODWILL
Goodwill represents the excess of cost over the fair value of the net
assets of businesses acquired.
As required by applicable accounting rules, we test goodwill for
impairment at least annually and between annual tests in certain circumstances,
and we write down goodwill when impaired, rather than amortizing it as previous
accounting standards required. Goodwill is tested for impairment by comparing
the fair value with its carrying value. Fair value is determined using
discounted cash flows, market multiples and market capitalization. Significant
estimates used in the methodologies include estimates of future cash flows,
future short-term and long-term growth rates, weighted average cost of capital
and estimates of market multiples for the reportable units.
The determination of the value of goodwill requires management to make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or the related
assumptions change in the future, we could be required to record impairment
charges. Any material change in our valuation of assets in the future and any
consequent adjustment for impairment could have a material adverse impact on our
future reported financial results.
As a result of MDT and IES acquisitions, we recorded goodwill in the
amount of $4,954,981 as of December 31, 2002.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in accordance with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of the carrying amount of assets to be held
29
and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less selling costs. As of December 31, 2002,
no impairment losses have been identified.
The determination of the value of such long-lived and intangible assets
requires management to make assumptions regarding estimated future cash flows
and other factors to determine the fair value of the respective assets. If these
estimates or the related assumptions change in the future, we could be required
to record impairment charges. Any material change in our valuation of assets in
the future and any consequent adjustment for impairment could have a material
adverse impact on our future reported financial results.
As a result of MDT and IES acquisitions, we recorded intangible assets
in the amount of $2.6 million as of December 31, 2002.
BUSINESS COMBINATIONS
We have accounted for the combination with IES and MDT utilizing the
purchase method of accounting. The combination required management to estimate
the fair value of the assets acquired and liabilities assumed. These estimates
have been based on our business plans for the entity acquired. Should the actual
use of assets or resolution of obligations differ from our estimates, revisions
to the estimated fair values would be required. If a change in estimate occurs
after one year following the acquisition, the change would be recorded in our
statement of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS No. 146
requires that costs associated with exit or disposal activities be recognized
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is effective for all exit or disposal activities
initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146
to have a material impact on our results of operations or financial position.
RECENT DEVELOPMENTS
GERMAN POLICE ORDER
In January 2003, IES was awarded a $2.6 million contract to supply
simulation training systems to the largest regional police division in Germany.
The contract calls for delivery of several separate interactive training
systems, with delivery dates ranging from April to September 2003 and payment
dates due following delivery, testing and ascertainment of appropriate run
capability of each system.
CECOM ORDERS
In December 2002, we entered into a contract with the US Army
Communications Electronic Command (CECOM) pursuant to 10 U.S.C. ss. 2304c(2),
"Unusual and Compelling Urgency," for a delivery order of advanced Zinc-Air
batteries. The contract calls for order releases during the first three calendar
quarters of 2003, with a current order ceiling of $2,543,250.
In April 2003, we announced that we had received an additional $1.6 million
order from CECOM for a delivery order of advanced Zinc-Air batteries with
deliveries anticipated to take place from September through November 2003.
30
GENERAL
During 2002, we acquired two new subsidiaries, IES and MDT, we closed
our money-losing consumer battery operations, and we reorganized into two
divisions: Defense and Security Products and Electric Fuel Batteries. We have
previously been organized into Instant Power, Electric Vehicles, and Defense and
Security Products. Additionally, we focused on increasing our activities in the
defense and security sectors, following the expansion of our battery development
and procurement contracts with the US Army's Communications Electronics Command
(CECOM) and other defense-related agencies, while searching for new
opportunities to market our core Zinc-Air technology for commercial applications
and to OEMs. With an expanded focus on defense and homeland security technology
and business opportunities, we launched new Zinc-Air battery products designed
to meet the requirements of this market. We also concentrated intensive efforts
on various cost-cutting strategies, including downsizing staff in areas showing
lower productivity and mandating participation among salaried employees in our
options-for-salary plan, whereby employees permanently waived a portion of their
salaries (generally between 15% and 25%) in exchange for options to purchase
shares of our common stock at a ratio of options to purchase 2.5 shares of our
stock for each dollar in salary waived. These options are issued at a market
value exercise price, so that they are not recorded as an expense on our
financials. This program ended at the end of 2002. See "Item 11. Executive
Compensation - Cash and Other Compensation - Options-for-Salary Program," below.
In conjunction with these cost-cutting efforts and with the movement of
our activities away from consumer sales and in the direction of defense and
security products and services, we decided during the third quarter of 2002 to
discontinue retail sales of our consumer battery products, effective in October
2002. As a result of this decision, more than 60 employees were terminated. The
discontinuation of the consumer retail products resulted in a one-time, pre-tax
charge of approximately $7.1 million during 2002, reflecting a write-down of
inventory and net fixed assets as well as costs associated with the reduction in
our workforce. Almost all these charges were non-cash impacting items.
Our line of existing battery products for the military and defense
sectors includes 12/24V, 30/60Ah Advanced Zinc-Air Power Packs (AZAPPs)
utilizing our most advanced cells (which have specific energy of 400 Wh/kg), a
line of super-lightweight AZAPPs that feature the same 400 Wh/kg cell technology
in new 16Ah cells, and our new, high-power 12V Zinc-Air Power Packs (ZAPPs),
which offer extended-use 12V portable power and current ratings up to 3.5A,
using our commercial Zinc-Air cell technology.
Our Electric Fuel Batteries Division is continuing with the production
of Zinc-Air fuel cell packs for the U.S. Army's Communications Electronics
Command (CECOM). The 12/24 volt, 800 watt-hour battery pack for battlefield
power, which is based on our Zinc-Air fuel cell technology, is approximately the
size and weight of a notebook computer. The battery is based on a new generation
of lightweight, 30 ampere-hours cells developed by us for both military and
future commercial products with high energy requirements.
In December 2002, we entered into a contract with the US Army
Communications Electronic Command (CECOM) pursuant to 10 U.S.C. ss. 2304c(2),
"Unusual and Compelling Urgency," for a delivery order of advanced Zinc-Air
batteries.
31
The contract calls for order releases during the first three calendar
quarters of 2003, with a current order ceiling of $2,543,250.
Under the terms of the contract, we will produce and supply the
BA-8180/U Zinc-Air Nonrechargeable Battery. BA-8180/U is the new Army
designation for Electric Fuel's Model FC Advanced Zinc-Air Power Pack, as it was
previously known during its development phase. In addition, we will supply three
types of electrical interface adapters for the BA-8180/U, including
equipment-specific adapters for the AN/PRC-119 SINCGARS and SINCGARS ASIP
tactical radio sets, and a generic interface for items of equipment that were
designed to interface with a BA-5590 or equivalent battery. Each of the three
interfaces was also assigned a national stock number (NSN) by CECOM. The
BA-8180/U was assigned an NSN in August 2002.
The BA-8180/U is a 12/24 volt, 800 watt-hour battery pack approximately
the size and weight of a notebook computer. The battery is based on a new
generation of lightweight, 30 ampere-hours cells that we developed over the last
five years with partial funding by CECOM. In extensive field testing, the
BA-8180/U battery typically provided 4 to 6 times the run time of a BA-5590, a
primary lithium battery pack widely used in the military.
Additionally, the Electric Fuel Batteries Division is continuing with
the introduction of the new emergency lights for the marine life jackets market.
In July 2002, our existing research and development contract with CECOM
was modified to provide us with additional funding of ten thousand dollars in
order to develop prototype zinc air batteries for battlefield drones. As a
result, we developed and plan to produce advanced zinc-air batteries for
unmanned air vehicles (UAVs) and micro air vehicles (MAVs). The new batteries
will provide the military's man-portable battlefield drones with longer range
and flying time than existing battery alternatives. Our solutions for UAVs and
MAVs are high-power, lightweight versions of our most advanced zinc-air cells,
which have specific energy of 400 Wh/kg.
Our Electric Fuel Batteries Division is also continuing its American
all-electric transit bus demonstration project, subcontracted by the Federal
Transit Administration (FTA). We successfully completed Phase I in June 2000 and
Phase II of the FTA program in July 2002, and have recently received approval of
subcontracting fees from the FTA to begin Phase III of the program, which will
focus on an evaluation of the performance of Zinc-Air battery propulsion systems
for transit buses; the installation of new advanced ultra capacitors; and the
implementation of an advanced control system for auxiliaries.
During 2002, we continued to invest in strengthening our intellectual
property position. We have 42 unexpired U.S. patents and 15 corresponding
European patents issued covering general aspects and various applications of our
Zinc-Air technology; these patents expire between 2007 and 2018.
We have experienced significant fluctuations in the sources and amounts
of our revenues and expenses, and we believe that the following comparisons of
results of operations for the periods presented do not necessarily provide a
meaningful indication of our development. Our research and development expenses
have been offset, to a limited extent, by the periodic receipt of research
grants from Israel's Office of the Chief Scientist. We expect that, because of
32
these and other factors, including our acquisitions of IES and MDT, our
discontinuation of certain of our operations, and general economic conditions
and delays due to legislation and regulatory and other processes and the
development of competing technologies, future results of operations may not
necessarily be meaningfully compared with those of current and prior periods.
Thus, we believe that period-to-period comparisons of its past results of
operations should not necessarily be relied upon as indications of future
performance.
We incurred significant operating losses for the years ended December
31, 2000, 2001 and 2002. While we expect to continue to derive revenues from the
sale of defense and security products that we manufacture (directly and through
our subsidiaries) and from components of the Electric Fuel Electric Vehicle
System, there can be no assurance that we will ever derive such revenues or
achieve profitability.
FUNCTIONAL CURRENCY
We consider the United States dollar to be the currency of the primary
economic environment in which we and our Israeli subsidiary Electric Fuel
(E.F.L) Ltd. ("EFL") operate and, therefore, both we and EFL have adopted and
are using the United States dollar as our functional currency. Transactions and
balances originally denominated in U.S. dollars are presented at the original
amounts. Gains and losses arising from non-dollar transactions and balances are
included in net income.
The majority of financial transactions of MDT is in New Israel Shekels
("NIS") and a substantial portion of MDT's costs is incurred in NIS. Management
believes that the NIS is the functional currency of MDT. Accordingly, the
financial statements of MDT have been translated into U.S. dollars. All balance
sheet accounts have been translated using the exchange rates in effect at the
balance sheet date. Statement of operations amounts has been translated using
the average exchange rate for the period. The resulting translation adjustments
are reported as a component of accumulated other comprehensive loss in
shareholders' equity.
RESULTS OF OPERATIONS
PRELIMINARY NOTE
Results for the year ended December 31, 2002 include the results of IES
and MDT for such period as a result of our acquisitions of these companies early
in the third quarter of 2002. The results of IES and MDT were not included in
our operating results for the year ended December 31, 2001. Accordingly, the
following year-to-year comparisons should not necessarily be relied upon as
indications of future performance.
In addition, results are net of the operations of the retail consumer
battery products, which operations were discontinued in the third quarter of
2002.
FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001
REVENUES. Revenues from continuing operations for the year ended
December 31, 2002 totaled $6.4 million, compared to $2.1 million for 2001, an
increase of $4.3 million, or 206%. This increase was primarily the result of the
inclusion of IES and MDT in our results in 2002.
33
During 2002, we recognized revenues from the sale of interactive
use-of-force training systems (through our IES subsidiary), from payments under
vehicle armoring contracts (through our MDT subsidiary), and from the sale of
lifejacket lights, as well as under contracts with the U.S. Army's CECOM for
deliveries of batteries and for design and procurement of production tooling and
equipment. We also recognized revenues from subcontracting fees received in
connection with Phase II of the United States Department of Transportation (DOT)
program, which began in the fourth quarter of 2001 and was completed in July
2002, and Phase III of the DOT program, which began in October 2002. We
participate in this program as a member of a consortium seeking to demonstrate
the ability of the Electric Fuel battery system to power a full-size,
all-electric transit bus. The total program cost of Phase II was $2.7 million,
50% of which was covered by the DOT subcontracting fees. Subcontracting fees
cover less than all of the expenses and expenditures associated with our
participation in the program. In 2001, we derived revenues principally from the
sale of lifejacket lights, under contracts with the U.S. Army's CECOM for
deliveries of batteries and for design and procurement of production tooling and
equipment and from subcontracting fees received in connection with the DOT
program.
In 2002, revenues were $4.7 million for the Defense and Security
Products Division (compared to $0 in 2001), due to the inclusion of IES and MDT
in our 2002 results, and $1.7 million for the Electric Fuel Batteries Division
(compared to $2.1 million in the comparable period in 2001, a decrease of
$411,000, or 20%), due primarily to $471,000 in revenues from a German
consortium project relating to our electric vehicle that were included in 2001
but that did not exist in 2002. Of the $4.7 million increase in Defense and
Security Products revenues, $2.0 million was attributable to the inclusion of
IES in our results in 2002 and $2.7 million was attributable to the inclusion of
MDT in our results in 2002.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues totaled $4.4
million during 2002, compared to $2.0 million in 2001, an increase of $2.4
million, or 122%, due to the inclusion of IES and MDT in our 2002 results.
Direct expenses for our two divisions during 2002 were $4.4 million for
the Defense and Security Products Division (compared to $0 in 2001), due to the
inclusion of IES and MDT in our 2002 results, and $3.1 million for the Electric
Fuel Batteries Division (compared to $2.3 million in the comparable period in
2001, an increase of $767,000, or 33%), due primarily to the following factors:
-- We began to ramp up production at our CECOM facility in
Alabama in anticipation of the CECOM order that we received in
December 2002; and
-- We wrote off certain disqualified CECOM inventory in the
amount of $116,000.
Of the $4.4 million increase in Defense and Security Products direct
expenses, $2.1 million was attributable to the inclusion of IES in our results
in 2002 and $2.3 million was attributable to the inclusion of MDT in our results
in 2002.
Gross profit was $2.0 million during 2002, compared to $101,000 during
2001, an increase of $1.9 million. This increase was the direct result of all
34
factors presented above, most notably the inclusion of IES and MDT in our 2002
results. In 2002, IES contributed $1.3 million to our gross profit, and MDT
contributed $1.1 million, which was offset by a gross loss of $360,000 in our
other divisions.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for 2002 were $686,000, compared to $456,000 in 2001, an increase of $230,000,
or 50%. This increase was primarily the result of the inclusion of IES, which
accounted for $130,000 of the increase, in our 2002 results.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for 2002
were $1.3 million, compared to $106,000 in 2001, an increase of $1.2 million, or
1,136%. This increase was primarily attributable to the following factors:
-- We had sales and marketing expenses in 2002 related to IES of
$572,000, which we did not have in 2001;
-- We had sales and marketing expenses in 2002 related to MDT of
$63,000, which we did not have in 2001; and
-- We incurred expenses for consultants, primarily lobbyists, in
the amount of $128,000 in connection with our Electric Vehicle
program and $441,000 in connection with our CECOM battery
program with the U.S. Army.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for 2002 were $4.0 million compared to $3.8 million in 2001, an
increase of $196,000, or 5%. This increase was primarily attributable to the
inclusion of IES and MDT in our results beginning with the third quarter, which
increased general and administrative expenses by approximately $839,000. This
increase was offset by decrease in general and expenses of $643,000, resulting
from:
-- the dismissal of our litigation with Electrofuel Inc., which
resulted in a decrease in litigation-related legal expenses;
and
-- the settlement of our dispute with a former employee on terms
that resulted in a savings to us over the amount that we had
set aside on our books.
FINANCIAL INCOME. Financial income, net of interest expenses and
exchange differentials, totaled approximately $100,000 in 2002 compared to
$263,000 in 2001, a decrease of $163,000, or 62%. This decrease was due
primarily to lower interest rates and lower balances of invested funds as a
result of our use of the proceeds of private placements of our securities.
INCOME TAXES. We and our Israeli subsidiary EFL incurred net operating
losses during 2002 and 2001 and, accordingly, we were not required to make any
provision for income taxes. MDT had taxable income, but we may use EFL's losses
to offset MDT's income, and accordingly MDT has made no provision for income
taxes.
35
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
totaled $649,000 in 2002, compared to $0 in 2001, due to the inclusion of IES
and MDT in our 2002 results. Of this $649,000 increase, $551,000 was
attributable to the inclusion of IES in our results in 2002 and $98,000 was
attributable to the inclusion of MDT in our results in 2002.
NET LOSS FROM CONTINUING OPERATIONS. Due to the factors cited above, we
reported a net loss from continuing operations of $4.9 million in 2002, compared
to a net loss of $4.0 million in 2001, an increase of $913,000, or 22%.
NET LOSS FROM DISCONTINUED OPERATIONS. In the third quarter of 2002, we
decided to discontinue operations relating to the retail sales of our consumer
battery products. Accordingly, all revenues and expenses related to this segment
have been presented in our consolidated statements of operations for the year
ended December 31, 2002 in an item entitled "Loss from discontinued operations."
Net loss from discontinued operations in 2002 was $13.6 million,
compared to $13.3 million in 2001, an increase of $306,000, or 2%. This increase
was the result of a write-off of fixed inventory and assets in the amount of
$7.1 million in connection with our discontinuation of the operations relating
to the retail sales of our consumer battery products at the end of the third
quarter of 2002, which was not entirely offset by the elimination of the losses
from these discontinued operations beginning with the fourth quarter of 2002.
NET LOSS. Due to the factors cited above, we reported a net loss of
$18.5 million in 2002, compared to a net loss of $17.3 million in 2001, an
increase of $1.2 million, or 7%.
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
PRELIMINARY NOTE. We have broken down the results for the years ended
December 31, 2001 and 2000 in accordance with the continuing operations
divisions that we maintained at the time: Electric Vehicle, and Defense and
Security Products (which at the time consisted of only our CECOM batteries and
our water-activated batteries). Beginning in 2002, both of these divisions were
combined into a single division called Electric Fuel Batteries. It is therefore
appropriate to compare our overall results from continuing operations in 2001
and 2000 with the results of our Electric Fuel Battery Division in 2002.
REVENUES. Revenues from continuing operations for the year ended
December 31, 2001 totaled $2.1 million, compared to $1.5 million for 2000, an
increase of $604,000, or 40%.
During 2001, we recognized revenues from continuing operations from the
sale of lifejacket lights and portable high-power zinc-air fuel cell packs for
military use. We also recognized revenues from subcontracting fees received in
connection with the United States Department of Transportation (DOT) program
which began in 1998 and, after we completed Phase I in July of 2000, was
extended in the fourth quarter of 2000. We participate in this program as a
member of a consortium seeking to demonstrate the ability of the Electric Fuel
battery system to power a full-size, all-electric transit bus. The total program
cost of Phase II is approximately $2.7 million, 50% of which will be covered by
the DOT subcontracting fees. Subcontracting fees cover less than all of the
expenses and expenditures associated with our participation in the program. We
also received electric vehicle revenues during 2001 from our German consortium
36
(EFRB) project. In 2000, we derived revenues from continuing operations
principally from the sale of lifejacket lights. Additionally, we also recognized
revenues from activities related to the DOT program.
In 2001, revenues were $894,000 for the Electric Vehicle Division
(compared to $310,000 in 2000, an increase of $584,000, or 188%) and $1.2
million for the Defense and Security Products Division (formerly known as the
Defense and Safety Products Division) (compared to $1.2 million in 2000,
unchanged).
The increase in revenues from the Electric Vehicle Division in 2001 was
the result of our having received the German consortium (EFRB) project,
described above. This project generated revenues of $471,000 in 2001.
COST OF REVENUES AND GROSS PROFIT. Cost of revenues totaled $2.0
million during 2001, compared to $1.5 million in 2000, an increase of $506,000,
or 34%. This increase was primarily the result of the increase in our Electric
Vehicle revenues in 2001, as described above, which also resulted in an increase
in cost of goods sold.
Gross profit was $101,000 during 2001, compared to $4,000 during 2000,
an increase of $97,000. This increase was the direct result of all factors
presented above, most notably the increased electric vehicle revenues during
2001 from our German consortium (EFRB) project.
RESEARCH AND DEVELOPMENT EXPENSES, NET. Research and development
expenses less royalty-bearing grants for 2001 were $456,000, compared to
$499,000 in 2000, a decrease of $43,000, or 9%.
Research and development expenses were reduced by $0 of royalty bearing
grants from the BIRD Foundation during 2001 (compared to $195,000 in 2000).
Direct expenses for our two divisions for the fiscal year ended
December 31, 2001 were $907,000 for the Electric Vehicle Division ($634,000 in
2000, an increase of $273,000, or 43%), and $1.4 million for the Defense and
Security Products Division ($1.1 million in 2000, an increase of $268,000, or
24%). The increase of expenses in the Electric Vehicle Division was the result
of progress that was made in phase II of the FTA program and the German program.
Net costs of fixed assets (net of accumulated depreciation) at December
31, 2001 in the Electric Vehicle and Defense and Security Products Divisions
were $666,000 and $853,000, respectively.
SELLING EXPENSES. Selling expenses for the year ended December 31, 2001
were $106,000, compared to $127,000 in 2000, a decrease of $21,000, or 16%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for 2001 were $3.8 million compared to $3.3 million in 2000, an
increase of $521,000, or 16%. This increase in expenses was the result of the
following factors (in descending order of importance):
-- Increases in management salaries and in accruals related to
our senior employees, accounting for approximately $150,000 of
the increase in general and administrative expenses;
37
-- Non-cash write-down of notes receivable from certain
stockholders reflecting a diminution in the market value of
securities collateralizing such notes, accounting for
approximately $100,000 of the increase in general and
administrative expenses; and
-- An increase in expenses related to travel, consultants, and
directors and officers liability insurance, accounting for
approximately $200,000 of the increase in general and
administrative expenses.
FINANCIAL INCOME. Financial income, net of interest expenses and
exchange differentials, totaled approximately $263,000 in 2001 compared to
$544,000 in 2000, a decrease of $281,000, or 52%, due primarily to lower
interest rates and lower balances of invested funds as a result of our use of
the proceeds of private placements of our securities conducted in May and
November 2000, which was only partially offset by income from the proceeds of
private placements of our securities conducted in May, November and December
2001, as well as a decrease in interest income from certain shareholder loans.
INCOME TAXES. We and our Israeli subsidiary EFL incurred net operating
losses during 2001 and 2000 and, accordingly, we were not required to make any
provision for income taxes.
NET LOSS FROM CONTINUING OPERATIONS. Due to the factors cited above,
particularly the increase in general and administrative expenses and the
decrease in financial income, we reported a net loss of $4.0 million in 2001,
compared to a net loss of $3.4 million in 2000, an increase of $641,000, or 19%.
NET LOSS FROM DISCONTINUED OPERATIONS. Net loss from discontinued
operations was $13.3 million in 2001, compared to $8.6 million in 2000, an
increase of $4.7 million, or 55%. This increase was primary the result of the
following factors (in descending order of importance):
-- Our sales and marketing expenses increased in 2001 compared to
2000, primarily because of increased sales and marketing
expenses in the United States and the United Kingdom,
accounting for an increase in sales and marketing of
approximately $2.1 million;
-- Our revenues derived from discontinued operations were lower
by an amount of $620,000, primarily because a single large
order that we received from one customer (Wal-Mart) during
2000 was not repeated in 2001, thereby resulting in fewer
products sold. An additional factor in the decrease in
revenues was our reduction in the price at which we sold our
products during 2001, which resulted in lower revenues from
the products we did sell;
-- Products that we had sold that were still subject to possible
return continued to be carried as inventory. Once it was clear
that these products would not be returned, we decreased the
inventory, resulting in an increase in cost of revenues of
approximately $615,000;
-- We took an inventory write-off as a result of a decision to
discontinue production and sale of most disposable battery
38
products in response to low consumer demand for those
products, accounting for an increase in cost of revenues of
approximately $440,000;
-- When we lowered the retail prices of our products, we
recognized losses on those of our products that we carried in
inventory due to the principle of presenting inventory at the
lower of cost or market value, accounting for an increase in
cost of revenues of approximately $400,000;
-- We increased our accruals for doubtful debts because a greater
portion of our accounts receivable was aged over six months,
accounting for approximately $300,000 of the increase in
general and administrative expenses;
-- We concentrated on production of chargers, which were more
popular than disposable batteries but which have higher
production costs and hence a higher gross loss than do the
disposable batteries that we emphasized in 2000, accounting
for an increase in cost of revenues of approximately $300,000;
and
-- Some of our equipment began to be depreciable beginning in the
second half of 2001, which resulted in an increase in our cost
of revenues during 2001 of the amount of the depreciation,
which was approximately $200,000.
The above factors were offset to some extent by reduction in research
and development expenses related to our discontinued operation in 2001 compared
to 2000, primarily as a result of our move from a company primarily engaged in
research and development to a company engaged in production.
NET LOSS. Due to the factors cited above, we reported a net loss of
$17.3 million in 2001 (without taking into account a deemed dividend to certain
shareholders as a result of the repricing of warrants held by certain of our
investors, as described in Note 12.g.2 of the Notes to the Consolidated
Financial Statements), compared to a net loss of $12.0 million in 2000, and
increase of $5.3 million, or 44%.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, we had cash and cash equivalents of
approximately $1.5 million, and certificates of deposit due within one year
amounting to $633,000, compared with $12.7 million as of December 31, 2001, a
decrease of $11.2 million, or 88%. The decrease in cash was primarily the result
of losses incurred in our consumer battery division, which we shut down in the
third quarter of 2002, and the costs of the acquisitions of IES and MDT.
We used available funds in 2002 primarily for the acquisition of IES
and MDT, and other working capital needs. We increased our investment in fixed
assets by $667,000 (including fixed assets used in discontinued operations)
during the year ended December 31, 2002, primarily in the Electric Fuel
Batteries Division. Our fixed assets amounted to $2.6 million as at year end
after the write-off of net fixed assets in the amount of $4.5 million due to
discontinuation of our consumer battery business.
39
Net cash used in operating activities from continuing operations for
2002 and 2001 was $3.5 million and $2.5 million, respectively, an increase of
$1.0 million, or 40%. This increase was primarily the result of an increased net
loss, an increase in inventory and a decrease in accounts payable and in
accruals in comparison to 2001.
Net cash used in investing activities for 2002 and 2001 was $5.4
million and $1.3 million, respectively, an increase of $4.1 million, or 319%.
This increase was primarily the result of our investment in the acquisition of
IES and MDT.
Net cash provided by financing activities for 2002 and 2001 was $3.1
million and $15.7 million, respectively, a decrease of $12.6 million, or 80%.
This decrease was primarily the result of lower amounts of funds raised through
sales of our common stock in 2002 compared to 2001.
Our Israeli subsidiary EFL presently has a line of credit with the
First International Bank of Israel Ltd. (FIBI) of up to $750,000, secured by
such security as we and the bank shall agree upon from time to time. This credit
facility imposes financial and other covenants on Arotech and EFL. As of
December 31, 2002, the bank had issued letters of credit and bank guarantees
totaling approximately $35,000.
During 2002, certain of our employees exercised options under our
registered employee stock option plan. The proceeds to us from the exercised
options were approximately $113,000.
On January 15, 2002 we issued and sold to Grenville Finance Ltd., for
an aggregate purchase price of $750,000, an aggregate of 441,176 shares of
common stock.
On January 23, 2002 we issued and sold to various institutional
investors affiliated with the Special Situation funds, for an aggregate purchase
price of $2,480,000, an aggregate of 1,600,000 shares of common stock.
On December 31, 2002 we issued and sold to various institutional
investors we issued and sold to three institutional investors an aggregate
$3,500,000 principal amount of 9% Secured Convertible Debentures due June 30,
2005, as more fully described under "Item 5. Market For Registrant's Common
Equity and Related Stockholder Matters - Recent Sales of Unregistered
Securities," above.
We have approximately $4.0 million in long term debt outstanding, and
approximately $1.3 million in short-term debt.
Approximately 22.9% of the stock of our Israeli-based subsidiary EFL is
deemed to be beneficially owned (indirectly through their ownership of our stock
by application of certain attribution rules) by four United States citizens:
Leon S. Gross, Austin W. Marxe and David M. Greenhouse, and Robert S. Ehrlich.
(Information with respect to the stockholdings of Messrs. Marxe and Greenhouse
is based on a Schedule 13G filed with the Securities and Exchange Commission on
February 11, 2002, as amended on February 13, 2003.) If at any time in the
future, more than 50% of either (i) the voting power of our stock, or (ii) the
total value of our stock, is held or deemed to be held by five or fewer
individuals (including, if applicable, those individuals who currently own an
aggregate of 22.9% of our stock) who are United States citizens or residents,
EFL would satisfy the foreign personal holding company stock ownership test
40
under the Internal Revenue Code and we could be subject to additional U.S. taxes
on any undistributed foreign personal holding company income of EFL. For 2002,
EFL had no income which would qualify as undistributed foreign personal holding
company income. However, no assurance can be given that in the future EFL will
not have income that qualifies as undistributed foreign personal holding company
income.
We believe that our present cash position and anticipated cash flows
from operations should be sufficient to satisfy our estimated cash requirements
through the next year.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Historically, the majority of our revenues have been in U.S. dollars.
The United States dollar cost of our operations in Israel, with regard to
expenses incurred in NIS, is influenced by the extent to which an increase in
the rate of inflation in Israel is not offset by the devaluation of the NIS in
relation to the dollar. In the past two years, inflation in Israel has been more
than fully compensated by the devaluation of the NIS and, accordingly, the
dollar cost of our NIS expenses has decreased. Even if the recent trend is
reversed (as was the case in previous years), we do not believe that continuing
inflation in Israel or delays in the devaluation of the NIS are likely to have a
material adverse effect on us, except to the extent that such circumstances have
an impact on Israel's economy as a whole. In the years ended December 31, 2000,
2001 and 2002, the annual rates of inflation in Israel were 0.0%, 1.4% and 6.5%,
respectively, compared to the devaluation of the NIS against the dollar during
such periods of (2.7)%, 9.3% and 7.3%, respectively. Additionally, our $2.6
million contract to supply simulation training systems to the largest regional
police division in Germany is denominated in Euros.
EFFECTIVE CORPORATE TAX RATE
Our production facilities in Israel have been granted "Approved
Enterprise" status under the Israel Law for Encouragement of Capital
Investments, 5719-1959, and consequently are eligible for certain tax benefits
for seven to ten years after they first generate taxable income (provided the
maximum period as prescribed by law has not elapsed). Under this law, a company
may either accept government grants and receive a reduced tax rate, or forego
government grants and receive an alternate package of tax benefits that includes
a complete exemption from certain taxes. We have elected to receive a grant of
funds together with a reduced tax rate for the aforementioned period.
EFL's effective corporate tax rate may be affected by the
classification of certain items of income as being "approved income" for
purposes of the Approved Enterprise law, and hence subject to a lower tax rate
(25% to 10%, depending on the extent of foreign ownership of EFL - presently
15%) than is imposed on other forms of income under Israeli law (presently 36%).
The effective tax upon income we distribute to our stockholders would be
increased as a result of the withholding tax imposed upon dividends distributed
by EFL to Arotech, resulting in an overall effective corporate tax rate of
approximately 28% for income arising from EFL's Approved Enterprises and 44%
regarding other income.
Arotech and EFL have incurred net operating losses or had earnings
arising from tax-exempt income during the years ended December 31, 2000, 2001
and 2002 and accordingly no provision for income taxes was required. Taxes in
41
these entities paid in 2000, 2001 and 2002 are primarily composed of United
States federal alternative minimum taxes.
As of December 31, 2002, we had U.S. net operating loss carry forwards
of approximately $15 million that are available to offset future taxable income,
expiring primarily in 2015, and foreign net operating loss carry forwards of
approximately $93 million, which are available indefinitely to offset future
taxable income.
RISK FACTORS
The following factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Report and presented elsewhere by management from time to time.
BUSINESS-RELATED RISKS
WE HAVE HAD A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.
We were incorporated in 1990 and began our operations in 1991. We have
funded our operations principally from funds raised in each of the initial
public offering of our common stock in February 1994; through subsequent public
and private offerings of our common stock and equity and debt securities
convertible into shares of our common stock; research contracts and supply
contracts; funds received under research and development grants from the
Government of Israel; and sales of products that we and our subsidiaries
manufacture. We incurred significant operating losses since our inception.
Additionally, as of December 31, 2002, we had an accumulated deficit of
approximately $100.7 million. There can be no assurance that we will ever
achieve profitability or that our business will continue to exist. Additionally,
because we do not presently meet the transaction requirements for filing
registration statements for primary offerings of our securities on the simpler
Form S-3 registration statement, raising capital through sales of our securities
may be more difficult in the future than it has been in the past.
OUR EXISTING INDEBTEDNESS MAY ADVERSELY AFFECT OUR ABILITY TO OBTAIN
ADDITIONAL FUNDS AND MAY INCREASE OUR VULNERABILITY TO ECONOMIC OR BUSINESS
DOWNTURNS.
Our indebtedness, including the aggregate principal amount of the
debentures sold by us in December 2002, aggregated approximately $5.3 million as
of December 31, 2002. Accordingly, we are subject to the risks associated with
indebtedness, including:
o we must dedicate a portion of our cash flows from operations
to pay debt service costs and, as a result, we have less funds
available for operations, future acquisitions of consumer
receivable portfolios, and other purposes;
o it may be more difficult and expensive to obtain additional
funds through financings, if available at all;
o we are more vulnerable to economic downturns and fluctuations
in interest rates, less able to withstand competitive
pressures and less flexible in reacting to changes in our
industry and general economic conditions; and
42
o if we default under any of our existing debt instruments or if
our creditors demand payment of a portion or all of our
indebtedness, we may not have sufficient funds to make such
payments.
The occurrence of any of these events could materially adversely affect
our results of operations and financial condition and adversely affect our stock
price.
The agreements governing the terms of our debentures contain numerous
affirmative and negative covenants that limit the discretion of our management
with respect to certain business matters and place restrictions on us, including
obligations on our part to preserve and maintain our assets and restrictions on
our ability to incur or guarantee debt, to merge with or sell our assets to
another company, and to make significant capital expenditures without the
consent of the debenture holders. Our ability to comply with these and other
provisions of such agreements may be affected by changes in economic or business
conditions or other events beyond our control.
FAILURE TO COMPLY WITH THE TERMS OF OUR DEBENTURES COULD RESULT IN A
DEFAULT THAT COULD HAVE MATERIAL ADVERSE CONSEQUENCES FOR US.
A failure to comply with the obligations contained in our debenture
agreements, including a failure to have our registration statement registering
the shares underlying our debentures and the warrants issued as part of the
debenture financing declared effective by the SEC on or before January 1, 2004,
could result in an event of default under such agreements which could result in
an acceleration of the debentures and the acceleration of debt under other
instruments evidencing indebtedness that may contain cross-acceleration or
cross-default provisions. If the indebtedness under the debentures or other
indebtedness were to be accelerated, there can be no assurance that our assets
would be sufficient to repay in full such indebtedness. The foregoing
description of our agreement with our debenture holders is qualified in its
entirety by reference to the agreements with our debenture holders filed as
exhibits to our Current Report on Form 8-K that we filed with the SEC on January
6, 2003.
WE HAVE PLEDGED A SUBSTANTIAL PORTION OF OUR ASSETS TO SECURE OUR
BORROWINGS.
The debentures are secured by a substantial portion of our assets. If
we default under the indebtedness secured by our assets, those assets would be
available to the secured creditor to satisfy our obligations to the secured
creditor, which could materially adversely affect our results of operations and
financial condition and adversely affect our stock price.
WE NEED SIGNIFICANT AMOUNTS OF CAPITAL TO OPERATE AND GROW OUR BUSINESS.
We require substantial funds to conduct the necessary research,
development and testing of our products; to establish commercial scale
manufacturing facilities; and to market our products. We continue to seek
additional funding, including through the issuance of equity or debt securities.
However, there can be no assurance that we will obtain any such additional
financing in a timely manner or on acceptable terms. If additional funds are
raised by issuing equity securities, stockholders may incur further dilution. If
additional funding is not secured, we will have to modify, reduce, defer or
eliminate parts of our anticipated future commitments and/or programs.
43
WE MAY NOT BE SUCCESSFUL IN OPERATING A NEW BUSINESS.
Prior to the IES and MDT acquisitions, our primary business was the
marketing and sale of products based on primary and refuelable Zinc-Air fuel
cell technology and advancements in battery technology for defense and security
products and other military applications, electric vehicles and consumer
electronics. As a result of the IES and MDT acquisitions, a substantial
component of our business will be the marketing and sale of hi-tech multimedia
and interactive digital solutions for training military, law enforcement and
security personnel and sophisticated lightweight materials and advanced
engineering processes used to armor vehicles. These are new businesses for us
and our management group has limited experience operating these types of
businesses. Although we have retained the management personnel at IES and MDT,
we cannot assure that such personnel will continue to work for us or that we
will be successful in managing this new business. If we are unable to
successfully operate these new businesses, especially the business of IES, our
business, financial condition and results of operations could be materially
impaired.
WE CANNOT ASSURE YOU OF MARKET ACCEPTANCE OF OUR MILITARY ZINC-AIR BATTERY
PRODUCTS AND ELECTRIC VEHICLE TECHNOLOGY.
Our batteries for the defense industry and a signal light powered by
water-activated batteries for use in life jackets and other rescue apparatus are
the only commercial Zinc-Air battery products we currently have available for
sale. Significant resources will be required to develop and produce additional
consumer products utilizing this technology on a commercial scale. Additional
development will be necessary in order to commercialize our technology and each
of the components of the Electric Fuel System for electric vehicles and defense
products. We cannot assure you that we will be able to successfully develop,
engineer or commercialize our Zinc-Air energy system, or that we will be able to
develop products for commercial sale or that, if developed, they can be produced
in commercial quantities or at acceptable costs or be successfully marketed. The
likelihood of our future success must be considered in light of the risks,
expenses, difficulties and delays frequently encountered in connection with the
operation and development of a relatively early stage business and with
development activities generally.
We believe that public pressure and government initiatives are
important factors in creating an electric vehicle market. However, there can be
no assurance that there will be sufficient public pressure or that further
legislation or other governmental initiatives will be enacted, or that current
legislation will not be repealed, amended, or have its implementation delayed.
In addition, we are subject to the risk that even if an electric fuel vehicle
market develops, a different form of zero emission or low emission vehicle will
dominate the market. In addition, we cannot assure you that other solutions to
the problem of containing emissions created by internal combustion engines will
not be invented, developed and produced. Any other solution could achieve
greater market acceptance than electric vehicles. The failure of a significant
market for electric vehicles to develop would have a material adverse effect on
our ability to commercialize this aspect of our technology. Even if a
significant market for electric vehicles develops, there can be no assurance
that our technology will be commercially competitive within that market.
OUR ACQUISITION STRATEGY INVOLVES VARIOUS RISKS.
Part of our strategy is to grow through the acquisition of companies
that will complement our existing operations or provide us with an entry into
markets we do not currently serve. Growth through acquisitions involves
44
substantial risks, including the risk of improper valuation of the acquired
business and the risk of inadequate integration. There can be no assurance that
suitable acquisition candidates will be available, that we will be able to
acquire or manage profitably such additional companies or that future
acquisitions will produce returns that justify our investments therein. In
addition, we may compete for acquisition and expansion opportunities with
companies that have significantly greater resources than we do. Furthermore,
acquisitions could disrupt our ongoing business, distract the attention of our
senior managers, make it difficult to maintain our operational standards,
controls and procedures and subject us to contingent and latent risks that are
different, in nature and magnitude, than the risks we currently face.
We may finance future acquisitions with cash from operations or
additional debt or equity financings. There can be no assurance that we will be
able to generate internal cash or obtain financing from external sources or
that, if available, such financing will be on terms acceptable to us. The
issuance of additional common stock to finance acquisitions may result in
substantial dilution to our stockholders. Any debt financing may significantly
increase our leverage and may involve restrictive covenants which limit our
operations.
WE MAY NOT SUCCESSFULLY INTEGRATE OUR NEW ACQUISITIONS.
In light of our recent acquisitions of IES and MDT, our success will
depend in part on our ability to manage the combined operations of these
companies and to integrate the operations and personnel of these companies along
with our other subsidiaries and divisions into a single organizational
structure. There can be no assurance that we will be able to effectively
integrate the operations of our subsidiaries and divisions and our
newly-acquired businesses into a single organizational structure. Integration of
these operations could also place additional pressures on our management as well
as on our key technical resources. The failure to successfully manage this
integration could have an adverse material effect on us.
If we are successful in acquiring additional businesses, we may
experience a period of rapid growth that could place significant additional
demands on, and require us to expand, our management, resources and management
information systems. Our failure to manage any such rapid growth effectively
could have a material adverse effect on our financial condition, results of
operations and cash flows.
IF WE ARE UNABLE TO MANAGE OUR GROWTH, OUR OPERATING RESULTS WILL BE
IMPAIRED.
We are currently experiencing a period of growth and development
activity which could place a significant strain on our personnel and resources.
Our activity has resulted in increased levels of responsibility for both
existing and new management personnel. Many of our management personnel have had
limited or no experience in managing growing companies. We have sought to manage
our current and anticipated growth through the recruitment of additional
management and technical personnel and the implementation of internal systems
and controls. However, our failure to manage growth effectively could adversely
affect our results of operations.
WE WILL NEED TO DEVELOP THE EXPERIENCE TO MANUFACTURE CERTAIN OF OUR
PRODUCTS IN COMMERCIAL QUANTITIES AND AT COMPETITIVE PRICES.
We currently have limited experience in manufacturing in commercial
quantities and have, to date, produced only limited quantities of military
batteries and components of the batteries for electric vehicles. In order for us
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to be successful in the commercial market, these products must be manufactured
to meet high quality standards in commercial quantities at competitive prices.
The development of the necessary manufacturing technology and processes will
require extensive lead times and the commitment of significant amounts of
financial and engineering resources, which may not be available to us. We cannot
assure you that we will successfully develop this technology or these processes.
Moreover, we cannot assure you that we will be able to successfully implement
the quality control measures necessary for commercial manufacturing.
SOME OF THE COMPONENTS OF OUR TECHNOLOGY AND OUR PRODUCTS POSE POTENTIAL
SAFETY RISKS WHICH COULD CREATE POTENTIAL LIABILITY EXPOSURE FOR US.
Some of the components of our technology and our products contain
elements that are known to pose potential safety risks. Also, because electric
vehicle batteries contain large amounts of electrical energy, they may cause
injuries if not handled properly. In addition to these risks, and although we
incorporate safety procedures in our research, development and manufacturing
processes, there can be no assurance that accidents in our facilities will not
occur. Any accident, whether occasioned by the use of all or any part of our
products or technology or by our manufacturing operations, could adversely
affect commercial acceptance of our products and could result in significant
production delays or claims for damages resulting from injuries. Any of these
occurrences would materially adversely affect our operations and financial
condition.
WE MAY FACE PRODUCT LIABILITY CLAIMS.
To date, there have been no material claims or threatened claims
against us by users of our products, including the products manufactured by MDT,
based on a failure of our products to perform as specified. In the event that
any claims for substantial amounts were to be asserted against us, they could
have a materially adverse effect on our financial condition and results of
operations. We maintain general product liability insurance. However, there is
no assurance that the amount of our insurance will be sufficient to cover
potential claims or that the present amount of insurance can be maintained at
the present level of cost, or at all.
SOME OF OUR BUSINESS IS DEPENDENT ON GOVERNMENT CONTRACTS.
Most of IES's customers to date have been in the public sector of the
U.S., including the federal, state and local governments, and in the public
sectors of a number of other countries, and most of MDT's customers have been in
the public sector in Israel. A significant decrease in the overall level or
allocation of defense spending or law enforcement in the U.S. or other countries
could have a material adverse effect on our future results of operations and
financial condition.
Sales to public sector customers are subject to a multiplicity of
detailed regulatory requirements and public policies as well as to changes in
training and purchasing priorities. Contracts with public sector customers may
be conditioned upon the continuing availability of public funds, which in turn
depends upon lengthy and complex budgetary procedures, and may be subject to
certain pricing constraints. Moreover, U.S. government contracts and those of
many international government customers may generally be terminated for a
variety of factors when it is in the best interests of the government and
contractors may be suspended or debarred for misconduct at the discretion of the
government. There can be no assurance that these factors or others unique to
government contracts or the loss or suspension of necessary regulatory licenses
will not have a material adverse effect on our future results of operations and
financial condition.
46
OUR FIELDS OF BUSINESS ARE HIGHLY COMPETITIVE.
The competition to develop defense and security products and electric
vehicle battery systems, and to obtain funding for the development of these
products, is, and is expected to remain, intense.
Our defense and security products compete with other manufacturers of
specialized training systems, including Firearms Training Systems, Inc., a
producer of interactive simulation systems designed to provide training in the
handling and use of small and supporting arms. In addition, we compete with
manufacturers and developers of armor for cars and vans, including O'Gara-Hess &
Eisenhardt, a division of Armor Holdings, Inc.
Our battery technology competes with other battery technologies, as
well as other Zinc-Air technologies. The competition in this area of our
business consists of development stage companies, major international companies
and consortia of such companies, including battery manufacturers, automobile
manufacturers, energy production and transportation companies, consumer goods
companies and defense contractors. Many of our competitors have financial,
technical, marketing, sales, manufacturing, distribution and other resources
significantly greater than ours.
Various battery technologies are being considered for use in electric
vehicles and defense and safety products by other manufacturers and developers,
including the following: lead-acid, nickel-cadmium, nickel-iron, nickel-zinc,
nickel-metal hydride, sodium-sulfur, sodium-nickel chloride, zinc-bromine,
lithium-ion, lithium-polymer, lithium-iron sulfide, primary lithium,
rechargeable alkaline and Zinc-Air.
If we are unable to compete successfully in each of our operating
areas, especially in the defense and security products area of our business, our
business and results of operations could be materially adversely affected.
FAILURE TO RECEIVE REQUIRED REGULATORY PERMITS OR TO COMPLY WITH VARIOUS
REGULATIONS TO WHICH WE ARE SUBJECT COULD ADVERSELY AFFECT OUR BUSINESS.
Regulations in Europe, Israel, the United States and other countries
impose various controls and requirements relating to various components of our
business. While we believe that our current and contemplated operations conform
to those regulations, we cannot assure you that we will not be found to be in
non-compliance. We have applied for, and received, the necessary permits under
the Israel Dangerous Substances Law, 5753-1993, required for the use of
potassium hydroxide and zinc metal. However, there can be no assurance that
changes in these regulations or the adoption of new regulations will not impose
costly compliance requirements on us, subject us to future liabilities, or
restrict our ability to operate our business.
OUR BUSINESS IS DEPENDENT ON PATENTS AND OTHER PROPRIETARY RIGHTS THAT MAY
BE DIFFICULT TO PROTECT AND COULD AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
Our ability to compete effectively will depend on our ability to
maintain the proprietary nature of our technology and manufacturing processes
through a combination of patent and trade secret protection, non-disclosure
agreements and licensing arrangements. We hold patents, or patent applications,
covering elements of our technology in the United States and in Europe. In
47
addition, we have patent applications pending in the United States and in
foreign countries, including the European Community, Israel and Japan. We intend
to continue to file patent applications covering important features of our
technology. We cannot assure you, however, that patents will issue from any of
these pending applications or, if patents issue, that the claims allowed will be
sufficiently broad to protect our technology. In addition, we cannot assure you
that any of our patents will not be challenged or invalidated, that any of our
issued patents will afford protection against a competitor or that third parties
will not make infringement claims against us.
Litigation, or participation in administrative proceedings, may be
necessary to protect our proprietary rights. This type of litigation can be
costly and time consuming and could divert company resources and management
attention to defend our rights, and this could harm us even if we were to be
successful in the litigation. The invalidation of patents owned by or licensed
to us could have a material adverse effect on our business. In addition, patent
applications filed in foreign countries are subject to laws, rules and
procedures that differ from those of the United States. Therefore, there can be
no assurance that foreign patent applications related to patents issued in the
United States will be granted. Furthermore, even if these patent applications
are granted, some foreign countries provide significantly less patent protection
than the United States. In the absence of patent protection, and despite our
reliance upon our proprietary confidential information, our competitors may be
able to use innovations similar to those used by us to design and manufacture
products directly competitive with our products. In addition, no assurance can
be given that others will not obtain patents that we will need to license or
design around. To the extent any of our products are covered by third-party
patents, we could require a license under such patents to develop and market our
patents.
Despite our efforts to safeguard and maintain our proprietary rights,
we may not be successful in doing so. In addition, competition is intense, and
there can be no assurance that our competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our
technology. Moreover, in the event of patent litigation, we cannot assure you
that a court would determine that we were the first creator of inventions
covered by our issued patents or pending patent applications or that we were the
first to file patent applications for those inventions. If existing or future
third-party patents containing broad claims were upheld by the courts or if we
were found to infringe third party patents, we may not be able to obtain the
required licenses from the holders of such patents on acceptable terms, if at
all. Failure to obtain these licenses could cause delays in the introduction of
our products or necessitate costly attempts to design around such patents, or
could foreclose the development, manufacture or sale of our products. We could
also incur substantial costs in defending ourselves in patent infringement suits
brought by others and in prosecuting patent infringement suits against
infringers.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, through non-disclosure and confidentiality agreements with our
customers, employees, consultants, strategic partners and potential strategic
partners. We cannot assure you that these agreements will not be breached, that
we would have adequate remedies for any breach or that our trade secrets will
not otherwise become known or be independently developed by competitors.
WE HAVE UNDERGONE RECENT MANAGEMENT CHANGES.
In October 2002, Yehuda Harats, who had been our CEO since the
inception of our company, resigned from his positions with us in order to pursue
other interests. Our Board of Directors selected our long-time Chairman of the
48
Board, Robert S. Ehrlich, to be our new President and CEO. Our success will
depend to some extent on our ability to quickly and smoothly execute the change
in leadership as a result of this change of CEO.
WE ARE DEPENDENT ON KEY PERSONNEL AND OUR BUSINESS WOULD SUFFER IF WE FAIL
TO RETAIN THEM.
We are highly dependent on certain members of our management and
engineering staff, and the loss of the services of one or more of these persons
could adversely affect us. We are especially dependent on the services of our
Chairman, President and Chief Executive Officer, Robert S. Ehrlich. The loss of
Mr. Ehrlich could have a material adverse effect on us. We are party to an
employment agreement with Mr. Ehrlich, which agreement expires at the end of
2003. We do not have key-man life insurance on Mr. Ehrlich.
THERE ARE RISKS INVOLVED WITH THE INTERNATIONAL NATURE OF OUR BUSINESS.
A significant portion of our sales are made to customers located
outside the U.S., primarily in Europe and Asia. In 2000, 2001 and 2002, without
taking account of revenues derived from discontinued operations, 45%, 49%, and
56%, respectively, of our revenues, including the revenues of IES and MDT on a
pro forma basis, were derived from sales to customers located outside the U.S.
We expect that our international customers will continue to account for a
substantial portion of our revenues in the near future. Sales to international
customers may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations, foreign taxes,
longer payment cycles and changes in import/export regulations and tariff rates.
In addition, various forms of protectionist trade legislation have been and in
the future may be proposed in the U.S. and certain other countries. Any
resulting changes in current tariff structures or other trade and monetary
policies could adversely affect our sales to international customers.
WE MAY BE SUBJECT TO INCREASED UNITED STATES TAXATION.
We believe that Electric Fuel and our wholly-owned Israeli subsidiary
EFL will be treated as personal holding companies for purposes of the personal
holding company (PHC) rules of the Internal Revenue Code of 1986. Under the PHC
rules, a PHC is subject to a special 39.6% tax on its "undistributed PHC
income", in addition to regular income tax. We believe that Electric Fuel and
EFL have not had any material undistributed PHC income. However, no assurance
can be given that Electric Fuel and EFL will not have undistributed PHC income
in the future.
Approximately 22.9% of the stock of EFL was deemed to be beneficially
owned (directly or indirectly by application of certain attribution rules) as of
December 31, 2002 by four United States citizens: Leon S. Gross, Austin W. Marxe
and David M. Greenhouse, and Robert S. Ehrlich (see "Item 12. Security Ownership
of Certain Beneficial Owners and Management") (information with respect to the
stockholdings of Messrs. Marxe and Greenhouse is based on a Schedule 13G filed
with the Securities and Exchange Commission on February 11, 2002, as amended on
February 13, 2003). If more than 50% of either (i) the voting power of our
stock, or (ii) the total value of our stock, is ever acquired or deemed to be
acquired by five or fewer individuals (including, if applicable, those
individuals who currently own an aggregate of 22.9% of our shares) who are
United States citizens or residents, EFL would satisfy the foreign personal
holding company (FPHC) stock ownership test under the Internal Revenue Code, and
49
we could be subject to additional U.S. taxes (including PHC tax) on any
"undistributed FPHC income" of EFL. We believe that EFL has not had any material
undistributed FPHC income. However, no assurance can be given that EFL will not
become a FPHC and have undistributed FPHC income in the future.
INVESTORS SHOULD NOT PURCHASE OUR COMMON STOCK WITH THE EXPECTATION OF
RECEIVING CASH DIVIDENDS.
We currently intend to retain any future earnings for funding growth
and, as a result, do not expect to pay any cash dividends in the foreseeable
future.
MARKET-RELATED RISKS
THE PRICE OF OUR COMMON STOCK IS VOLATILE.
The market price of our common stock has been volatile in the past and
may change rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price: o Announcements by us, our
competitors or our customers;
o The introduction of new or enhanced products and services by
us or our competitors;
o Changes in the perceived ability to commercialize our
technology compared to that of our competitors;
o Rumors relating to our competitors or us;
o Actual or anticipated fluctuations in our operating results;
and
o General market or economic conditions.
IF OUR SHARES WERE TO BE DELISTED, OUR STOCK PRICE MIGHT DECLINE FURTHER
AND WE MIGHT BE UNABLE TO RAISE ADDITIONAL CAPITAL.
One of the continued listing standards for our stock on the Nasdaq
National Market is the maintenance of a $1.00 bid price. Our stock price has
generally been trading below $1.00 since October 18, 2002. On December 6, 2002,
Nasdaq notified us of our failure to meet the continued listing standards, and
informed us that unless our stock closes for ten consecutive trading days with a
bid price in excess of $1.00 prior to March 6, 2003 (subsequently extended, as a
result of an amendment to Nasdaq's listing regulations, to June 4, 2003), Nasdaq
would notify us of its intent to delist our stock from the Nasdaq National
Market. Should Nasdaq notify us of its intent to delist our stock, we would have
the opportunity to appeal this notification, although there can be no assurances
that this appeal would be resolved favorably.
There can be no assurance that our common stock will remain listed on
the Nasdaq National Market. If our common stock were to be delisted from the
Nasdaq National Market, we might apply to be listed on the Nasdaq SmallCap
market; however, there can be no assurance that we would be approved for listing
on the Nasdaq SmallCap market, which has the same $1.00 minimum bid and other
similar requirements as the Nasdaq National Market. If we were to move to the
Nasdaq SmallCap market, current Nasdaq regulations would give us the opportunity
to obtain an additional 180-day grace period and an additional 90-day grace
period after that if we meet certain net income, shareholders' equity or market
capitalization criteria. While our stock would continue to trade on the
over-the-counter bulletin board following any delisting from the Nasdaq, any
50
such delisting of our common stock could have an adverse effect on the market
price of, and the efficiency of the trading market for, our common stock. Also,
if in the future we were to determine that we need to seek additional equity
capital, it could have an adverse effect on our ability to raise capital in the
public equity markets.
In addition, if we fail to maintain Nasdaq listing for our securities,
and no other exclusion from the definition of a "penny stock" under the Exchange
Act is available, then any broker engaging in a transaction in our securities
would be required to provide any customer with a risk disclosure document,
disclosure of market quotations, if any, disclosure of the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market values of our securities held in the customer's
account. The bid and offer quotation and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer's confirmation. If brokers become subject to the "penny stock" rules
when engaging in transactions in our securities, they would become less willing
to engage in transactions, thereby making it more difficult for our stockholders
to dispose of their shares.
WE ARE SUBJECT TO SIGNIFICANT INFLUENCE BY SOME STOCKHOLDERS THAT MAY HAVE
THE EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL.
As of February 28, 2003, our directors, executive officers and
principal stockholders and their affiliates (including Leon S. Gross (11.6%),
Austin W. Marxe and David M. Greenhouse (8.0%), IES Electronics Industries Ltd.
(6.2%) and Robert S. Ehrlich (4.3%)) collectively are deemed beneficially to own
approximately 29.0% of the outstanding shares of our common stock (see "Item 12.
Security Ownership of Certain Beneficial Owners and Management"), including
options and warrants exercisable within 60 days of February 28, 2003
(information with respect to the stockholdings of Messrs. Marxe and Greenhouse
is based on a Schedule 13G filed with the Securities and Exchange Commission on
February 11, 2002, as amended on February 13, 2003, and information with respect
to the stockholdings of IES Electronics Industries Ltd. is based on a Schedule
13D filed with the Securities and Exchange Commission on August 12, 2002, as
amended on October 28, 2002 and January 9, 2003). As a result, these
stockholders are able to exercise significant influence over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, preventing or discouraging a change in control of
Electric Fuel.
Pursuant to a voting rights agreement dated September 30, 1996, as
amended, between Leon S. Gross, Robert S. Ehrlich, Yehuda Harats and us,
Lawrence M. Miller, Mr. Gross's advisor, is entitled to be nominated to serve on
our board of directors so long as Mr. Gross, his heirs or assigns retain
beneficial ownership of at least 1,375,000 shares of common stock. In addition,
under the voting rights agreement, Mr. Gross and Messrs. Ehrlich and Harats
agreed to vote and take all necessary action so that Messrs. Ehrlich, Harats and
Miller shall serve as members of the board of directors until the earlier of
December 28, 2004 or our fifth annual meeting of stockholders after December 28,
1999. Mr. Harats resigned as a director in 2002; however, we believe that Mr.
Harats must continue to comply with the terms of this agreement.
51
A SUBSTANTIAL NUMBER OF OUR SHARES ARE AVAILABLE FOR SALE IN THE PUBLIC
MARKET AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE.
Sales of a substantial number of shares of common stock into the public
market, or the perception that those sales could occur, could adversely affect
our stock price or could impair our ability to obtain capital through an
offering of equity securities. As of February 28, 2003, we had 35,146,261 shares
of common stock issued and outstanding. Of these shares, 27,610,658 are freely
transferable without restriction under the Securities Act of 1933 and 7,526,478
may be sold subject to the volume restrictions, manner-of-sale provisions and
other conditions of Rule 144 under the Securities Act of 1933.
In connection with a stock purchase agreement dated September 30, 1996
between Leon S. Gross and us, we also entered into a registration rights
agreement with Mr. Gross dated September 30, 1996, setting forth registration
rights with respect to the shares of common stock issued to Mr. Gross in
connection with the offering. These rights include the right to make two demands
for the registration of the shares of our common stock owned by Mr. Gross. In
addition, Mr. Gross was granted unlimited rights to "piggyback" on registration
statements that we file for the sale of our common stock. Mr. Gross presently
owns 3,547,870 shares, of which 1,538,462 have never been registered.
In addition, pursuant to the terms of their employment agreements with
us, both Yehuda Harats and Robert S. Ehrlich have a right to demand registration
of their shares. Of the shares owned by Mr. Harats, 435,404 shares have never
been registered, and of the 688,166 shares owned by Mr. Ehrlich, 453,933 shares
have never been registered.
EXERCISE OF OUR WARRANTS, OPTIONS AND CONVERTIBLE DEBT COULD ADVERSELY
AFFECT OUR STOCK PRICE AND WILL BE DILUTIVE.
As of February 28, 2003, there were outstanding warrants to purchase a
total of 9,421,238 shares of our common stock at a weighted average exercise
price of $1.87 per share, options to purchase a total of 5,715,955 shares of our
common stock at a weighted average exercise price of $2.16 per share, of which
5,131,032 were vested and exercisable within 60 days of such date, at a weighted
average exercise price of $2.15 per share, and outstanding debentures and
promissory notes convertible into a total of 6,032,721 shares of our common
stock at a weighted average conversion price of $0.65 per share. Holders of our
options, warrants and convertible debt will probably exercise or convert them
only at a time when the price of our common stock is higher than their
respective exercise or conversion prices. Accordingly, we may be required to
issue shares of our common stock at a price substantially lower than the market
price of our stock. This could adversely affect our stock price. In addition, if
and when these shares are issued, the percentage of our common stock that
existing stockholders own will be diluted.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN
PROVISIONS THAT COULD DISCOURAGE A TAKEOVER.
Provisions of our amended and restated certificate of incorporation may
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. These
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock. These provisions:
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o divide our board of directors into three classes serving
staggered three-year terms;
o only permit removal of directors by stockholders "for cause,"
and require the affirmative vote of at least 85% of the
outstanding common stock to so remove; and
o allow us to issue preferred stock without any vote or further
action by the stockholders.
The classification system of electing directors and the removal
provision may tend to discourage a third-party from making a tender offer or
otherwise attempting to obtain control of us and may maintain the incumbency of
our board of directors, as the classification of the board of directors
increases the difficulty of replacing a majority of the directors. These
provisions may have the effect of deferring hostile takeovers, delaying changes
in our control or management, or may make it more difficult for stockholders to
take certain corporate actions. The amendment of any of these provisions would
require approval by holders of at least 85% of the outstanding common stock.
ISRAEL-RELATED RISKS
A SIGNIFICANT PORTION OF OUR OPERATIONS TAKES PLACE IN ISRAEL, AND WE COULD
BE ADVERSELY AFFECTED BY THE ECONOMIC, POLITICAL AND MILITARY CONDITIONS IN THAT
REGION.
The offices and facilities of two of our principal subsidiaries, EFL
and MDT, are located in Israel (in Beit Shemesh and Lod, respectively, both of
which are within Israel's pre-1967 borders). We conduct research and development
activities through EFL, and most of our senior management is located at EFL's
facilities. Although we expect that most of our sales will be made to customers
outside Israel, we are nonetheless directly affected by economic, political and
military conditions in that country. Accordingly, any major hostilities
involving Israel or the interruption or curtailment of trade between Israel and
its present trading partners could have a material adverse effect on our
operations. Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel.
Historically, Arab states have boycotted any direct trade with Israel
and to varying degrees have imposed a secondary boycott on any company carrying
on trade with or doing business in Israel. Although in October 1994, the states
comprising the Gulf Cooperation Council (Saudi Arabia, the United Arab Emirates,
Kuwait, Dubai, Bahrain and Oman) announced that they would no longer adhere to
the secondary boycott against Israel, and Israel has entered into certain
agreements with Egypt, Jordan, the Palestine Liberation Organization and the
Palestinian Authority, Israel has not entered into any peace arrangement with
Syria or Lebanon. Moreover, since September 2000, there has been a significant
deterioration in Israel's relationship with the Palestinian Authority, and a
significant increase in terror and violence. Efforts to resolve the problem have
failed to result in an agreeable solution. Continued hostilities between the
Palestinian community and Israel and any failure to settle the conflict may have
a material adverse effect on our business and us. Moreover, the current
political and security situation in the region has already had an adverse effect
on the economy of Israel, which in turn may have an adverse effect on us.
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Many of our employees are currently obligated to perform annual reserve
duty in the Israel Defense Forces and are subject to being called for active
military duty at any time. No assessment can be made of the full impact of such
requirements on us in the future, particularly if emergency circumstances occur,
and no prediction can be made as to the effect on us of any expansion of these
obligations. However, further deterioration of hostilities with the Palestinian
community into a full-scale conflict might require more widespread military
reserve service by some of our employees, which could have a material adverse
effect on our business.
SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES ON US AND OUR
OFFICERS MAY BE DIFFICULT TO OBTAIN.
We are organized under the laws of the State of Delaware and will be
subject to service of process in the United States. However, approximately 49%
of our assets are located outside the United States. In addition, two of our
directors and all of our executive officers are residents of Israel and all or a
substantial portion of the assets of such directors and executive officers are
located outside the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, in original actions instituted in Israel. However, subject to certain
time limitations and other conditions, Israeli courts may enforce final
judgments of United States courts for liquidated amounts in civil matters,
including judgments based upon the civil liability provisions of the Securities
Act and the Exchange Act. As a result, it may not be possible for investors to
enforce or effect service of process upon these directors and executive officers
or to judgments of U.S. courts predicated upon the civil liability provisions of
U.S. laws against our assets, as well as the assets of these directors and
executive officers. In addition, awards of punitive damages in actions brought
in the U.S. or elsewhere may be unenforceable in Israel.
ANY FAILURE TO OBTAIN THE TAX BENEFITS FROM THE STATE OF ISRAEL THAT WE
EXPECT TO RECEIVE COULD NEGATIVELY IMPACT OUR PLANS AND PROSPECTS.
We benefit from various Israeli government programs, grants and tax
benefits, particularly as a result of the "approved enterprise" status of a
substantial portion of our existing facilities and the receipt of grants from
the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade.
To be eligible for some of these programs, grants and tax benefits, we must
continue to meet certain conditions, including producing in Israel and making
specified investments in fixed assets. If we fail to meet such conditions in the
future, we could be required to refund grants already received, adjusted for
inflation and interest. From time to time, the government of Israel has
discussed reducing or eliminating the benefits available under approved
enterprise programs. We cannot assure you that these programs and tax benefits
will be continued in the future at their current levels or at all. The
Government of Israel has announced that programs receiving approved enterprise
status in 1996 and thereafter will be entitled to a lower level of government
grants than was previously available. The termination or reduction of certain
programs and tax benefits (particularly benefits available to us as a result of
the approved enterprise status of a substantial portion of our existing
facilities and approved programs and as a recipient of grants from the office of
the Chief Scientist) could have a material adverse effect on our business,
results of operations and financial condition. In addition, EFL has granted a
floating lien (that is, a lien that applies not only to assets owned at the time
but also to after-acquired assets) over all of EFL's assets as a security to the
54
State of Israel to secure its obligations under the approved enterprise
programs.
OUR GRANTS FROM THE ISRAELI GOVERNMENT IMPOSE CERTAIN RESTRICTIONS ON US.
Since 1992, our Israeli subsidiary, EFL, has received funding from the
Office of the Chief Scientist of the Israel Ministry of Industry and Trade
relating to the development of our Zinc-Air battery products, such as our
electric vehicle and our batteries and chargers for consumer products. Between
1998 and 2000, we have also received funds from the Israeli-U.S. Bi-National
Industrial Research and Development (BIRD) Foundation. Through the end of 2002,
we have received an aggregate of $9.9 million from grants from the Chief
Scientist and $772,000 from grants from BIRD, and we may receive future grants,
the amounts of which would be determined at the time of application. The funding
from the Chief Scientist prohibits the transfer or license of know-how and the
manufacture of resulting products outside of Israel without the permission of
the Chief Scientist. Although we believe that the Chief Scientist does not
unreasonably withhold this permission if the request is based upon commercially
justified circumstances and any royalty obligations to the Chief Scientist are
sufficiently assured, the matter is solely within the discretion of the Chief
Scientist, and we cannot be sure that such consent, if requested, would be
granted upon terms satisfactory to us or granted at all. Without such consent,
we would be unable to manufacture any products developed by this research
outside of Israel, even if it would be less expensive for us to do so.
Additionally, current regulations require that, in the case of the approved
transfer of manufacturing rights out of Israel, the maximum amount to be repaid
through royalty payments would be increased to between 120% and 300% of the
amount granted, depending on the extent of the manufacturing to be conducted
outside of Israel, and that an increased royalty rate of up to 5% would be
applied. These restrictions could adversely affect our potential revenues and
net income from the sale of such products.
EXCHANGE RATE FLUCTUATIONS BETWEEN THE U.S. DOLLAR AND THE ISRAELI NIS MAY
NEGATIVELY AFFECT OUR EARNINGS.
Although a substantial majority of our revenues and a substantial portion of our
expenses are denominated in U.S. dollars, a significant portion of our costs,
including personnel and facilities-related expenses, is incurred in New Israeli
Shekels (NIS). Inflation in Israel will have the effect of increasing the dollar
cost of our operations in Israel, unless it is offset on a timely basis by a
devaluation of the NIS relative to the dollar.
SOME OF OUR AGREEMENTS ARE GOVERNED BY ISRAELI LAW.
Israeli law governs both our agreement with IES and our agreement with
MDT, as well as certain other agreements, such as our lease agreements on our
subsidiaries' premises in Israel. While Israeli law differs in certain respects
from American law, we do not believe that these differences materially adversely
affect our rights or remedies under these agreements.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.................................................. F-2
Consolidated Balance Sheets..................................................... F-3
Consolidated Statements of Operations........................................... F-5
Statements of Changes in Shareholders' Equity................................... F-6
Consolidated Statements of Cash Flows........................................... F-9
Notes to Consolidated Financial Statements...................................... F-12
SUPPLEMENTARY FINANCIAL DATA
Quarterly Financial Data (unaudited) for the two years ended December 31, 2002.. F-47
ITEM 11. EXECUTIVE COMPENSATION
CASH AND OTHER COMPENSATION
GENERAL
Our Chief Executive Officer and the other highest paid executive
officer (of which there was one) who were compensated at a rate of more than
$100,000 in salary and bonuses during the year ended December 31, 2002
(collectively, the "Named Executive Officers") are Israeli residents, and thus
certain elements of the compensation that we pay them is structured as is
customary in Israel.
During 2002, 2001 and 2000, compensation to our Named Executive
Officers took several forms:
-- cash salary;
-- bonus, some of which was paid in cash in the year in which it
was earned and some of which was accrued in the year in which
it was earned but paid in cash in a subsequent year;
-- cash reimbursement for taxes paid by the Named Executive
Officer and reimbursed by us in accordance with Israeli tax
regulations;
-- accruals (but not cash payments) in respect of contractual
termination compensation in excess of the Israeli statutory
minimum;
56
-- accruals (but not cash payments) in respect of pension plans,
which consist of a savings plan, life insurance and statutory
severance pay benefits, and a continuing education fund (as is
customary in Israel);
-- stock options, including options issued in exchange for a
waiver of salary under the "options-for-salary" program
discussed in more detail below; and
-- other benefits, primarily consisting of annual statutory
holiday pay.
The specific amounts of each form of compensation paid to each Named
Executive Officer appear in the summary compensation table and the notes thereto
appearing under "Summary Compensation Table," below.
TERMINATION COMPENSATION OF AND SETTLEMENT WITH YEHUDA HARATS
In October 2002, we announced that Yehuda Harats, our president and CEO
and a member of our Board, had decided to resign from his positions with us and
our subsidiaries in order to pursue other interests. In December 2002, we came
to an agreement with Mr. Harats whereby we agreed to pay him $551,499 through
the end of 2005 in satisfaction of all our contractual and legal severance and
other obligations to him. See "Item 13. Certain Relationships and Related
Transactions - Termination Compensation of and Settlement with Yehuda Harats,"
below.
Prior to Mr. Harats's resignation, we had accrued a sum of $1,212,939
in respect of these obligations on our books, consisting of contractual
severance, statutory severance, contractually guaranteed bonus, and various
benefits, including unused vacation, unused sick days, and continuing benefits
over the three years after termination. Since we settled with Mr. Harats for a
sum of $551,499 rather than the $1,212,939 that we had accrued on our books,
this settlement effectively resulted in a gain for us in the fourth quarter of
2002 of $661,440, which is the difference between the amount that we had accrued
on our books in respect of these obligations and the amount that we ultimately
agreed to pay.
We continue to carry on our books a total of $1,076,740 in loans from
us to Mr. Harats on which he remains liable; however, we do not carry these
loans at full value because recourse under the loans is only to certain shares
that we hold, the fair market value of which is now less than the principal
amount of the loans. See "Item 13. Certain Relationships and Related
Transactions - Officer Loans," below.
SUMMARY COMPENSATION TABLE
The following table, which should be read in conjunction with the
explanations provided above, shows the compensation that we paid (or accrued),
in connection with services rendered for 2002, 2001 and 2000, to our Named
Executive Officers.
57
SUMMARY COMPENSATION TABLE(1)
LONG TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
-------------------------------- ------------- -----------------------------------------
CHANGES IN
ACCRUALS FOR
SICK DAYS, PAYMENT TO
SECURITIES VACATION DAYS, PENSION AND
TAX UNDERLYING AND TERMINATION EDUCATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS REIMBURSEMENT OPTIONS COMPENSATION FUNDS OTHERS
-------------------------------- ------ ----- ------------- ------- ------------ ----- ------
Yehuda Harats* 2002 $256,462 $ 32,380(2)$ 14,687 112,500(3) $ (661,440)(4) $ 22,735 $ 654
President, Chief
Executive Officer and
director
2001 $248,681 $ 99,750 $ 19,145 616,000(5) $ 375,375(6) $ 62,617 $ 142,919(7)
2000 $245,560 $ 82,380 $ 8,083 400,000 $ 128,138(8) $ 41,807 $ 859
Robert S. Ehrlich 2002 $ 202,962 $ 99,750(2)$ 15,232 262,500(9) $ 170,691(10) $ 22,256 $ 654
Chairman of the Board,
President, Chief
Executive Officer and
director**
2001 $ 211,644 $ 84,000 $ 17,201 521,000(11) $ 229,800(12) $ 52,841 $ 87,113(13)
2000 $ 245,574 $ 82,380 $ 7,146 400,000 $ 177,658(14) $ 41,806 $ 859
-------------------------------------
* Mr. Harats's employment with us terminated on October 23, 2002.
** Until October 23, 2002, Mr. Ehrlich served as our Chairman of the Board and
Chief Financial Officer.
(1) We paid the amounts reported for each named executive officer in U.S.
dollars and/or New Israeli Shekels(NIS). We have translated amounts paid in
NIS into U.S. dollars at the exchange rate of NIS into U.S. dollars at the
time of payment or accrual.
(2) We paid each of Messrs. Ehrlich and Harats $32,380 during 2002 on account
of the 2002 bonuses to which they were entitled according to their
contracts. Additionally, we accrued $67,370 for Mr. Ehrlich in satisfaction
of the remainder of the bonus to which he was entitled according to his
contract. The remainder of the additional bonus to which Mr. Harats was
entitled according to the terms of his contract was included in the sums
that we are obligated to pay Mr. Harats under the terms of our severance
agreement with him, which sums are detailed in "Termination Compensation of
and Settlement with Yehuda Harats," above. During 2002, we also paid
$99,750 to Mr. Harats in full payment of his 2001 bonus and $84,000 to Mr.
Ehrlich in full payment of his 2001 bonus.
(3) Of this amount, 112,500 options were in exchange for a total of $45,000 in
salary waived by Mr. Harats pursuant to the options-for-salary program
instituted by us beginning in May 2001. See "Options-for-Salary Program,"
below.
(4) This represents the savings to us at year end of the amounts that we had
accrued on our financials in connection with these obligations over the
amount that we ultimately agree to pay in the context of our settlement
with Mr. Harats. See "Termination Compensation of and Settlement with
Yehuda Harats," above.
(5) Of this amount, 100,000 options were in exchange for a total of $40,000 in
salary waived by Mr. Harats during 2001 pursuant to the options-for-salary
program instituted by us beginning in May 2001. See "Options-for-Salary
Program," below.
(6) Of this amount, $263,994 represents our accrual for severance pay that
would be payable to Mr. Harats upon a "change of control" or upon the
occurrence of certain other events; $67,074 represents our accrual for sick
leave and vacation redeemable by Mr. Harats; and $44,307 represents the
increase of the accrual for severance pay that would be payable to Mr.
Harats under the laws of the State of Israel if we were to terminate his
employment.
(7) Of this amount, $142,240 represents benefit imputed to Mr. Harats upon the
purchase by us of certain of his shares for treasury, and $679 represents
other benefits that we paid to Mr. Harats in 2001. See "Item 13. Certain
Relationships and Related Transactions - Officer Loans," below.
(8) Of this amount, $2,911 represents our accrual for severance pay that would
be payable to Mr. Harats upon a "change of control" or upon the occurrence
of certain other events; $70,500 represents our accrual for sick leave and
vacation redeemable by Mr. Harats; and $54,727 represents the increase of
the accrual for severance pay that would be payable to Mr. Harats under the
laws of the State of Israel if we were to terminate his employment.
58
(9) Of this amount, 262,500 options were in exchange for a total of $105,000 in
salary waived by Mr. Ehrlich during 2002 pursuant to the options-for-salary
program instituted by us beginning in May 2001. See "Options-for-Salary
Program," below.
(10)Of this amount, $109,935 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" or upon the
occurrence of certain other events; $17,571 represents the increase of the
accrual for sick leave and vacation redeemable by Mr. Ehrlich; and $43,725
represents the increase of our accrual for severance pay that would be
payable to Mr. Ehrlich under the laws of the State of Israel if we were to
terminate his employment.
(11)Of this amount, 80,000 options were in exchange for a total of $32,000 in
salary waived by Mr. Ehrlich during 2001 pursuant to the options-for-salary
program instituted by us beginning in May 2001. See "Options-for-Salary
Program," below.
(12)Of this amount, $172,360 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" or upon the
occurrence of certain other events; $50,548 represents the increase of the
accrual for sick leave and vacation redeemable by Mr. Ehrlich; and $6,892
represents the increase of our accrual for severance pay that would be
payable to Mr. Ehrlich under the laws of the State of Israel if we were to
terminate his employment.
(13)Of this amount, $86,434 represents benefit imputed to Mr. Ehrlich upon the
purchase by us of certain of his shares for treasury, and $679 represents
other benefits that we paid to Mr. Ehrlich in 2001. See "Item 13. Certain
Relationships and Related Transactions - Officer Loans," below.
(14)Of this amount, $59,363 represents our accrual for severance pay that would
be payable to Mr. Ehrlich upon a "change of control" or upon the occurrence
of certain other events; $58,353 represents the increase of the accrual for
sick leave and vacation redeemable by Mr. Ehrlich; and $59,942 represents
the increase of our accrual for severance pay that would be payable to Mr.
Ehrlich under the laws of the State of Israel if we were to terminate his
employment.
EXECUTIVE LOANS
During 1999 and 2000, we extended certain loans to our Named Executive
Officers. These loans are summarized in the following table, and are further
described under "Item 13. Certain Relationships and Related Transactions -
Officer Loans," below.
ORIGINAL AMOUNT
PRINCIPAL OUTSTANDING
NAME OF BORROWER DATE OF LOAN AMOUNT OF LOAN AS OF 12/31/02 TERMS OF LOAN
---------------- ------------ -------------- -------------- -------------
Yehuda Harats........... 12/28/99 $ 167,975 $ 201,570 Ten-year non-recourse loan to purchase our
stock, secured by the shares of stock
purchased.
Yehuda Harats........... 02/09/00 $ 789,991 $ 875,170 Twenty-five-year non-recourse loan to
purchase our stock, secured by the
shares of stock purchased.
Robert S. Ehrlich....... 12/28/99 $ 167,975 $ 201,570 Ten-year non-recourse loan to purchase our
stock, secured by the shares of stock
purchased.
Robert S. Ehrlich....... 02/09/00 $ 789,991 $ 623,579 Twenty-five-year non-recourse loan to
purchase our stock, secured by the
shares of stock purchased.
OPTIONS-FOR-SALARY PROGRAM
Between May 2001 and December 2002, we conducted an options-for-salary
program designed to conserve our cash and to offer incentives to employees to
remain with us despite lower cash compensation. Under this program, most of our
salaried employees permanently waived a portion of their salaries in exchange
59
for options to purchase shares of our common stock, at a ratio of options to
purchase 2.5 shares of our stock for each dollar in salary waived. Social
benefits (such as pension) and contractual bonuses for such employees continued
to be calculated based on their salaries prior to reduction. The
options-for-salary program was ended on December 31, 2002.
During 2001, options were accrued quarterly in advance, but since no
employees requested the grant of their options during the third quarter, all
grants were deferred to the beginning of the fourth quarter, during the month of
October. During 2002, options were accrued quarterly in advance for the Named
Executive Officers, and annually in advance for other employees.
During 2001, in exchange for waiver of $79,739 in salary, our employees
other than the Named Executive Officers received a total of 199,347 options,
which options were granted based on the lowest closing price of our common stock
during the month of October 2001 ($1.30). Named Executive Officers, in exchange
for waiver of $72,000 in salary, received a total of 180,000 options during
2001, which options were granted based on the lowest closing prices of our
common stock during the month of October 2001 ($1.30), as set forth in the table
below.
During 2002, in exchange for waiver of $339,200 in salary, our
employees other than the Named Executive Officers received a total of 848,000
options, which options were granted based on the lowest closing price of our
common stock during the month of December 2002 ($0.61). Named Executive
Officers, in exchange for waiver of $150,000 in salary, received a total of
375,000 options during 2002, which options were granted based on the lowest
closing prices of our common stock during each quarter of 2002, as set forth in
the table below.
Options for employees who were ceased to be employed by us during the
course of the year were priced at the lowest closing price of our common stock
through the date of termination.
Following is a table setting forth the number of options that we issued
to each of our Named Executive Officers under the options-for-salary program
during each fiscal quarter in which the program was in effect, and the range of
trading prices for our common stock during each such fiscal quarter:
60
LOW TRADING CLOSING
FISCAL AMOUNT OF NUMBER OF NUMBER OF AVERAGE PRICE HIGH TRADING PRICE
QUARTER SALARY OPTIONS OPTIONS EXERCISE DURING PRICE DURING ON LAST DAY
NAMED EXECUTIVE OFFICER ENDED WAIVED ACCRUED ISSUED PRICE QUARTER QUARTER OF QUARTER
------------------------ ---------------------------- -------------------------- --------------------------------------------------
Yehuda Harats.......... 06/30/01 $ 10,000 25,000 0 - $2.18 $4.20 $2.54
09/30/01 $ 15,000 37,500 0 - $1.10 $3.05 $1.48
12/31/01 $ 15,000 37,500 100,000 $1.30 $1.30 $2.48 $1.66
03/31/02 $ 15,000 37,500 37,500 $1.42 $1.35 $2.41 $1.55
06/30/02 $ 15,000 37,500 37,500 $0.73 $0.73 $1.79 $0.91
09/30/02 $ 15,000 37,500 37,500 $0.85 $0.79 $1.70 $1.05
Robert S. Ehrlich...... 06/30/01 $ 8,000 20,000 0 - $2.18 $4.20 $2.54
09/30/01 $ 12,000 30,000 0 - $1.10 $3.05 $1.48
12/31/01 $ 12,000 30,000 80,000 $1.30 $1.30 $2.48 $1.66
03/31/02 $ 26,250 65,625 65,625 $1.42 $1.35 $2.41 $1.55
06/30/02 $ 26,250 65,625 65,625 $0.73 $0.73 $1.79 $0.91
09/30/02 $ 26,250 65,625 65,625 $0.85 $0.79 $1.70 $1.05
12/31/02 $ 26,250 65,625 65,625 $0.61 $0.61 $1.17 $0.64
STOCK OPTIONS
The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 2002, all of which
were granted under the options-for-salary program described above.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS OF ASSUMED ANNUAL RATES
SECURITIES GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ------------------------------
NAME GRANTED YEAR ($/SH) DATE 5% ($) 10% ($)
--------------- ----------- ------------- ----------- ---------- ------------- -------------
Yehuda Harats.......... 37,500(2) 2.3% $1.42 4/1/12 $ 33,489 $84,887
37,500(2) 2.3% $0.73 7/1/12 $ 17,216 $43,629
37,500(2) 2.3% $0.85 10/1/12 $ 20,046 $50,801
Robert S. Ehrlich...... 65,625(2) 4.0% $1.42 4/1/12 $ 58,605 $148,552
65,625(2) 4.0% $0.73 7/1/12 $ 30,128 $76,350
65,625(2) 4.0% $0.85 10/1/12 $ 35,081 $88,901
65,625(2) 4.0% $0.61 1/1/13 $ 25,175 $63,799
---------------------------------
(1)The potential realizable value illustrates value that might be realized upon
exercise of the options immediately prior to the expiration of their terms,
assuming the specified compounded rates of appreciation of the market price
per share from the date of grant to the end of the option term. Actual
gains, if any, on stock option exercise are dependent upon a number of
factors, including the future performance of the common stock and the timing
of option exercises, as well as the executive officer's continued employment
through the vesting period. The gains shown are net of the option exercise
price, but do not include deductions for taxes and other expenses payable
upon the exercise of the option or for sale of underlying shares of common
stock. The 5% and 10% rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future increases in the price of our stock. There can be no
assurance that the amounts reflected in this table will be achieved, and
unless the market price of our common stock appreciates over the option
term, no value will be realized from the option grants made to the executive
officers.
(2)Granted in exchange for a waiver of salary under our options-for-salary
program.
61
The table below sets forth information for the Named Executive Officers
with respect to aggregated option exercises during fiscal 2002 and fiscal 2002
year-end option values.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL-YEAR-END(1)
CQUIRED ON VALUE ------------------------------ ----------------------------------
NAME A EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------------- ------------------ -------------- --------------- ---------------- -----------------
Yehuda Harats........ 50,000 $ 10,500.00 1,076,501 116,666 $ 0 $ 0
Robert S. Ehrlich.... 50,000 $ 10,500.00 868,401 91,666 $ 1,969 $ 0
-----------------------------------
(1) Options that are "in-the-money" are options for which the fair market value
of the underlying securities on December 31, 2002 exceeds the exercise or
base price of the option.
EMPLOYMENT CONTRACTS
In October 2002, we announced that Yehuda Harats, the president and CEO
and a member of our Board, had decided to resign from his positions with
Electric Fuel and its subsidiaries in order to pursue other interests. The Board
of Directors selected Robert S. Ehrlich, Chairman of the Board, to be the new
President and CEO. In connection with the resignation of Mr. Harats, we are
required to pay him certain amounts due to him by law and under the terms of his
employment agreement. In December 2002, we came to an agreement with Mr. Harats
whereby we agreed to pay him $729,500 through the end of 2005 in satisfaction of
all our contractual and legal severance and other obligations to him, which sum
was approximately one-half of the amount we had accrued on our financial
statements in connection with such obligations. Our debt to Mr. Harats is
secured by certain of our assets in Israel. See "Item 11. Executive Compensation
- Cash and Other Compensation - Termination Compensation of and Settlement with
Yehuda Harats," above.
Mr. Ehrlich is party to an employment agreement with us effective as of
January 1, 2000. The term of this employment agreement expires on December 31,
2002, but is extended automatically for additional terms of two years each
unless either Mr. Ehrlich or we terminate the agreement sooner. Additionally, we
have the right, on at least 90 days' notice to Mr. Ehrlich, unilaterally to
extend the initial term of his agreement for a period of one year (i.e., until
December 31, 2003). We have exercised this right, and accordingly the automatic
two-year extensions will begin from December 31, 2003 instead of December 31,
2002.
The employment agreement provides for a base salary of $20,000 per
month, as adjusted annually for Israeli inflation and devaluation of the Israeli
shekel against the U.S. dollar, if any. Additionally, the board may at its
discretion raise Mr. Ehrlich's base salary. In January 2002, the board raised
Mr. Ehrlich's base salary to $23,750 per month effective January 1, 2002; Mr.
Ehrlich has elected to waive this increase in his salary and to receive options
instead, under our salary for options program.
The employment agreement provides that if the results we actually
attain in a given year are at least 80% of the amount we budgeted at the
beginning of the year, we will pay a bonus, on a sliding scale, in an amount
equal to a minimum of 35% of Mr. Ehrlich's annual base salary then in effect, up
to a maximum of 90% of his annual base salary then in effect if the results we
62
actually attain for the year in question are 120% or more of the amount we
budgeted at the beginning of the year.
The employment agreement also contains various benefits customary in
Israel for senior executives (please see "Item 1. Business - Employees," above),
tax and financial planning expenses and an automobile, and contain
confidentiality and non-competition covenants. Pursuant to the employment
agreements, we granted Mr. Ehrlich demand and "piggyback" registration rights
covering shares of our common stock held by him.
We can terminate Mr. Ehrlich's employment agreement in the event of
death or disability or for "Cause" (defined as conviction of certain crimes,
willful failure to carry out directives of our board of directors or gross
negligence or willful misconduct). Mr. Ehrlich has the right to terminate his
employment upon a change in our control or for "Good Reason," which is defined
to include adverse changes in employment status or compensation, our insolvency,
material breaches and certain other events. Additionally, Mr. Ehrlich may retire
(after age 68) or terminate his agreement for any reason upon 150 days' notice.
Upon termination of employment, the employment agreement provides for payment of
all accrued and unpaid compensation, and (unless we have terminated the
agreement for Cause or Mr. Ehrlich has terminated the agreement without Good
Reason and without giving us 150 days' notice of termination) bonuses due for
the year in which employment is terminated and severance pay in the amount of
three years' base salary (or, in the case of termination by Mr. Ehrlich on 150
days' notice, a lump sum payment of $520,000). Furthermore, certain benefits
will continue and all outstanding options will be fully vested.
Other employees have entered into individual employment agreements with
us. These agreements govern the basic terms of the individual's employment, such
as salary, vacation, overtime pay, severance arrangements and pension plans.
Subject to Israeli law, which restricts a company's right to relocate an
employee to a work site farther than sixty kilometers from his or her regular
work site, we have retained the right to transfer certain employees to other
locations and/or positions provided that such transfers do not result in a
decrease in salary or benefits. All of these agreements also contain provisions
governing the confidentiality of information and ownership of intellectual
property learned or created during the course of the employee's tenure with us.
Under the terms of these provisions, employees must keep confidential all
information regarding our operations (other than information which is already
publicly available) received or learned by the employee during the course of
employment. This provision remains in force for five years after the employee
has left our service. Further, intellectual property created during the course
of the employment relationship belongs to us.
A number of the individual employment agreements, but not all, contain
non-competition provisions which restrict the employee's rights to compete
against us or work for an enterprise which competes against us. Such provisions
remain in force for a period of two years after the employee has left our
service.
Under the laws of Israel, an employee of ours who has been dismissed
from service, died in service, retired from service upon attaining retirement
age, or left due to poor health, maternity or certain other reasons, is entitled
to severance pay at the rate of one month's salary for each year of service. We
currently fund this obligation by making monthly payments to approved private
63
provident funds and by its accrual for severance pay in the consolidated
financial statements. See Note 2.r of the Notes to the Consolidated Financial
Statements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our board of directors for the 2002
fiscal year consisted of Dr. Jay M. Eastman, Jack E. Rosenfeld and Lawrence M.
Miller. None of the members have served as our officers or employees.
Robert S. Ehrlich, our Chairman and Chief Financial Officer, serves as
Chairman and a director of PSCX, for which Dr. Eastman serves as director and
member of the Executive and Strategic Planning Committees and Mr. Rosenfeld
serves as director and member of the Executive Compensation Committees.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the security
ownership, as of March 31, 2003, of those persons owning of record or known by
us to own beneficially more than 5% of our common stock and of each of our Named
Executive Officers and directors, and the shares of common stock held by all of
our directors and executive officers as a group.
PERCENTAGE OF TOTAL
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES BENEFICIALLY OWNED(2)(3) SHARES OUTSTANDING(3)
--------------------------------------- ------------------------------- ---------------------
Leon S. Gross........................................... 4,036,036(4)(11) 11.6%
Austin W. Marxe and David M. Greenhouse(5).............. 2,843,597(5) 8.0%
IES Electronics, Inc. .................................. 2,188,971(6) 6.2%
Robert S. Ehrlich....................................... 1,556,567(7)(12) 4.3%
Steven Esses............................................ 0 *
Avihai Shen............................................. 92,381(8) *
Dr. Jay M. Eastman...................................... 65,001(9) *
Jack E. Rosenfeld....................................... 67,001(10) *
Lawrence M. Miller...................................... 525,080(11) 1.5%
All of our directors and executive officers as a group
(7 persons**)........................................... 6,490,736(13) 17.9%
------------------------------------
*Less than one percent.
** Including Mr. Gross, who resigned as a director on March 17, 2003. Also
includes 601,835 shares held of record by or on behalf of Yehuda Harats as
of March 31, 2003 that are subject to the Voting Rights Agreement described
in footnote 12, below.
(1)Unless otherwise noted, the address of each beneficial owner is in care of
Arotech Corporation, 632 Broadway, New York, New York 10012.
(2)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.
64
(3)For purposes of determining beneficial ownership of our common stock,
owners of options exercisable within sixty days are considered to be the
beneficial owners of the shares of common stock for which such securities
are exercisable. The percentage ownership of the outstanding common stock
reported herein is based on the assumption (expressly required by the
applicable rules of the Securities and Exchange Commission) that only the
person whose ownership is being reported has converted his options into
shares of common stock.
(4)Includes 453,165 shares held by Leon S. Gross and Lawrence M. Miller as
co-trustees of the Rose Gross Charitable Foundation, and 35,001 shares
issuable upon exercise of options exercisable within 60 days.
(5)Consists of 2,055,718 shares and 787,879 warrants. Of these amounts,
916,027 shares and 315,151 warrants are owned by Special Situations Fund
III, L.P., a Delaware limited partnership ("Special Fund III"), 437,273
shares and 218,182 warrants are owned by Special Situations Private Equity
Fund, L.P., a Delaware limited partnership ("SSPE"), 331,336 shares and
109,091 warrants are owned by Special Situations Cayman Fund, L.P., a
Cayman Islands limited partnership ("Special Cayman Fund"), and 371,082
shares and 145,455 warrants are owned by Special Situations Technology
Fund, L.P., a Delaware limited partnership ("SST"). Austin W. Marxe and
David M. Greenhouse are the principal owners of MGP Advisers Limited
Partnership, a Delaware limited partnership ("MGP"), MG Advisers, L.L.C., a
New York limited liability company ("MG"), AWM Investment Company, Inc., a
Delaware corporation ("AWM"), and SST Advisers, L.L.C., a Delaware limited
liability company ("SSTA"). MGP is the general partner of Special Fund III.
AWM is the general partner of MGP and the general partner of and investment
adviser to the Cayman Fund. MG is the general partner of and investment
adviser to SSPE. SSTA is the general partner of and investment adviser to
SST. Messrs. Marxe and Greenhouse share voting and investment power over
the shares held by all of Special Fund III, SSPE, Special Cayman Fund and
SST and are principally responsible for the selection, acquisition and
disposition of the portfolio securities by the investment advisers on
behalf of their funds. The address of Messrs. Marxe and Greenhouse is 153
East 53rd Street, New York, New York 10022. All information in this
footnote and in the text to which this footnote relates is based on a
Schedule 13G filed with the Securities and Exchange Commission on February
11, 2002, as amended on February 13, 2003.
(6)Includes 563,971 shares issuable upon conversion of a convertible note. IES
Technologies Inc. is a wholly-owned Delaware subsidiary of IES
Technologies, Ltd., which is a wholly-owned Israeli subsidiary of IES
Electronics Industries, Ltd., which is a publicly-traded Israeli
corporation. The address of all of the above entities is 32 Ben-Gurion
Street, Ramat-Gan 52573, Israel. All information in this footnote and in
the text to which this footnote relates is based on a Schedule 13D filed
with the Securities and Exchange Commission on August 12, 2002, as amended
on October 28, 2002 and January 9, 2003.
(7)Includes 52,568 shares held by an affiliated corporation, 242,313 shares
held in Mr. Ehrlich's pension plan, 22,000 shares held by children sharing
the same household, and 868,401 shares issuable upon exercise of options
exercisable within 60 days.
(8)Includes 81,881 shares issuable upon exercise of options exercisable within
60 days.
(9)Consists of 65,001 shares issuable upon exercise of options exercisable
within 60 days.
(10)Includes 65,001 shares issuable upon exercise of options exercisable within
60 days.
(11)Includes 453,165 shares held by Leon S. Gross and Lawrence M. Miller as
co-trustees of the Rose Gross Charitable Foundation, and 60,001 shares
issuable upon exercise of options exercisable within 60 days.
(12)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 our
common stock held by that person in favor of the election of Messrs.
Ehrlich, Harats and Miller until the earlier of December 28, 2004 or our
fifth annual meeting of stockholders after December 28, 1999. Mr. Harats
resigned as a director in 2002; however, we believe that Mr. Harats must
continue to comply with the terms of this agreement. As of March 31, 2002,
5,291,036 shares of our common stock were subject to this Voting Rights
Agreement (including 601,835 shares held of record by or on behalf of
Yehuda Harats as of March 31, 2003).
(13)Includes 1,163,286 shares issuable upon exercise of options exercisable
within 60 days.
65
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information, as of February 28,
2003, with respect to our 1991, 1993, 1995 and 1998 stock option plans, as well
as any other stock options and warrants previously issued by us (including
individual compensation arrangements) as compensation for goods and services:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES UNDER EQUITY
TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS (A))
PLAN CATEGORY (A) (B) (C)
---------------------------- ------------------------ ----------------------- -----------------------
Equity compensation 3,554,105 $2.66 2,578,463
plans approved by
security holders.....
Equity compensation
plans not approved
by security
holders(1)(2)........ 2,726,506 $2.16 2,070,460
-------------------------------------
(1)In October 1998, the Board of Directors adopted the 1998 Non-Executive
Stock Option and Restricted Stock Purchase Plan, which under Delaware law
did not require shareholder approval since directors and executive
officers were ineligible to participate in it. Participation in the 1998
Plan is limited to those of our employees and consultants who are neither
executive officers nor otherwise subject to Section 16 of the Securities
Exchange Act of 1934, as amended, or Section 162(m) of the Internal
Revenue Code of 1986, as amended. The 1998 Plan is administered by the
Compensation Committee of our Board of Directors, which determined the
conditions of grant. Options issued under the 1998 Plan generally expire
no more than ten years from the date of grant, and incentive options
issued under the 1998 Plan may be granted only at exercise prices equal
to the fair market value of our common stock on the date the option is
granted. A total of 4,750,000 shares of our common stock were originally
subject to the 1998 Plan, of which 1,936,720 options are outstanding,
742,820 options have been exercised, and 2,070,460 remain available for
grant..
(2)For a description of the material features of grants of options and
warrants other than options granted under our employee stock option
plans, please see Notes 12.g.2, 12.g.3, 12.g.4, and 12.h.2 of the Notes
to the Consolidated Financial Statements
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
VOTING AND REGISTRATION RIGHTS AGREEMENTS
Pursuant to a securities purchase agreement dated December 28, 1999
between a group of purchasers, including Mr. Gross, and us, Mr. Gross agreed
that for a period of five years, neither he nor his "affiliates" (as such term
is defined in the Securities Act) directly or indirectly or in conjunction with
or through any "associate" (as such term is defined in Rule 12b-2 of the
Exchange Act), will (i) solicit proxies with respect to any capital stock or
other voting securities of ours under any circumstances, or become a
"participant" in any "election contest" relating to the election of our
66
directors (as such terms are used in Rule 14a-11 of Regulation 14A of the
Exchange Act); (ii) make an offer for the acquisition of substantially all of
our assets or capital stock 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 of our capital stock or other voting
securities 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 a stock purchase agreement dated September 30, 1996
between Leon S. Gross and us, we also entered into a registration rights
agreement with Mr. Gross dated September 30, 1996, setting forth registration
rights with respect to the shares of common stock issued to Mr. Gross in
connection with the offering. These rights include the right to make two demands
for a shelf registration statement on Form S-3 for the sale of the common stock
that 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. In
addition, under the registration rights agreement, Mr. Gross is subject to
customary underwriting lock-up requirements with respect to public offerings of
our securities.
Pursuant to a voting rights agreement dated September 30, 1996 and as
amended December 10, 1997 and December 28, 1999, between Mr. Gross, Robert S.
Ehrlich, Yehuda Harats and us, Lawrence M. Miller, Mr. Gross's advisor, is
entitled to be nominated to serve on our board of directors so long as Mr.
Gross, his heirs or assigns retain at least 1,375,000 shares of common stock. In
addition, under the voting rights agreement, Mr. Gross and Messrs. Ehrlich and
Harats agreed to vote and take all necessary action so that Messrs. Ehrlich,
Harats and Miller shall serve as members of the board of directors until the
earlier of December 28, 2004 or our fifth annual meeting of stockholders after
December 28, 1999. Mr. Harats resigned as a director in 2002; however, we
believe that Mr. Harats must continue to comply with the terms of this
agreement. As of March 31, 2002, 5,291,036 shares of our common stock were
subject to this Voting Rights Agreement (including 601,835 shares held of record
by or on behalf of Yehuda Harats as of March 31, 2003).
OFFICER LOANS
On December 3, 1999, Messrs. Ehrlich and Harats each purchased 125,000
shares of our common stock out of our treasury at the closing price of the
common stock on December 2, 1999. Payment was rendered by Messrs. Ehrlich and
Harats in the form of non-recourse promissory notes due in 2009 in the amount of
$167,975 each, secured by the shares of common stock purchased and other shares
of common stock previously held by them. As of December 31, 2002, the aggregate
amount outstanding pursuant to these promissory notes for each of Messrs.
Ehrlich and Harats was $201,570 and $201,570, respectively.
On February 9, 2000, Messrs. Ehrlich and Harats each exercised 131,665
stock options. Messrs. Ehrlich and Harats paid the exercise price of the stock
options and certain taxes that we paid on their behalf by giving us non-recourse
promissory notes due in 2025 in the amount of $789,991 each, secured by the
shares of our common stock acquired through the exercise of the options and, in
the case of Mr. Ehrlich, certain compensation due to him upon termination. As of
December 31, 2002, the aggregate amount outstanding pursuant to these promissory
notes for each of Messrs. Ehrlich and Harats was $623,579 and $875,170,
respectively.
67
TERMINATION COMPENSATION OF AND SETTLEMENT WITH YEHUDA HARATS
In October 2002, we announced that Yehuda Harats, our president and CEO
and a member of our Board, had decided to resign from his positions with us and
our subsidiaries in order to pursue other interests. In December 2002, we came
to an agreement with Mr. Harats whereby we agreed to pay him $551,499 through
the end of 2005 in satisfaction of all our contractual and legal severance and
other obligations to him. See "Item 13. Certain Relationships and Related
Transactions - Termination Compensation of and Settlement with Yehuda Harats,"
below.
Prior to Mr. Harats's resignation, we had accrued a sum of $1,212,939
in respect of these obligations on our books, consisting of contractual
severance, statutory severance, contractually guaranteed bonus, and various
benefits, including unused vacation, unused sick days, and continuing benefits
over the three years after termination. Since we settled with Mr. Harats for a
sum of $551,499 rather than the $1,212,939 that we had accrued on our books,
this settlement effectively resulted in a gain for us in the fourth quarter of
2002 of $661,440, which is the difference between the amount that we had accrued
on our books in respect of these obligations and the amount that we ultimately
agreed to pay.
We continue to carry on our books a total of $1,076,740 in loans from
us to Mr. Harats on which he remains liable (described above); however, we do
not carry these loans at full value because recourse under the loans is only to
certain shares that we hold, the fair market value of which is now less than the
principal amount of the loans.
68
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements - See Index to Financial Statements on page 56
above.
(2) Financial Statements Schedules - All schedules are omitted because
of the absence of conditions under which they are required or
because the required information is presented in the financial
statements or related notes thereto.
(3) Exhibits - The following Exhibits are either filed herewith or have
previously been filed with the Securities and Exchange Commission
and are referred to and incorporated herein by reference to such
filings:
Exhibit No. Description
----------- -----------
(8)3.1.........Amended and Restated Certificate of Incorporation
(15)3.1.1.......Amendment to our Amended and Restated Certificate of
Incorporation
(2)3.2.........Amended and Restated By-Laws
(1)4...........Specimen Certificate for shares of common stock, $.01 par
value
(1)10.1........Option Agreement dated October 29, 1992 between Electric Fuel
B.V. ("EFBV") and Electric Storage Advanced Technologies, Sr
("ESAT")
(1)10.2........Sublicense Agreement dated May 20, 1993 between EFBV and ESAT
(1)10.3........Letter Agreement dated May 20, 1993 between EFBV and ESAT
(1)10.4........Notice of Edison's assumption of ESAT's obligations under the
Sublicense Agreement with EFBV
(1)10.5........Letter of Intent between us and Deutsche Post AG dated
November 18, 1993
+ (6)10.6........Amended and Restated 1993 Stock Option and Restricted Stock
Purchase Plan dated November 11, 1996
+ (1)10.7.1......Form of Management Employment Agreements
+ *(1)10.7.2......General Employee Agreements
* (1)10.8........Office of Chief Scientist documents
(2)10.8.1......Letter from the Office of Chief Scientist to us dated January
4, 1995
* (1)10.9........Lease Agreement dated December 2, 1992 between us and Har
Hotzvim Properties Ltd.
* (1)10.10.......Letter of Approval by the Investment Center of the Ministry of
Trade
* (2)10.11.......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.
+ (3)10.12.......Amended and Restated 1995 Non-Employee Director Stock Option
Plan
(3)10.13.......Letters of Approval of Lines of Credit from First
International Bank of Israel Ltd. dated March 14, 1996 and
March 18, 1996
(4)10.14.......Stock Purchase Agreement between us and Leon S. Gross
("Gross") dated September 30, 1996
69
Exhibit No. Description
----------- -----------
(4)10.15.......Registration Rights Agreement between us and Gross dated
September 30, 1996
(4)10.16.......Voting Rights Agreement between us, Gross, Robert S. Ehrlich
and Yehuda Harats dated September 30, 1996
(5)10.17.......Agreement between us and Walter Trux dated December 18, 1996
(5)10.18.......Cooperation Agreement between The Israel Electric Corporation
and EFL dated as of October 31, 1996 + (5)10.19.......Amended
and Restated Employment Agreement dated as of October 1, 1996
between us, EFL and Yehuda Harats
+ (15)10.19.1.....Second Amended and Restated Employment Agreement, effective as
of January 1, 2000 between us, EFL and Yehuda Harats
+ (15)10.19.2.....Letter dated January 12, 2001 amending the Second Amended and
Restated Employment Agreement, effective as of January 1, 2000
between us, EFL and Yehuda Harats
+ (5)10.20.......Amended and Restated Employment Agreement dated as of October
1, 1996 between us, EFL and Robert S. Ehrlich
+ (15)10.20.1.....Second Amended and Restated Employment Agreement, effective as
of January 1, 2000 between us, EFL and Robert S. Ehrlich
+ (15)10.20.2.....Letter dated January 12, 2001 amending the Second Amended and
Restated Employment Agreement, effective as of January 1, 2000
between us, EFL and Robert S. Ehrlich
(5)10.21.......Agreement dated February 20, 1997 between STN ATLAS Elektronik
GmbH and EFL
+ (6)10.22.......Employment Agreement dated May 13, 1997 between us, EFL, and
Joshua Degani
+ (15)10.22.1.....Amendment dated January 12, 2001 to Employment Agreement dated
May 13, 1997 between us, EFL, and Joshua Degani
+ (6)10.23.......Termination Agreement dated March 12, 1998 between us, EFL and
Menachem Korall
(6)10.24.......Consulting Agreement dated March 12, 1998 between us, EFL, and
Shampi Ltd.
(6)10.25.......Amendment No. 1 to the Voting Rights Agreement between us,
Gross, Robert S. Ehrlich, and Yehuda Harats dated December 10,
1997
(6)10.26.......Amendment No. 2 to the Registration Rights Agreement between
us, Gross, Robert S. Ehrlich and Yehuda Harats dated December
10, 1997
(7)10.27.......1998 Non-Executive Stock Option and Restricted Stock Purchase
Plan
(8)10.28.......Distribution Agreement dated December 31, 1998 between us and
TESSCO Technologies Inc.
(9)10.29.......Amendment to our Restated Certificate of Incorporation
(10)10.30.......Securities Purchase Agreement dated December 28, 1999, and
exhibits thereto, by and among us and the Purchasers listed on
Exhibit A thereto
(10)10.31.......Form of Warrant dated December 28, 1999
70
Exhibit No. Description
----------- -----------
(10)10.32.......Amendment No. 1 to Voting Rights Agreement dated December 28,
1999, by and between us, Leon S. Gross, Robert S. Ehrlich,
Yehuda Harats and the Purchasers listed on Exhibit A to the
Securities Purchase Agreement dated December 28, 1999
(11)10.33.......Common Stock Purchase Agreement dated January 5, 2000, and
exhibits thereto, by and among us and the Purchasers listed on
Exhibit A thereto
(12)10.34.1.....Promissory Note dated January 3, 1998, from Yehuda Harats to
us
(12)10.34.2.....Amendment dated April 1, 1998, to Promissory Note dated
January 3, 1998 between Yehuda Harats and us
(12)10.35.1.....Promissory Note dated January 3, 1993, from Robert S. Ehrlich
to us
(12)10.35.2.....Amendment dated April 1, 1998, to Promissory Note dated
January 3, 1993 between Robert S. Ehrlich and us
(12)10.36.......Promissory Note dated December 3, 1999, from Yehuda Harats to
us
(12)10.37.......Promissory Note dated December 3, 1999, from Robert S. Ehrlich
to us
(12)10.38.......Promissory Note dated February 9, 2000, from Yehuda Harats to
us
(12)10.39.......Promissory Note dated February 9, 2000, from Robert S. Ehrlich
to us
(15)10.40.......Share and Assets Purchase Agreement dated March 15, 2000 among
us, Tadiran Limited, Tadiran Batteries Limited and Tadiran
Electric Industries
(15)10.41.......Stock Purchase Agreement dated March 15, 2000 between us and
Koor Industries Ltd.
(15)10.42.......Registration Rights Agreement dated March 15, 2000 between us,
Tadiran Limited and Koor Industries Ltd.
(15)10.43.......Voting Rights Agreement dated March 15, 2000 among made as of
March 15, 2000 by and among us, Robert S. Ehrlich and Yehuda
Harats, Koor Industries Ltd. and Tadiran Limited
(13)10.44.......Termination and Release Agreement dated May 17, 2000 among us,
Tadiran Limited, Tadiran Batteries Limited, Tadiran Electric
Industries Corporation, Koor Industries Ltd., Robert S.
Ehrlich and Yehuda Harats
(13)10.45.......Common Stock Purchase Agreement dated May 17, 2000 between us
and Koor Industries Ltd.
(13)10.46.......Registration Rights Agreement dated May 17, 2000 between us
and Koor Industries Ltd.
(14)10.47.......Securities Purchase Agreement dated as of November 17, 2000
between us and Capital Ventures International
(14)10.48.......Series A Stock Purchase Warrant issued to Capital Ventures
International dated November 17, 2000
(14)10.49.......Series B Stock Purchase Warrant issued to Capital Ventures
International dated November 17, 2000
(14)10.50.......Stock Purchase Warrant issued to Josephthal & Co., Inc. dated
November 17, 2000
(15)10.51.......Promissory Note dated January 12, 2001, from Yehuda Harats to
us
(15)10.52.......Promissory Note dated January 12, 2001, from Robert S. Ehrlich
to us
71
Exhibit No. Description
----------- -----------
(15)10.53.......Promissory Note dated January 12, 2001, from Joshua Degani to
us
(15)10.54.......Agreement of Lease dated December 5, 2000 between us as tenant
and Renaissance 632 Broadway LLC as landlord
(16)10.55.......Series C Stock Purchase Warrant issued to Capital Ventures
International dated May 3, 2001
(17)10.56.......Form of Common Stock Purchase Warrant dated May 8, 2001
(18)10.57.......Securities Purchase Agreement dated as of October 25, 2001
between us and Orsay Services Inc.
(19)10.58.......Securities Purchase Agreement dated as of December 4, 2001
between us and Vertical International Limited
(20)10.59.......Stock Purchase Agreement dated as of January 11, 2002 between
us and Grenville Finance Ltd.
(21)10.60.......Stock Purchase Agreement dated as of January 18, 2002 between
us and Special Situations Private Equity Fund, L.P., Special
Situations Fund III, L.P., Special Situations Technology Fund,
L.P. and Special Situations Cayman Fund, L.P.
(22)10.61.......Asset Purchase Agreement dated August 2, 2002 between us and
I.E.S. Electronics Industries U.S.A., Inc. and its direct and
certain of its indirect shareholders
(22)10.62.......Share Purchase Agreement dated August 2, 2002 between us and
H.R.T. Ltd. And A.G.A. Protection Methods and Commerce Ltd.
[English summary of Hebrew original]
(23)10.63.......Securities Purchase Agreement dated December 31, 2002 between
us and the Investors
(23)10.64.......Form of 9% Secured Convertible Debenture due June 30, 2005
(23)10.65.......Form of Warrant dated December 31, 2002
(23)10.66.......Form of Security Agreement dated December 31, 2002
(23)10.67.......Form of Intellectual Property Security Agreement dated
December 31, 2002
+(24)10.68.......Settlement Agreement and Release between us and Yehuda Harats
dated December 31, 2002
(24)10.69.1.....Commercial lease agreement between Commerce Square Associates
L.L.C. and I.E.S. Electronics Industries U.S.A., Inc. dated
September 24, 1997
(24)10.69.2.....Amendment to Commercial lease agreement between Commerce
Square Associates L.L.C. and I.E.S. Electronics Industries
U.S.A., Inc. dated as of May 1, 2000
(24)10.70.......Agreement of Lease dated December 6, 2000 between Janet Nissim
et al. and M.D.T. Protection (2000) Ltd. [English summary of
Hebrew original]
(24)10.71.......Agreement of Lease dated August 22, 2001 between Aviod
Building and Earthworks Company Ltd. et al. and M.D.T.
Protective Industries Ltd. [English summary of Hebrew
original]
(24)21..........List of Subsidiaries of the Registrant
**23..........Consent of Kost Forer & Gabbay
**99.1........Written Statement of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
72
**99.2........Written Statement of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-------------------------------------
*English translation or summary from original Hebrew
**Filed herewith
+Includes management contracts and compensation plans and arrangements
(1)Incorporated by reference to our Registration Statement on Form S-1
(Registration No. 33-73256), which became effective on February 23, 1994
(2)Incorporated by reference to our Registration Statement on Form S-1
(Registration No. 33-97944), which became effective on February 5, 1996
(3)Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1995
(4)Incorporated by reference to our Current Report on Form 8-K dated October 4,
1996
(5)Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1996, as amended
(6)Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1997, as amended
(7)Incorporated by reference to our Registration Statement on Form S-8
(Registration No. 333- 74197), which became effective on March 10, 1998
(8)Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1998
(9)Incorporated by reference to our Registration Statement on Form S-3
(Registration No. 333-95361), which became effective on February 10,
1999
(10)Incorporated by reference to our Current Report on Form 8-K filed January 7,
2000
(11)Incorporated by reference to our Current Report on Form 8-K filed January
24, 2000
(12)Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1999
(13)Incorporated by reference to our Current Report on Form 8-K filed May 23,
2000
(14)Incorporated by reference to our Current Report on Form 8-K filed November
17, 2000
(15)Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2000
(16)Incorporated by reference to our Current Report on Form 8-K filed May 7,
2001 (EDGAR Film No. 1623996)
(17)Incorporated by reference to our Current Report on Form 8-K filed May 7,
2001 (EDGAR Film No. 1623989)
(18)Incorporated by reference to our Current Report on Form 8-K filed November
21, 2001
(19)Incorporated by reference to our Current Report on Form 8-K filed December
4, 2001
(20)Incorporated by reference to our Current Report on Form 8-K filed January
15, 2002
(21)Incorporated by reference to our Current Report on Form 8-K filed January
23, 2002
(22)Incorporated by reference to our Current Report on Form 8-K filed August 12,
2002
(23)Incorporated by reference to our Current Report on Form 8-K filed January 6,
2003
(24)Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 2002
(b) Reports on Form 8-K.
(1) We filed an amendment to a Current Report on Form 8-K on October 11,
2002, reporting "Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits," in connection with our acquisition of the
assets of I.E.S. Electronics Industries U.S.A., Inc.
(2) We filed a Current Report on Form 8-K on October 22, 2002, reporting
"Item 5. Other Events and Regulation FD Disclosure," in connection
with our decision to discontinue retail sales of our consumer
battery products and the resignation of Yehuda Harats as our
President and Chief Executive Officer.
(3) We filed a Current Report on Form 8-K on January 6, 2003, reporting
"Item 5. Other Events and Regulation FD Disclosure," in connection
with our sale of $3,500,000 principal amount 9% Secured Convertible
Debentures due June 30, 2005 and certain other related transactions,
and in connection with our reaching a settlement with our former
CEO.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, on May 8,
2003.
ELECTRIC FUEL CORPORATION
By: /S/ ROBERT S. EHRLICH
--------------------------------------
Name: Robert S. Ehrlich
Title: Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amended report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chairman, President, Chief Executive Officer and
/S/ ROBERT S. EHRLICH Director
--------------------------------------
Robert S. Ehrlich (Principal Executive Officer) May 8 , 2003
-----
/S/ AVIHAI SHEN Vice President - Finance May 8 , 2003
------------------------------------- ------
Avihai Shen (Principal Financial Officer)
/S/ DANNY WALDNER Controller May 8 , 2003
------------------------------------- ------
Danny Waldner (Principal Accounting Officer)
/S/ STEVEN ESSES Executive Vice President, Chief Operating Officer May 8 , 2003
------------------------------------- ------
Steven Esses and Director
/S/ JAY M. EASTMAN Director May 8 , 2003
------------------------------------- ------
Dr. Jay M. Eastman
/S/ LAWRENCE M. MILLER Director May 8 , 2003
--------------------------------------- ------
Lawrence M. Miller
/S/ JACK E. ROSENFELD Director May 8 , 2003
-------------------------------------- ------
Jack E. Rosenfeld
Director May , 2003
--------------------------------------- ------
Bert W. Wasserman
74
CERTIFICATIONS
-------------------------------------------------------------------------------
I, Robert S. Ehrlich, certify that:
1. I have reviewed this amended annual report on Form 10-K/A of Electric
Fuel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 8, 2003
/S/ ROBERT S. EHRLICH
-----------------------------------------------
Robert S. Ehrlich, Chairman, President and CEO
(Principal Executive Officer)
CERTIFICATIONS
-------------------------------------------------------------------------------
I, Avihai Shen, certify that:
1. I have reviewed this amended annual report on Form 10-K/A of Electric
Fuel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 8, 2003
/S/ AVIHAI SHEN
---------------------------------------------
Avihai Shen, Vice President - Finance and CFO
(Principal Financial Officer)
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
PAGE
-------
Report of Independent Auditors 2
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations 5
Statements of Changes in Shareholders' Equity 6 - 8
Consolidated Statements of Cash Flows 9 - 11
Notes to Consolidated Financial Statements 12 - 46
ERNST & YOUNG LOGO
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
ELECTRIC FUEL CORPORATION
We have audited the accompanying consolidated balance sheets of Electric
Fuel Corporation (doing business as Arotech Corporation) (the "Company") and its
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Kost, Forer & Gabbay
Tel Aviv, Israel KOST FORER & GABBAY
February 27, 2003 A Member of Ernst & Young Global
F-2
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
DECEMBER 31,
-----------------------------------------
2002 2001
------------------ ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,457,526 $ 12,671,754
Restricted collateral deposit and other restricted cash 633,339 -
Trade receivables (net of allowance for doubtful accounts in the
amounts of $40,636 and $39,153 as of December 31, 2002 and 2001,
respectively) 3,776,195 765,402
Other accounts receivable and prepaid expenses 1,032,311 448,651
Inventories 1,711,479 523,366
Assets of discontinued operations 349,774 8,422,082
------------------ ------------------
Total current assets 8,960,624 22,831,255
------------------ ------------------
LOANS TO SHAREHOLDERS - 501,288
SEVERANCE PAY FUND 1,025,071 854,891
PROPERTY AND EQUIPMENT, NET 2,555,249 2,220,806
GOODWILL 4,954,981 -
OTHER Intangible Assets, NET 2,567,457 -
------------------ ------------------
$ 20,063,382 $ 26,408,240
================== ==================
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
DECEMBER 31,
------------------------------------------
2002 2001
------------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term bank loans $ 108,659 $ -
Trade payables 2,900,117 791,576
Other accounts payable and accrued expenses 2,009,109 1,222,653
Current portion of promissory note due to purchase of a subsidiary 1,200,000 -
Liabilities of discontinued operations 1,053,798 1,860,107
------------------- ------------------
Total current liabilities 7,271,683 3,874,336
LONG TERM LIABILITIES
Accrued severance pay 2,994,233 3,125,848
Promissory note due to acquisition of a subsidiary 516,793 -
------------------- ------------------
Total long-term liabilities 3,511,026 3,125,848
COMMITMENTS AND CONTINGENT LIABILITIES
MINORITY INTEREST 243,172 -
SHAREHOLDERS' EQUITY:
Share capital -
Common stock - $0.01 par value each;
Authorized: 100,000,000 shares as of December 31, 2002 and 2001;
Issued: 35,701,594 shares and 29,059,469 shares as of December 31,
2002 and 2001, respectively; Outstanding - 35,146,261 shares and
28,504,136 shares as of December 31, 2002 and 2001, respectively 357,017 290,596
Preferred shares - $0.01 par value each;
Authorized: 1,000,000 shares as of December 31, 2002 and 2001; No
shares issued and outstanding as of December 31, 2002 and 2001 - -
Additional paid-in capital 114,082,584 105,686,909
Accumulated deficit (100,673,619) (82,169,261)
Deferred stock compensation (12,000) (18,000)
Treasury stock, at cost (Common stock - 555,333 shares as of December 31,
2002 and 2001) (3,537,106) (3,537,106)
Notes receivable from shareholders (1,177,589) (845,081)
Accumulated other comprehensive loss (1,786) -
------------------- ------------------
Total shareholders' equity 9,037,501 19,408,057
------------------- ------------------
$ 20,063,382 $ 26,408,241
=================== ==================
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Revenues:
Products $ 5,944,370 $ 1,670,634 $ 1,179,500
Services 462,369 422,998 310,442
------------------- ------------------- -------------------
Total revenues 6,406,739 2,093,632 1,489,942
Cost of revenues 4,421,748 1,992,636 1,486,300
------------------- ------------------- -------------------
Gross profit 1,984,991 100,996 3,642
------------------- ------------------- -------------------
Operating expenses:
Research and development, net 685,919 455,845 498,895
Selling and marketing expenses 1,309,669 105,977 126,893
General and administrative expenses 4,023,103 3,827,544 3,306,716
Amortization of intangible assets 623,543 - -
In-process research and development write-off 26,000 - -
------------------- ------------------- -------------------
Total operating costs and expenses 6,668,234 4,389,366 3,932,504
------------------- ------------------- -------------------
Operating loss (4,683,243) (4,288,370) (3,928,862)
Financial income, net 100,451 262,581 544,181
------------------- ------------------- -------------------
Loss before minority interest in earnings of a
subsidiary (4,582,792) (4,025,789) (3,384,681)
Minority interest in earnings of a subsidiary (355,360) - -
------------------- ------------------- -------------------
Net loss from continuing operations (4,938,152) (4,025,789) (3,384,681)
Net loss from discontinued operations (including loss
on disposal of $4,446,684) (13,566,206) (13,260,999) (8,596,277)
------------------- ------------------- -------------------
Net loss $ (18,504,358) $ (17,286,788) $ (11,980,958)
=================== =================== ===================
Deemed dividend to certain shareholders of Common stock $ - $ (1,196,667) $ -
------------------- ------------------- -------------------
Net loss attributable to shareholders of Common stock $ (18,504,358) $ (18,483,455) $ (11,980,958)
=================== =================== ===================
Basic and diluted net loss per share from continuing
operations $ (0.15) $ (0.21) $ (0.17)
=================== =================== ===================
Basic and diluted net loss per share from discontinued $ (0.42) $ (0.55) $ (0.45)
operations
=================== =================== ===================
Basic and diluted net loss per share $ (0.57) $ (0.76) $ (0.62)
=================== =================== ===================
Weighted average number of shares used in computing
basic and diluted net loss per share 32,381,502 24,200,184 19,243,446
=================== =================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN U.S. DOLLARS
ACCUMULATED
ADDITIONAL DEFERRED OTHER
COMMON STOCK PAID-IN ACCUMULATED STOCK COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION INCOME (LOSS) STOCK
--------------------------------------------------------------------------------------------------
Balance as of January 1, 2000 15,728,387 $ 157,284 $60,110,815 $(52,901,515) - - $ (37,731)
Payment of interest and
principal on notes
receivable from shareholders - - - - - - -
Issuance of shares to
investors, net 2,477,952 24,780 18,249,373 - - - -
Issuance of shares to service
providers 35,000 350 524,650 - - - -
Exercise of options 1,880,156 18,802 6,936,355 - - - -
Exercise of warrants 1,301,196 13,011 2,437,295 - - - -
Deferred stock compensation - - 37,924 - (37,924) - -
Stock compensation related to
options repriced - - 26,250 - - -
Amortization of deferred
stock compensation - - - - 20,684 - -
Stock compensation related to
options issued to
consultants - - 769,128 - - - -
Accrued interest on notes
receivable from shareholders - - - - - - -
Comprehensive loss :
Net loss - - - (11,980,958) - - -
----------- ------------ ------------- -------------- -------------- --------------- -----------
Total comprehensive loss
Balance as of December 31,
2000 21,422,691 $ 214,227 $89,091,790 $(64,882,473) $ (17,240) $ - $ (37,731)
=========== ============ ============= ============== ============== =============== ===========
NOTES
TOTAL RECEIVABLE TOTAL
COMPREHENSIVE FROM SHAREHOLDERS'
LOSS SHAREHOLDERS EQUITY
---------------------------------------------
Balance as of January 1, 2000 $ (3,086,494) $ 4,242,359
Payment of interest and
principal on notes
receivable from shareholders 2,705,052 2,705,052
Issuance of shares to
investors, net - 18,274,153
Issuance of shares to service
providers - - 525,000
Exercise of options - (3,723,456) 3,231,701
Exercise of warrants - 2,450,306
Deferred stock compensation - -
Stock compensation related to
options repriced - 26,250
Amortization of deferred
stock compensation - 20,684
Stock compensation related to
options issued to
consultants - 769,128
Accrued interest on notes
receivable from shareholders (185,306) (185,306)
Comprehensive loss :
Net loss (11,980,958) - (11,980,958)
--------------- -------------- --------------
Total comprehensive loss $ (11,980,958)
===============
Balance as of December 31,
2000 $(4,290,204) $20,078,369
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN U.S. DOLLARS
COMMON STOCK ADDITIONAL DEFERRED
------------------------ PAID-IN ACCUMULATED STOCK TREASURY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION STOCK
--------------------------------------------------------------------------------------
Balance as of January 1, 2001 21,422,691 $ 214,227 $89,091,790 $ 64,882,473) $ (17,240) $ (37,731)
Repurchase of common shares
from shareholders and
repayment of the related
interest and principal of
notes from shareholders - - 228,674 - - (3,499,375)
Issuance of shares to investors,
net 6,740,359 67,405 14,325,941 - - -
Retirement of shares (3,000) (30) (17,970) - - -
Issuance of shares to service
providers 346,121 3,461 536,916 - - -
Exercise of options 219,965 2,200 512,089 - - -
Exercise of warrants 333,333 3,333 836,667 - - -
Deferred stock compensation - - 18,000 - (18,000) -
Amortization of deferred stock
compensation - - (6,193) - 17,240 -
Stock compensation related to
options issued to
consultants - - 139,291 - - -
Stock compensation related to
options to consultants
repriced - - 21,704 - - -
Comprehensive loss:
Net loss - - - (17,286,788) - -
----------- ------------ ------------ -------------- -------------- --------------
Total comprehensive loss
Balance as of December 31, 2001 29,059,469 $ 290,596 $105,686,909 $(82,169,261) $ (18,000) $ (3,537,106)
=========== ============ ============ ============== ============== ==============
TOTAL NOTES RECEIVABLE TOTAL
COMPREHENSIVE FROM SHAREHOLDERS'
LOSS SHAREHOLDERS EQUITY
----------------------------------------------------
Balance as of January 1, 2001 $ (4,290,204) $ 20,078,369
Repurchase of common shares
from shareholders and
repayment of the related
interest and principal of
notes from shareholders 3,470,431 199,730
Issuance of shares to investors,
net - 14,393,346
Retirement of shares 18,000 -
Issuance of shares to service
providers - 540,377
Exercise of options (43,308) 470,981
Exercise of warrants - - 840,000
Deferred stock compensation - -
Amortization of deferred stock
compensation - 11,047
Stock compensation related to
options issued to
consultants - 139,291
Stock compensation related to
options to consultants
repriced - 21,704
Comprehensive loss:
Net loss (17,286,788) - (17,286,788)
-------------- ------------------ -----------------
Total comprehensive loss $(17,286,788)
==============
Balance as of December 31, 2001 $ (845,081) $ 19,408,057
================== =================
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN U.S. DOLLARS
COMMON STOCK ADDITIONAL DEFERRED
------------------------ PAID-IN ACCUMULATED STOCK TREASURY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION STOCK
--------------------------------------------------------------------------------------
Balance as of January 1, 2002 29,059,469 $290,596 $105,686,909 $(82,169,261) $(18,000) $(3,537,106)
Adjustment of notes from
shareholders
Repayment of notes from
employees - - - - - -
Issuance of shares to investors 2,041,176 20,412 3,209,588
Issuance of shares to service
providers 368,468 3,685 539,068
Issuance of shares to lender
in respect of prepaid
interest expenses 387,301 3,873 232,377 - - -
Exercise of options by
employees 191,542 1,915 184,435
Amortization of deferred stock
compensation 6,000
Stock compensation related to
options issued to employees 13,000 130 12,870
Issuance of shares in respect
of acquisition 3,640,638 36,406 4,056,600
Accrued interest on notes
receivable 160,737
Other comprehensive loss
Foreign currency translation
adjustment
Net loss (18,504,358)
------------- ------------- ------------- -------------- -------------- -------------
Total comprehensive loss
Balance as of December 31, 2002 35,701,594 $ 357,017 $114,082,584 $(100,673,619) $ (12,000) $(3,537,106)
============= ============= ============= ============== ============== =============
ACCUMULATED
TOTAL NOTES RECEIVABLE OTHER COM- TOTAL
COMPREHENSIVE FROM PREHENSIVE SHAREHOLDERS'
LOSS SHAREHOLDERS LOSS EQUITY
-------------------------------------------------------------
Balance as of January 1, 2002 $(845,081) - $19,408,057
Adjustment of notes from
shareholders (178,579) (178,579)
Repayment of notes from
employees 43,308 43,308
Issuance of shares to investors 3,230,000
Issuance of shares to service
providers 542,753
Issuance of shares to lender
in respect of prepaid
interest expenses - 236,250
Exercise of options by
employees (36,500) 149,850
Amortization of deferred stock
compensation 6,000
Stock compensation related to
options issued to employees 13,000
Issuance of shares in respect
of acquisition 4,093,006
Accrued interest on notes
receivable (160,737) -
Other comprehensive loss
Foreign currency translation
adjustment (1,786) (1,786) (1,786)
Net loss (18,504,358) (18,504,358)
--------------- ------------- -------------- --------------
Total comprehensive loss $ (18,506,144)
===============
Balance as of December 31, 2002 $(1,177,589) $ (1,786) $ 9,037,501
============= ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2002 2001 2000
------------------ ------------------ -----------------
Cash flows from operating activities:
Net loss (18,504,358) (17,286,788) (11,980,958)
Less loss for the period from discontinued operations 13,566,206 13,260,999 8,596,277
Adjustments required to reconcile net loss to net cash used
in operating activities:
Minority interest in earnings of subsidiary 355,360 - -
Depreciation 473,739 530,013 514,242
Amortization of intangible assets 623,543 - -
In-process research and development write-off 26,000 - -
Accrued severance pay, net (357,808) 530,777 209,999
Amortization of deferred stock compensation 6,000 17,240 9,010
Impairment and write-off of loans to shareholders 542,317 206,005 -
Compensation expenses related to repurchase of treasury
stock - 228,674 -
Write-off of inventories 116,008 - -
Amortization of compensation related to options issued to
consultants and repriced options issued to employees
and consultants - - 233,636
Compensation expenses related to shares issued to
employees 13,000 - -
Accrued interest on notes receivable from shareholders - 36,940 (230,922)
Interest accrued on promissory notes due to acquisition 29,829 - -
Interest accrued on restricted collateral deposit (3,213) - -
Capital (gain) loss from sale of property and equipment (4,444) 815 (6,330)
Decrease (increase) in trade receivables 389,516 (452,425) 35,741
Decrease (increase) in other accounts receivable and
prepaid expenses 257,218 616,040 (595,744)
Increase in inventories (520,408) (128,897) (98,092)
Increase (decrease) in trade payables (62,536) (301,075) (85,996)
Increase (decrease) in other accounts payable and accrued
expenses (423,664) 286,511 (40,191)
------------------ ------------------ -----------------
Net cash used in operating activities from continuing (3,477,695) (2,455,171) (3,439,328)
operations (reconciled from continuing operations)
Net cash used in operating activities from discontinued
operations (reconciled from discontinued operations) (5,456,912) (10,894,660) (10,523,852)
------------------ ------------------ -----------------
Net cash used in operating activities (8,934,607) (13,349,831) (13,963,180)
------------------ ------------------ -----------------
F-9
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (275,540) (513,746) (552,044)
Payment to suppliers for purchase of property and
equipment from previous year (39,336) (43,883) -
Loans granted to shareholders (4,529) - (958,156)
Repayment of loans granted to shareholders - - 225,097
Proceeds from sale of property and equipment 8,199 40,217 57,867
Acquisition of IES (1) (2,958,083) - -
Acquisition of MDT (2) (1,201,843) - -
Increase in restricted cash (595,341) - -
Net cash used in discontinued operations (purchase of
property and equipment) (290,650) (761,555) (2,306,467)
----------------- ----------------- -----------------
Net cash used in investing activities (5,357,123) (1,278,967) (3,533,703)
----------------- ----------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of shares, net 3,230,000 14,393,346 18,150,404
Proceeds from exercise of options 113,350 470,981 3,231,701
Proceeds from exercise of warrants - 840,000 2,450,306
Payment of interest and principal on notes receivable from
shareholders 43,308 - 2,705,052
Profit distribution to minority (412,231) - -
Increase in short term bank credit 108,659 - -
Payment on capital lease obligation (5,584) - -
----------------- ----------------- -----------------
Net cash provided by financing activities 3,077,502 15,704,327 26,537,463
----------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents (11,214,228) 1,075,529 9,040,580
Cash and cash equivalents at the beginning of the year 12,671,754 11,596,225 2,555,645
----------------- ----------------- -----------------
Cash and cash equivalents at the end of the year $ 1,457,526 $ 12,671,754 $ 11,596,225
================= ================= =================
Supplementary information on non-cash transactions:
Purchase of property and equipment against trade payables $ - $ 39,336 $ 227,230
================= ================= =================
Purchase of treasury stock in respect of notes receivable from
shareholders $ - $ 3,499,375 $ -
================= ================= =================
Retirement of shares issued under notes receivables $ - $ 18,000 $ -
================= ================= =================
Issuance of shares to consultants in respect of prepaid
interest expenses $ 236,250 $ - $ 120,000
================= ================= =================
Exercise of options against notes receivable $ 36,500 $ 43,308 $ 3,723,456
================= ================= =================
Supplemental disclosure of cash flows activities:
Cash paid during the year for:
Interest $ 10,640 $ 19,106 $ 25,537
================= ================= =================
F-10
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
-------------------------------------------------------------------------------
IN U.S. DOLLARS
(1) In July 2002, the Company acquired substantially all of the assets of
I.E.S. Electronics Industries U.S.A., Inc. ("IES"). The net fair value of
the assets acquired and the liabilities assumed, at the date of
acquisition, was as follows:
Working capital, excluding cash and $ 1,197,000
cash equivalents
Property and equipment, net 396,776
Capital lease obligation (15,526)
Technology 1,515,000
Existing contracts 46,000
Covenants not to compete 99,000
In process research and development 26,000
Customer list 527,000
Trademarks 439,000
Goodwill 4,068,726
-------------------
8,298,976
Issuance of shares (3,653,929)
Issuance of promissory note (1,686,964)
-------------------
$ 2,958,083
===================
(2) In July 2002, the Company acquired 51% of the outstanding ordinary shares
of MDT Protective Industries Ltd. ("MDT"). The fair value of the assets
acquired and liabilities assumed was as follows:
Working capital, excluding cash and $ 350,085
cash and cash equivalents
Property, and equipment, net 139,623
Minority rights (300,043)
Technology 280,000
Customer base 285,000
Goodwill 886,255
--------------------
1,640,920
Issuance of shares (439,077)
--------------------
$ 1,201,843
====================
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:- GENERAL
a. Electric Fuel Corporation d/b/a Arotech Corporation ("EFC," "Electric Fuel,"
or the "Company") and its subsidiaries are engaged in the development,
manufacture and marketing of defense and security products, including advanced
hi-tech multimedia and interactive digital solutions for training of military,
law enforcement and security personnel and sophisticated lightweight materials
and advanced engineering processes to armor vehicles, and in the design,
development and commercialization of its proprietary zinc-air battery technology
for electric vehicles and defense applications. The Company is primarily
operating through Electric Fuel Ltd. ("EFL") a wholly-owned Israeli based
subsidiary, IES Interactive Training, Inc. ("IES"), a wholly-owned U.S.
subsidiary, and MDT Protective Industries, an Israeli concern in which the
Company has a 51% interest. The Company's production and research and
development operations are primarily located in Israel and in the United States.
In addition to EFL and MDT, the Company has three wholly-owned non-operating
foreign subsidiaries, in the U.K ("EFL U.K."), in Germany ("GmbH") and in the
Netherlands ("BV"). The Company also has three subsidiaries in the United States
in addition to IES: Electric Fuel Transportation Corp. (Delaware), Instant Power
Corporation (Delaware), and I.E.S. Defense Services, Inc. (Delaware).
b. Acquisition of IES:
In August 2, 2002, the Company entered into an asset purchase agreement among
I.E.S. Electronics Industries U.S.A., Inc. ("IES"), its direct and certain of
its indirect shareholders, and its wholly-owned Israeli subsidiary, EFL,
pursuant to the terms of which it acquired substantially all the assets, subject
to substantially all the liabilities, of IES, a developer, manufacturer and
marketer of advanced hi-tech multimedia and interactive digital solutions for
training of military, law enforcement and security personnel.
Beginning in 2002 and even before, management began to weigh seriously the
considerable costs of competing in the retail consumer products market and of
continuing as a company whose sole products consisted of various forms of
batteries, and began to look to acquire profitable companies with positive cash
flow and strong, in-place management that would expand in the non-battery field
on the Company's Zinc-Air batteries for the defense industry, which were then
just beginning to become an important part of the Company's business. Management
concentrated its search almost exclusively on companies with a strong presence
in the defense and security products and services industry, in an attempt to
emphasize the Company's growing defense and security battery business, and out
of a desire to re-position the Company away from its historical roots as a
battery company. In keeping with this decision, management found IES, a
profitable company that had substantial positive cash flow, strong management,
and accordingly, management believed, a potential for significant earnings
growth in the near term while offering the Company the opportunity to
re-position itself away from the consumer products market and into the defense
and security market. The nature of this acquisition necessarily involved a
company whose primary assets were its trademarks and name recognition, its
intellectual property, such as technology, and its broad customer base,
resulting in a significant allocation of the purchase price to intangible
assets. The acquisition resulted in a significant allocation to goodwill due to
the potential for significant growth in the earnings of IES resulting from the
potential for a significant increase in IES's international sales.
The Company intends to continue to use the assets purchased in the conduct of
the business formerly conducted by IES (the "Business"). The acquisition has
been accounted under the purchase method of accounting. Accordingly, all assets
and liabilities were acquired at the values on such date, and the Company
consolidated IES's results with its own commencing at such date.
F-12
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
The assets purchased consisted of the current assets, property and equipment,
and other intangible assets used by IES in the operations of the Business. The
consideration for the assets and liabilities purchased consisted of (i) cash and
promissory notes in an aggregate amount of $4,800,000 ($3,000,000 in cash and
$1,800,000 in promissory notes, which was recorded at its fair value in the
amount of $1,686,964) (see Note 9), and (ii) the issuance, with registration
rights, of a total of 3,250,000 shares of the Company's common stock, $.01 par
value per share, having a value of approximately $3,653,929, which shares are
the subject of a voting agreement on the part of IES and certain of its
affiliated companies. The value of 3,250,000 shares issued was determined based
on the average market price of EFC's Common stock over the period including two
days before and after the terms of the acquisition were agreed to. The total
consideration of $8,390,893 (including $50,000 of transaction costs) was
determined based upon arm's-length negotiations between the Company and IES and
IES's shareholders.
Based upon a valuation of tangible and intangible assets acquired, Electric Fuel
has allocated the total cost of the acquisition to I.E.S.'s assets as follows:
Cash $ 50,988
Trade receivables 2,023,299
Inventory 284,341
Property and equipment 396,776
Other receivables 101,547
Technology (four year useful life) 1,515,000
Existing contracts (one year useful life) 46,000
Covenants not to compete (five year useful
life) 99,000
In process research and development 26,000
Customer list (seven year useful life) 527,000
Trademarks (indefinite useful life) 439,000
Goodwill 4,068,726
----------------------
Total assets acquired 9,577,677
Accounts payable and accrued expenses (1,010,649)
Lease obligations (15,526)
Deferred warranty revenues (160,609)
----------------------
Total liabilities assumed (1,186,784)
Net assets acquired $ 8,390,893
======================
Intangible assets in the amount of $2,187,000 have a weighted-average useful
life of approximately 4 years. The $4,068,726 of goodwill was assigned to the
Defense and Security segment.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill arising from acquisitions will not be amortized. In lieu of
amortization, EFC is required to perform an annual impairment review. If EFC
determines, through the impairment review process, that goodwill has been
impaired, it will record the impairment charge in its statement of operations.
EFC will also assess the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
The value assigned to the tangible, intangibles assets and liabilities was
determined as follows:
F-13
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
1. To determine the value of the Company's net current assets, property
and equipment, and net liabilities; the Cost Approach was used, which
requires that the assets and liabilities in question be restated to
their market values. Per valuation made, the book values for the
current assets and liabilities were reasonable proxies for their market
values.
2. The amount of the excess cost attributable to technology of Range 2000,
3000 and A2Z Systems is $1,515,000 and was determined using the Income
Approach.
3. The value assigned to purchased in-process technology relates to two
projects "Black Box" and A2Z trainer. The estimated fair value of the
acquired in-process research and development platforms that had not yet
reached technological feasibility and had no alternative future use
amounted to $26,000. Technological feasibility or commercial viability
of these projects was established at the acquisition date. These
products were considered to have no alternative future use other than
the technological indications for which they were in development.
Accordingly, these amounts were immediately expensed in the
consolidated statement of operations on the acquisition date in
accordance with FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase
Method." The estimated fair values of these platforms were determined
using discounted cash flow models. Projects were estimated to be 4%
complete; estimated costs to completion of these platforms were
approximately $200,000 and $25,000, respectively, and discount rate of
25% was used.
4. The value assigned to the customer list is amounted to $527,000.
Management states that its customers have generally been very loyal to
the Company's products; most present customers will purchase add-ons or
up-grades to their IES simulator systems in the future, and some will
purchase additional warranties for the systems they possess. The
Company's customer list has been valued using the Income Approach.
5. The value assigned to the trademarks is amounted to $439,000 and was
determined based on the Cost Approach. In doing so, it is assumed that
historical expenditures for advertising are a reasonable proxy for the
future benefits expected from the Trademarks and Trade names.
6. Value of IES's Covenant Not to Compete (CNC) was valued at the amount
of $99,000. One of IES's intangible assets is its Covenant Not to
Compete. Asset Purchase Agreement precludes the former parent company,
and its principals and key employees from competing with IES for five
years from the Valuation Date. According to management, among the
individuals covered by the CNC are the original developers of the Range
2000 and A2Z systems. Estimated CNC's value was determined using the
Income Approach. The estimated value of the CNC is the sum of the
present value of the cash flows that would be lost if the CNC was not
in place. Specifically, the value of the CNC is calculated as the
difference between the projected cash flows if the former parent
company or its principals were to start competing immediately and the
projected cash flows if those parties start competing after five years,
when the CNC expires.
F-14
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
7. The excess of the cost of IES over the net of the amounts assigned to
assets acquired and liabilities assumed is recognized as goodwill in
the amount of $4,068,726. An acquired workforce in the amount of
$333,000 that does not meet the separability criteria has been included
in the amount recognized as goodwill.
c. Acquisition of MDT:
On July 1, 2002, the Company entered into a stock purchase agreement with all of
the shareholders of M.D.T. Protective Industries Ltd. ("MDT"), pursuant to the
terms of which the Company purchased 51% of the issued and outstanding shares of
MDT, a privately-held Israeli company that specializes in using sophisticated
lightweight materials and advanced engineering processes to armor vehicles. The
Company also entered into certain other ancillary agreements with MDT and its
shareholders and other affiliated companies.
Beginning in 2002 and even before, management began to weigh seriously the
considerable costs of competing in the retail consumer products market and of
continuing as a company whose sole products consisted of various forms of
batteries, and began to look to acquire profitable companies with positive cash
flow and strong, in-place management that would expand in the non-battery field
on the Company's Zinc-Air batteries for the defense industry, which were then
just beginning to become an important part of the Company's business. Management
concentrated its search almost exclusively on companies with a strong presence
in the defense and security products and services industry, in an attempt to
emphasize the Company's growing defense and security battery business, and out
of a desire to re-position the Company away from its historical roots as a
battery company. In keeping with this decision, management found MDT, a
profitable company that had substantial positive cash flow, strong management,
and, management believed, a potential for significant earnings growth in the
near term while offering the Company the opportunity to re-position itself away
from the consumer products market and into the defense and security market. The
nature of this acquisition necessarily involved a company whose primary assets
were its intellectual property, such as technology, and its broad customer base,
resulting in a significant allocation of the purchase price to intangible
assets. The acquisition resulted in the significant allocation to the goodwill
due to the following components: the potential for accelerating MDT's efforts to
offer its products internationally, shortening the time to market for MDT's new
products; future versions, which are expected to be developed over the next
years, based upon original MDT concepts and technology.
The Acquisition was accounted for under the purchase method of accounting and
results of MDT's operations have been included in the consolidated financial
statements since that date. The total consideration of $1,767,877 for the shares
purchased consisted of (i) cash in the aggregate amount of 5,814,000 New Israeli
Shekels ($1,231,780), and (ii) the issuance, with registration rights, of an
aggregate of 390,638 shares of our common stock, $0.01 par value per share,
having a value of approximately $439,077. The value of 390,638 shares issued was
determined based on the average market price of EFC's Common stock over the
period including two days before and after the terms of the acquisition were
agreed to and announced. The total consideration of $1,767,877 (including
$97,020 of transaction costs) was determined based upon arm's-length
negotiations between the Company and MDT and MDT's shareholders.
F-15
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
Based upon a valuation of tangible and intangible assets acquired, Electric Fuel
has allocated the total cost of the acquisition to MDT's assets as follows:
Cash and cash equivalents $ 25,019
Short-term bank deposits 153,427
Trade receivables 808,729
Inventory 196,411
Property and equipment 71,207
Other accounts receivable 82,254
Intangible assets
Technology (five year useful life) 280,000
Customer base (five year useful life) 285,000
Goodwill 886,255
----------------
Total assets acquired 2,788,303
Liabilities assumed
Accounts payable and other accrued expenses (907,011)
Other current liabilities (113,415)
----------------
Total liabilities assumed (1,020,426)
Net assets acquired $ 1,767,877
================
Intangible assets in the amount of $565,000 have a weighted-average useful life
of approximately 5 years. The $886,255 of goodwill was assigned to the Defense
and Security segment.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill arising from acquisitions will not be amortized. In lieu of
amortization, EFC is required to perform an annual impairment review. If EFC
determines, through the impairment review process, that goodwill has been
impaired, it will record the impairment charge in its statement of operations.
EFC will also assess the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
The value assigned to the tangible, intangibles assets and liabilities was
determined as following:
1. To determine the value of the Company's net current assets, net
property, and equipment and net liabilities; the Cost Approach was
used, which requires that the assets and liabilities in question be
restated to their market values. Per estimation made, the book values
for the current assets and liabilities were reasonable proxies for
their market values.
2. The amount of the excess cost attributable to technology of optimal
bulletproofing material and power mechanism for bulletproofed windows
is $280,000 and was determined using the Income Approach on the basis
of present value of cash flows attributable to the current technology
over expected future life.
3. The value assigned to the customer base is amounted to $285,000. The
Company's customer base has been valued using the Income Approach. The
valuation of the customers' base derives mostly from relations with
customers with no contracts. Most of the customers of MDT are from the
defense sector and usually have longstanding relationships and tend to
reorder from the Company.
F-16
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
4. The excess of the cost of MDT over the net of the amounts assigned to
assets acquired and liabilities assumed is recognized as goodwill in
the amount of $886,255. An acquired workforce it the amount of $492,000
that does not meet the separablility criteria has been included in the
amount recognized as goodwill.
d. Pro forma results:
The following unaudited proforma information does not purport to represent what
the Company's results of operations would have been had the acquisitions
occurred on January 1, 2001 and 2002, nor does it purport to represent the
results of operations of the Company for any future period.
YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001
--------------- ----------------
Revenues $12,997,289 $12,369,749
=============== ================
Net loss from continuing operations $(6,103,771) $(5,757,675)
=============== ================
Basic and diluted net loss per share for continuing operations $ (0.18) $ (0.21)
=============== ================
Weighted average number of shares of common stock in
computation of basic and diluted net loss per share 34,495,185 27,840,822
=============== ================
The amount of the excess cost attributable to in-process research and
development of IES and MDT in the amount of $26,000 has not been included in the
pro forma information, as it does not represent a continuing expense.
e. Discontinued operations:
In September 2002, the Company committed to a plan to discontinue the operations
of its retail sales of consumer battery products. The Company ceased the
operations and disposed of all assets related to this segment by abandonment.
The operations and cash flows of the consumer battery business have been
eliminated from the operations of the entity as a result of the disposal
transaction. The Company has no intent to continue its activity in the consumer
battery business. The Company's plan of discontinuance involved (i) termination
of all employees whose time was substantially devoted to the consumer battery
line and who could not be used elsewhere in the Company's operations, including
payment of all statutory and contractual severance amounts, by the end of the
fourth quarter of 2002, and (ii) disposal of the equipment and inventory used
exclusively in the consumer battery business, since the Company has no
reasonable expectation of being able to sell such equipment or inventory for any
amounts substantially greater than the cost of disposal or shipping, by the end
of the first quarter of 2003. The Company had previously reported its consumer
battery business as a separate segment (Consumer Batteries) as called for by
Statement of Financial Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131").
F-17
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:- GENERAL (CONT.)
The results of operations including revenue, operating expenses and other income
and expense of the retail sales of consumer battery products business unit for
2002, 2001 and 2000 have been reclassified in the accompanying statements of
operations as discontinued operations. The Company's balance sheets at December
31, 2002 and 2001 reflect the net liabilities of the retail sales of consumer
battery products business as net liabilities and net assets of discontinued
operations within current liabilities and current assets.
At December 31, 2002, the estimated net losses associated with the disposition
of the retail sales of consumer battery products business were approximately
$13,566,206 for 2002. These losses included approximately $6,508,222 in losses
from operations for the period from January 1, 2002 through the measurement date
of December 31, 2002 and $7,057,684, reflecting a write-off of inventory and net
property and equipment of the retail sales of consumer battery products
business, as follows:
DECEMBER 31, 2002
--------------------------
Write-off of inventories $ 2,611,000
Impairment of property and equipment 4,446,684
----------------
$ 7,057,684
================
As a result of the discontinuance of consumer battery segment, the Company
ceased to use property and equipment related to this segment. In accordance with
Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long- Lived Assets" ("SFAS No. 144") such assets were
considered to be impaired. Since the long-lived assets ceased to be used, the
carrying amount of the assets was reduced to its salvage value, which is zero.
Obligations to employees for severance and other benefits resulting from the
discontinuation have been reflected in the financial statements on an accrual
basis.
Summary operating results from the discontinued operation for the years ended
December 31, 2002, 2001 and 2000 are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
Revenues $ 1,100,442 $ 1,939,256 $ 2,563,620
Cost of sales (1) (5,293,120) (5,060,966) (3,073,142)
----------------- ----------------- -----------------
Gross loss 4,192,678 3,121,710 509,522
Operating expenses 4,926,844 10,139,289 8,086,755
Impairment of fixed assets 4,446,684 - -
----------------- ----------------- -----------------
Operating loss $ 13,566,206 $ 13,260,999 $ 8,596,277
================= ================= =================
(1) Including write-off of inventory in the amount of $2,611,000, $441,000 and
$0 for the years ended December 31, 2002, 2001 and 2000.
F-18
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
b. Financial statements in U.S. dollars:
A majority of the revenues of the Company and most of its subsidiaries is
generated in U.S. dollars. In addition, a substantial portion of the Company's
and most of its subsidiaries costs are incurred in U.S. dollars ("dollar").
Management believes that the dollar is the primary currency of the economic
environment in which the Company and most of its subsidiaries operate. Thus, the
functional and reporting currency of the Company and most of its subsidiaries is
the dollar. Accordingly, monetary accounts maintained in currencies other than
the U.S. dollar are remeasured into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS No.
52"). All transaction, gains and losses from the remeasured monetary balance
sheet items are reflected in the consolidated statements of operations as
financial income or expenses, as appropriate.
The majority of financial transactions of MDT is in New Israel Shekel ("NIS")
and a substantial portion of MDT's costs is incurred in NIS. Management believes
that the NIS is the functional currency of MDT. Accordingly, the financial
statements of MDT have been translated into U.S. dollars. All balance sheet
accounts have been translated using the exchange rates in effect at the balance
sheet date. Statement of operations amounts has been translated using the
average exchange rate for the period. The resulting translation adjustments are
reported as a component of accumulated other comprehensive loss in shareholders'
equity
c. Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries. Intercompany balances and
transactions have been eliminated upon consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that are readily
convertible to cash with maturities of three months or less when acquired.
e. Inventories:
Inventories are stated at the lower of cost or market value. Inventory
write-offs and write-down provisions are provided to cover risks arising from
slow-moving items or technological obsolescence and for market prices lower than
cost. The Company periodically evaluates the quantities on hand relative to
current and historical selling prices and historical and projected sales volume.
Based on this evaluation, provisions are made to write inventory down to its
market value. In 2002, the Company wrote off $116,008 of obsolete inventory,
which has been included in the cost of revenues.
F-19
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
Cost is determined as follows:
Raw and packaging materials - by the average cost method.
Work in progress - represents the cost of manufacturing with the addition of
allocable indirect manufacturing cost.
Finished products - on the basis of direct manufacturing costs with the addition
of allocable indirect manufacturing costs.
f. Property and equipment:
Property and equipment are stated at cost net of accumulated depreciation and
investment grants (no investment grants were received during 2002, 2001 and
2000).
Depreciation is calculated by the straight-line method over the estimated useful
lives of the assets, at the following annual rates:
%
--------------------------
Computers and related equipment 33
Motor vehicles 15
Office furniture and equipment 6 - 10
Machinery, equipment and installation 10 - 25 (mainly 10)
Leasehold improvements Over the term of the lease
The Company and its subsidiaries' long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with Statement of
Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 144") whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of the carrying amount of assets to be held and used
is measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of by sale are reported at the lower of the
carrying amount or fair value less selling costs. As of December 31, 2002 no
impairment losses have been identified.
g. Goodwill:
Goodwill represents the excess of cost over the fair value of the net assets of
businesses acquired. Under Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No, 142") goodwill acquired in a
business combination on or after July 1, 2001, is not amortized.
F-20
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
SFAS No. 142 requires goodwill to be tested for impairment on adoption of the
Statement and at least annually thereafter or between annual tests in certain
circumstances, and written down when impaired, rather than being amortized as
previous accounting standards required. Goodwill is tested for impairment by
comparing the fair value of the Company's reportable units with their carrying
value. Fair value is determined using discounted cash flows, market multiples
and market capitalization. Significant estimates used in the methodologies
include estimates of future cash flows, future short-term and long-term growth
rates, weighted average cost of capital and estimates of market multiples for
the reportable units.
h. Other intangible assets:
Intangible assets acquired in a business combination that are subject to
amortization should be amortized over their useful life using a method of
amortization that reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise used up, in accordance with SFAS No.
142. Intangible assets are amortized over their useful life (See Note 1b. and
c). The Company evaluates the remaining useful life of an intangible asset that
is being amortized each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization. If the
estimate of an intangible asset's remaining useful life is changed, the
remaining carrying amount of the intangible asset will be amortized
prospectively over that revised remaining useful life.
i. Impairment of indefinite lived intangible asset
The acquired trademark is deemed to have an indefinite useful life because it is
expected to contribute to cash flows indefinitely. Therefore, the trademark will
not be amortized until its useful life is no longer indefinite The trademark
will be tested for impairment in accordance FAS 142.
j. Revenue recognition:
The Company generates revenues primarily from sales of multimedia and
interactive digital training systems and use-of-force simulators specifically
targeted for law enforcement and firearms training and from service contracts
related to such sales (through IES), from providing lightweight armoring
services of vehicles (through MDT), and, to a lesser extent, from sale of
zinc-air battery products for defense applications. To a lesser extent, revenues
are generated from development services and long-term arrangements subcontracted
by the U.S Government.
Revenues from products, training and simulation systems are recognized in
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements ("SAB No. 101") when the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the
seller's price to the buyer is fixed or determinable, no further obligation
remains and collectibility is reasonably assured.
The Company does not grant a right of return to its customers.
F-21
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
Revenues from long-term agreements, subcontracted by the U.S. government, are
recorded on a cost-sharing basis, when services are rendered and products
delivered, as prescribed in the related agreements. Provisions for estimated
losses are recognized in the period in which the likelihood of such losses is
determined. As of December 31, 2002, no such estimated losses were identified.
Deferred revenues includes unearned amounts received from customers, but not
recognized as revenues.
Revenues from development services are recognized based on Statement of Position
No. 81-1 "Accounting for Performance of Construction - Type and Certain
Production - Type Contracts" ("SOP 81-1"), using contract accounting on a
percentage of completion method, based on completion of agreed-upon milestones
and in accordance with the "Output Method" or based on the time and material
basis. Provisions for estimated losses on uncompleted contracts are recognized
in the period in which the likelihood of such losses is determined. As of
December 31, 2002, no such estimated losses were identified.
Revenues from lightweight armoring services of vehicles are recorded when
services are rendered and vehicle is delivered and no additional obligations
exists.
k. Research and development cost:
Research and development costs, net of grants received, are charged to the
statements of operations as incurred.
l. Royalty-bearing grants:
Royalty-bearing grants from the Office of the Chief Scientist ("OCS") of the
Israeli Ministry of Industry and Trade and from the Israel-U.S. Bi-national
Industrial Research and Development Foundation ("BIRD-F") for funding approved
research and development projects are recognized at the time the Company is
entitled to such grants on the basis of the costs incurred, and included as a
deduction of research and development costs.
m. Income taxes:
The Company and its subsidiaries account for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). This Statement prescribes the use of the liability
method, whereby deferred tax assets and liability account balances are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
and its subsidiaries provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
F-22
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
n. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its subsidiaries
to concentrations of credit risk consist principally of cash and cash
equivalents, restricted collateral deposit and other restricted cash, trade
receivables and long-term loans to shareholders. Cash and cash equivalents are
invested in U.S. dollar deposits with major Israeli, U.S. and U.K. banks. Such
deposits in the U.S. may be in excess of insured limits and are not insured in
other jurisdictions. Management believes that the financial institutions that
hold the Company's investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
The trade receivables of the Company and its subsidiaries are mainly derived
from sales to customers located primarily in the United States, Europe and
Israel. Management believes that credit risks are moderated by the diversity of
its end customers and geographic sales areas. The Company performs ongoing
credit evaluations of its customers' financial condition. An allowance for
doubtful accounts is determined with respect to those accounts that the Company
has determined to be doubtful of collection.
The Company has provided long-term loans to its shareholders, amounting to
$733,059 as of December 31, 2002. The long-term loans are secured by the
Company's shares and since the value of the Company's shares has decreased, the
Company incurred a material loss during the years 2002 and 2001.
The Company and its subsidiaries had no off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
o. Basic and diluted net loss per share:
Basic net loss per share is computed based on the weighted average number of
shares of common stock outstanding during each year. Diluted net loss per share
is computed based on the weighted average number of shares of common stock
outstanding during each year, plus dilutive potential shares of common stock
considered outstanding during the year, in accordance with Statement of
Financial Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
All outstanding stock options and warrants have been excluded from the
calculation of the diluted net loss per common share because all such securities
are anti-dilutive for all periods presented. The total weighted average number
of shares related to the outstanding options and warrants excluded from the
calculations of diluted net loss per share was 4,394,803, 3,170,334 and
2,812,725 for the years ended December 31, 2002, 2001 and 2000, respectively.
p. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") and Interpretation No.
44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No.
44") in accounting for its employee stock option plans. Under APB No. 25, when
the exercise price of the Company's share options is less than the market price
of the underlying shares on the date of grant, compensation expense is
recognized. Under Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), pro-forma
information regarding net income and income per share is required, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123.
F-23
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company applies SFAS No. 123 and Emerging Issue Task Force No. 96-18
"Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18")
with respect to options issued to non-employees. SFAS No. 123 requires use of an
option valuation model to measure the fair value of the options at the grant
date.
The fair value for the options to employees was estimated at the date
of grant, using the Black-Scholes Option Valuation Model, with the following
weighted-average assumptions: risk-free interest rates of 3.5%, 3.5-4.5%, and
6.5% for 2002, 2001 and 2000, respectively; a dividend yield of 0.0% for each of
those years; a volatility factor of the expected market price of the Common
Stock of 0.64 for 2002, 0.82 for 2001 and 0.95% for 2000; and a weighted-average
expected life of the option of 10 years for 2002, 2001 and 2000.
The following table illustrates the effect on net income and earnings
per share, assuming that the Company had applied the fair value recognition
provision of SFAS No. 123 on its stock-based employee compensation:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
--------------- ------------------- ---------------
Net income as reported $(18,504,358) $ (18,483,455) $(11,980,958)
Add: Stock-based compensation expenses included in
reported net loss - 17,240 20,684
Deduct: Stock-based compensation expenses
determined under fair value method for all awards (2,072,903) (2,906,386) (2,045,764)
Pro forma net loss $ (20,577,261) $ (21,372,601) $(14,006,038)
Loss per share:
Basic and diluted, as reported $ (0.57) $ (0.76) $ (0.62)
Diluted, pro forma $ (0.64) $ (0.88) $ (0.73)
q. Fair value of financial instruments:
The following methods and assumptions were used by the Company and its
subsidiaries in estimating their fair value disclosures for financial
instruments:
The carrying amounts of cash and cash equivalents restricted collateral deposit
and other restricted cash, trade receivables, short-term bank credit, and trade
payables approximate their fair value due to the short-term maturity of such
instruments.
The carrying amount of the Company's long-term loans to shareholders
approximates their fair value. The fair value was estimated using the fair
market value of the secured Company's shares.
Long-terms liabilities are estimated by discounting the future cash flows using
current interest rates for loans or similar terms and maturities. The carrying
amount of the long-term liabilities approximates their fair value.
F-24
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
r. Severance pay:
The Company's liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment, or a portion
thereof. The Company's liability for all of its employees is fully provided by
monthly deposits with severance pay funds, insurance policies and by an accrual.
The value of these policies is recorded as an asset in the Company's balance
sheet.
In addition and according to certain employment agreements, the Company is
obligated to provide for a special severance pay in addition to amounts due to
certain employees pursuant to Israeli severance pay law. The Company has made a
provision for this special severance pay in accordance with Statement of
Financial Accounting Standard No. 106, "Employer's Accounting for Post
Retirement Benefits Other than Pensions" ("SFAS No. 106"). As of December 31,
2002 and 2001, the accumulated severance pay in that regard amounted to
$1,630,366 and $1,975,535, respectively.
The deposited funds include profits accumulated up to the balance sheet date.
The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor agreements. The value of the
deposited funds is based on the cash surrendered value of these policies and
includes immaterial profits.
Severance income for the year ended December 31, 2002 amounted to $338,574 as
compared to severance expenses for the years ended December 31, 2001 and 2000,
which amounted to $653,885 and $430,943, respectively.
s. Advertising costs:
The Company and its subsidiaries expense advertising costs as incurred.
Advertising expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $294,599, $1,676,280 and $1,453,025, respectively.
t. Impact of recently issued accounting standards:
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" which addresses significant issues regarding the
recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 requires
that costs associated with exit or disposal activities be recognized when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is effective for all exit or disposal activities initiated
after December 31, 2002. The Company does not expect the adoption of SFAS No.
146 to have a material impact on its results of operations or financial
position.
NOTE 3:- RESTRICTED COLLATERAL DEPOSIT AND OTHER RESTRICTED CASH
The restricted collateral deposit is invested in a $595,341 certificate of
deposit that is used to secure a standby letter of credit required in connection
with a sales contract the Company signed with the Royal Thai Army on September
28, 2002. The other restricted cash consists of security deposits in connection
with real property lease arrangements.
F-25
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
DECEMBER 31,
------------------------------------
2002 2001
---------------- ----------------
Government authorities $ 348,660 $ 204,435
Employees 23,959 4,680
Prepaid expenses 591,008 198,150
Other 68,684 41,386
---------------- ----------------
$ 1,032,311 $ 448,651
================ ================
NOTE 5:- INVENTORIES
DECEMBER 31,
--------------------------------------
2002 2001
----------------- -----------------
Raw and packaging materials $ 893,666 $ 454,086
Work in progress 296,692 28,995
Finished products 521,121 40,285
----------------- -----------------
$ 1,711,479 $ 523,366
================= =================
NOTE 6: - LOANS TO SHAREHOLDERS
In February and May 2000, two officers of the Company exercised options to
purchase a total of 263,330 and 550,000, respectively, shares of the Company's
common stock (see Note 12.e.2). In connection with such exercises, the Company
granted loans secured by the Company's shares to those two officers to cover
their related tax liabilities. The loans were in the form of non-recourse
promissory notes in the total amount of $958,156, bearing interest at a rate
equal to 4% over the then-current percentage increase in the Israeli Consumer
Price Index ("CPI") between the date of the loan and the date of the annual
interest calculation. During the years 2000 and 2001 one of the shareholders
repaid a portion of his non-recourse note at the amount of $225,097 and $38,639,
respectively. During the years 2002 and 2001, the Company has impaired those
loans and has written off the amounts of $501,288 and $206,005, respectively,
due to decline of the fair market value of its shares, which was recorded as
compensation in general and administrative expenses.
F-26
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 7:- PROPERTY AND EQUIPMENT, NET
a. Composition of property and equipment is as follows:
DECEMBER 31,
-------------------------------------
2002 2001
----------------- -----------------
Cost:
Computers and related equipment $ 815,759 $ 786,158
Motor vehicles 335,286 336,216
Office furniture and equipment 519,092 313,760
Machinery, equipment and 4,715,182 4,294,600
installations
Leasehold improvements 442,482 355,536
Demo inventory 154,689 -
---------------- ----------------
6,982,490 6,086,270
---------------- ----------------
Accumulated depreciation:
Computers and related equipment 669,258 566,290
Motor vehicles 39,281 62,523
Office furniture and equipment 255,829 180,498
Machinery, equipment and installations 3,106,389 2,797,558
Leasehold improvements 356,484 258,595
---------------- ----------------
4,427,241 3,865,464
---------------- ----------------
Depreciated cost $ 2,555,249 $ 2,220,806
================ ================
b. Depreciation expense amounted to $473,739, $530,013 and $514,242, for the
years ended December 31, 2002, 2001 and 2000, respectively.
As for liens, see Note 11.d.
F-27
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 8:- OTHER INTANGIBLE ASSETS, NET
a. YEAR ENDED DECEMBER 31,
-----------------------------------
2002 2001
---------------- ----------------
Intangible assets subject to amortization:
Cost:
Technology $ 1,795,000 $ -
Existing contracts 46,000 -
Covenants not to compete 99,000 -
Customer list 812,000 -
---------------- ----------------
2,752,000 -
Less - accumulated amortization -
Technology 524,500 -
Existing contracts 23,000 -
Covenants not to compete 9,900 -
Customer list 66,143 -
---------------- ----------------
623,543 -
Amortized cost 2,128,457 -
Intangible assets not subject to amortization:
Trademarks 439,000 -
---------------- ----------------
2,567,457 -
================ ================
b. Amortization expenses amounted to $623,543 for the year ended December 31, 2002.
c. Weighted-average amortization period of the intangible assets is 4 years.
d. Estimated amortization expenses for the years ended:
Year ended December 31,
--------------------------------------
2003 $ 1,172,000
2004 263,000
2005 233,000
2006 205,843
2007 AND FORWARD 254,614
-----------------
$ 2,128,457
=================
NOTE 9:- PROMISSORY NOTES
In connection with the acquisition discussed in Note 1b, the Company issued
promissory notes in the face amount of an aggregate of $1,800,000, one of which
was a note for $400,000 that was convertible into an aggregate of 200,000 shares
of the Company's common stock. The Company has accounted for these notes in
accordance with Accounting Principles Board Opinion No. 21, "Interest on
Receivables and Payables," and recorded the notes at its present value in the
amount of $1,686,964. In December 2002, the terms of these promissory notes were
amended to (i) extinguish the $1,000,000 note due at the end of June 2003 in
exchange for prepayment of $750,000, (ii) amend the $400,000 note due at the end
of December 2003 to be a $450,000 note, and (iii) amend the convertible $400,000
note due at the end of June 2004 to be a $450,000 note convertible at $0.75 as
to $150,000, at $0.80 as to $150,000, and at $0.85 as to $150,000. In accordance
with EITF 96-19, "Debtor's Accounting for a Modification or Exchange of Debt
Instruments," the terms of the promissory notes are not changed or modified and
the cash flow effect on a present value basis is less than 10% and therefore the
Company did not record any compensation related to these changes.
F-28
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 10:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
------------------------------------
2002 2001
---------------- -----------------
Employees and payroll accruals $ 615,292 $ 688,985
Accrued vacation pay 137,179 300,779
Accrued expenses 342,793 74,639
Advances from customers - 98,070
Minority balance 289,451 -
Government authorities 497,428 -
Deferred warranty revenues 95,831 -
Other 31,135 60,180
--------------- -----------------
$ 2,009,109 $ 1,122,653
=============== =================
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Royalty commitments:
1. Under EFL's research and development agreements with the Office of the Chief
Scientist ("OCS"), and pursuant to applicable laws, EFL is required to pay
royalties at the rate of 3%-3.5% of net sales of products developed with funds
provided by the OCS, up to an amount equal to 100% of research and development
grants received from the OCS (linked to the U.S. dollars. Amounts due in respect
of projects approved after year 1999 also bear interest of the Libor rate).
EFL is obligated to pay royalties only on sales of products in
respect of which OCS participated in their development. Should the project fail,
EFL will not be obligated to pay any royalties.
Royalties paid or accrued for the years ended December 31, 2002,
2001 and 2000, to the OCS amounted to $32,801, $75,791 and $70,637,
respectively.
As of December 31, 2002, total contingent liability to pay to OCS
(at 100%) was outstanding at the amount of approximately $9,882,000.
2. EFL, in cooperation with a U.S. participant, has received approval from the
BIRD-F for 50% funding of a project for the development of a hybrid propulsion
system for transit buses. The maximum approved cost of the project is
approximately $1.8 million, and the Company's share in the project costs is
anticipated to amount to approximately $1.1 million, which will be reimbursed by
BIRD-F at the aforementioned rate of 50%.
Royalties at rates of 2.5%-5% of sales are payable up to a maximum of 150% of
the grant received, linked to the U.S. Consumer Price Index. Accelerated
royalties are due under certain circumstances.
EFL is obligated to pay royalties only on sales of products in
respect of which BIRD-F participated in their development. Should the project
fail, EFL will not be obligated to pay any royalties.
F-29
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
Royalties paid or accrued to the BIRD-F amounted at $0 for each of
the three years ended December 31, 2002.
As of December 31, 2002, total contingent liability to pay BIRD-F
(at 150%) was approximately $772,000.
b. Lease commitments:
The Company and its subsidiaries rent their facilities under various operating
lease agreements, which expire on various dates, the latest of which is in 2005.
The minimum rental payments under non-cancelable operating leases are as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 $ 439,947
2004 147,444
2005 86,775
------------------
$ 674,166
==================
Total rent expenses for the years ended December 31, 2002, 2001 and 2000, were
approximately $629,101, $456,701 and $261,000, respectively.
Rental payments are primarily payable in Israeli currency, linked to the Israeli
Consumer Price Index ("CPI").
c. Guarantees:
The Company obtained bank guarantees in the amount of $34,893, mainly in respect
of a letter of credit to the supplier of one of its subsidiaries.
d. Liens:
As security for compliance with the terms related to the investment grants from
the state of Israel, EFL has registered floating liens on all of its assets, in
favor of the State of Israel.
NOTE 12:- SHAREHOLDERS' EQUITY
a. Shareholders' rights:
The Company's shares confer upon the holders the right to receive notice to
participate and vote in the general meetings of the Company and right to receive
dividends, if and when declared.
b. Issuance of common stock to investors:
1. On January 5, 2000, the Company entered into a Common Stock Purchase
Agreement with a group of private investors. Pursuant to this agreement, on
January 10, 2000, the Company issued 385,000 shares of common stock to the
investors for a total purchase price of $962,500.
F-30
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
2. On May 17, 2000, the Company entered into an agreement with an investor,
pursuant to which the Company issued 1,000,000 shares of common stock to the
investor, at a price of $10.00 per share, for a total purchase price of
$10,000,000. In addition, on November 16, 2000, the Company subsequently issued
an additional 92,952 shares of common stock pursuant to the anti-dilution
calculation stated in the share purchase agreement with the investor.
3. On November 17, 2000, the Company entered into an agreement with a venture
capital fund, pursuant to which the Company issued 1,000,000 shares of common
stock to the investor, at a price of $8.375 per share, for a total purchase
price of $8,375,000.
(See also Note 12.f.2.)
4. In May 2001, the Company issued a total of 4,045,454 shares of its common
stock to a group of institutional investors at a price of $2.75 per share, or a
total purchase price of $11,125,000. (See also Note 12.f.2 and 12.f.3.)
5. On November 21, 2001, the Company issued a total of 1,503,759 shares of its
common stock at a purchase price of $1.33 per share, or a total purchase price
of $2,000,000, to a single institutional investor.
6. On December 5, 2001, the Company issued a total of 1,190,476 shares of its
common stock at a purchase price of $1.68 per share, or a total purchase price
of $2,000,000, to a single institutional investor.
7. On January 18, 2002, the Company issued a total of 441,176 shares of its
common stock at a purchase price of $1.70 per share, or a total purchase price
of $750,000, to an investor (see also Note 12.f.4).
8. On January 24, 2002, the Company issued a total of 1,600,000 shares of its
common stock at a purchase price of $1.55 per share, or a total purchase price
of $2,480,000, to a group of investors.
c. Issuance of common stock to service providers and employees:
1. In June 2000, 35,000 shares of common stock were issued at par consideration
to a consultant for providing business development and marketing services in the
United Kingdom. At the issuance date, the fair value of these shares was
determined both by the value of the shares issued as reflected by fair market
price at the issuance date and by the value of the services provided and
amounted to $525,000 in accordance with EITF 96-18. In accordance with EITF
00-18, "Accounting Recognition for Certain Transactions Involving Equity
Instruments Granted to Other Than Employees" ("EITF 00-18"), the Company
recorded this compensation expenses of $405,000 during the year 2000 and
$120,000 during the year 2001 and included these amounts in marketing expenses.
2. On June 17, 2001 the Company issued a consultant a total of 8,550 shares of
its common stock in compensation for services rendered by such consultant for
the Company for preparation of certain video point-of-purchase and sales
demonstration materials. At the issuance date the fair value of these shares was
determined both by the value of the shares issued as reflected by fair market
price at the issuance date and by the value of the services provided and
amounted to $15,488 in accordance with EITF 96-18. In accordance with EITF
00-18, the Company recorded this compensation expense as marketing expenses in
the amount of $15,488.
F-31
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
3. On September 17, 2001 the Company issued to selling and marketing consultants
a total of 337,571 shares of its common stock in compensation for distribution
services rendered by such consultant. At the issuance date the fair value of
these shares was determined both by the value of the shares issued as reflected
by fair market price at the issuance date and by the value of the services
provided and amounted to $524,889 in accordance with EITF 96-18 and in
accordance with EITF 00-18. The Company recorded this compensation expense as
marketing expenses in the amount of $524,889.
4. On February 15, 2002 and September 10, 2002, 318,468 and 50,000 shares,
respectively, of common stock were issued at par consideration to a consultant
for providing business development and marketing services in the United Kingdom.
At the issuance date, the fair value of these shares was determined both by the
value of the shares issued as reflected by fair market price at the issuance
date and by the value of the services provided and amounted to $394,698 and
$63,000, respectively, in accordance with EITF 96-18. In accordance with EITF
00-18, the Company recorded this compensation expense of $394,698 and $63,000,
respectively, during the year 2002 and included this amount in marketing
expenses.
5. On September 10, 2002, an aggregate of 13,000 shares of common stock were
issued at par consideration to two of our employees as stock bonuses. At the
issuance date, the fair value of these shares was determined by the fair market
value of the shares issued as reflected by fair market price at the issuance
date in accordance with APB No. 25. In accordance with APB No. 25, the Company
recorded this compensation expense of $13,000 during the year 2002 and included
this amount in general and administrative expenses.
d. Issuance of shares to lenders
As part of the securities purchase agreement on December 31, 2002 (see Note 17),
the Company issued 387,301 shares at par consideration to lenders for the first
nine months of interest expenses. At the issuance date, the fair value of these
shares was determined both by the value of the shares issued as reflected by
fair market price at the issuance date and by the value of the interest and
amounted to $236,250 in accordance with APB 14.
e. Issuance of notes receivable:
1. Non-recourse notes receivable from employee-shareholders arising from the
purchase of 1,500,000 of the Company's shares, matured in 1998. The notes were
renewed as recourse notes, due on December 31, 2007, bearing interest at a rate
of 1% over the then-current federal funds rate of 5.5% or linked to the Israeli
CPI, whichever is higher. In April 1998, the terms of the recourse notes were
amended such that the Company would have recourse only to certain termination
compensation due to the employee-shareholders (which exceeds the amounts
outstanding under the notes), or if terminated for cause, the
employee-shareholders would continue to be personally liable.
Additionally, the Company agreed to purchase the Company's shares from the
employee-shareholders, at prevailing market prices, up to the full amount
outstanding under the notes and to grant new options at exercise prices equal to
prevailing market prices, in the amount that the shares were sold by the
employee-shareholders.
F-32
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
In March 2000, the employee-shareholders exercised certain stock options (see
Note 12.g). The proceeds in the amount of $605,052 from the sale of the shares
were allocated to the repayment of the loan referred to above. As of December
31, 2002, there was no outstanding balance on this loan.
2. In February 2000 and in May 2000, certain officers of the Company exercised
options to purchase a total of 263,330 and 550,000, respectively, shares of the
Company's common stock, paying the exercise price in form of ten-year
non-recourse promissory notes in an aggregate amount of $658,326 and $3,040,250,
respectively. The notes are secured by the shares issued upon exercise of such
options, bearing non-recourse interest at a rate equal to the federal fund rate
+ 1%. (See Note 6)
The Company has accounted for these promissory notes as a variable stock award
pursuant to the provisions of Emerging Issues Task Force issue 95-16,
"Accounting for Stock Compensation Arrangements with Employer Loan Features
under APB Opinion 25" ("EITF 95-16"). The Company did not record any
compensation due to the decrease in the market value of the Company's shares
during the years 2001 and 2000.
In February 2001, the Board of Directors of the Company, upon the recommendation
of its Compensation Committee and with the agreement of the officers involved,
purchased a total of 550,000 of the shares, which had already been issued, in
exchange for repayment of the non-recourse notes from the officers in the amount
of $3,470,431. $3,183,530 out of this amount relates to 550,000 shares from May
2000. The remaining amount of $248,262 represents repayment of other notes,
including $38,639 of loans to shareholders described in Note 6. As a result of
this transaction, the Company recorded treasury stock in the amount of
$3,499,375. An amount of $228,674 was recorded as additional paid-in-capital as
it reflected a compensation expense related to this re-purchase.
f. Warrants:
1. As part of an investment agreement in December 1999, the Company issued
warrants to purchase up to an additional 950,000 and 475,000 shares of the
Company's common stock to the investors at the exercise price of $1.25 and $4.50
per share, respectively. Pursuant to the terms of these warrants, a total of
251,196 shares of common stock were issued to such warrant holders in 2000 on a
cashless exercise basis. As of December 31, 2000, 1,050,000 warrants had been
exercised, in addition to the warrants issued on a cashless basis.
2. As part of the investment agreement in November 2000 (see Note 12.b.3), the
Company issued warrants to purchase an additional 1,000,000 shares of common
stock to the investor, with exercise prices of $11.31 for 333,333 of these
warrants and $12.56 per share for 666,667 of these warrants. In addition, the
Company issued warrants to purchase 150,000 shares of common stock, with
exercise prices of $9.63 for 50,000 of these warrants and $12.56 per share for
100,000 of these warrants to an investment banker involved in this agreement.
Out of these warrants issued to the investor, 666,667 warrants expire on
November 17, 2005 and 333,333 warrants were to expire on August 17, 2001.
As part of the transaction in May 2001 (see Note 12 b.4), the Company repriced
these warrants in the following manner:
F-33
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
-- Of the 1,000,000 warrants granted to the investor, the
exercise price of 666,667 warrants was reduced from $12.56 to
$3.50 and of 333,333 warrants was reduced from $11.31 to
$2.52. In addition, the 333,333 warrants that were to expire
on August 17, 2001, were immediately exercised for a total
consideration of $840,000.
-- Moreover, the Company issued to this investor an additional
warrant to purchase 250,000 shares of common stock at an
exercise price of $3.08 per share, to expire on May 3, 2006.
-- Of the 150,000 warrants granted to the investment banker the
exercise price of 100,000 warrants was reduced from $12.56 to
$3.08 and of 50,000 warrants was reduced from $9.63 to $3.08.
In addition, the 50,000 warrants that were to expire on August
17, 2001 were extended to November 17, 2005.
As a result of the aforesaid modifications, including the repricing of the
warrants to the investors and to the investment banker and the additional grant
of warrants to the investor, the Company has recorded a deemed dividend in the
amount of $1,196,667, to reflect the additional benefit created for these
certain investors. The fair value of the repriced warrants was calculated as a
difference measured between (1) the fair value of the modified warrant
determined in accordance with the provisions of SFAS No. 123, and (2) the value
of the old warrant immediately before its terms are modified, determined based
on the shorter of (a) its remaining expected life or (b) the expected life of
the modified option. The deemed dividend increased the loss applicable to common
stockholders in the calculation of basic and diluted net loss per share for the
year ended December 31, 2001, without any effect on total shareholder's equity.
3. As part of the investment agreement in May 2001 (see Note 12.b.4), the
Company issued to the investors a total of 2,696,971 warrants to purchase shares
of common stock at a price of $3.22 per share; these warrants are exercisable by
the holder at any time after November 8, 2001 and will expire on May 8, 2006.
The Company also issued to a financial consultant that provided investment
banking services concurrently with this transaction a total of 125,000 warrants
to purchase shares of common stock at a price of $3.22 per share; these warrants
are exercisable by the holder at any time and will expire on June 12, 2006. In
addition the Company paid approximately $562,000 in cash, which was recorded as
deduction from additional paid in capital.
4. As part of the investment agreement in January 2002 (see Note 12.b.7), the
Company, in January 2002, issued to a financial consultant that provided
investment banking services concurrently with this transaction a warrants to
acquire (i) 150,000 shares of common stock at an exercise price of $1.68 per
share, and (ii) 119,000 shares of common stock at an exercise price of $2.25 per
share; these warrants are exercisable by the holder at any time and will expire
on January 4, 2007.
F-34
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
5. As part of the securities purchase agreement on December 31, 2002 (see Note
17), the Company issued to the purchasers of its 9% secured convertible
debentures warrants as follows: (i) Series A Warrants to purchase an aggregate
of 1,166,700 shares of common stock at any time prior to December 31, 2007 at a
price of $0.84 per share; (ii) Series B Warrants to purchase an aggregate of
1,166,700 shares of common stock at any time prior to December 31, 2007 at a
price of $0.89 per share; and (iii) Series C Warrants to purchase an aggregate
of 1,166,700 shares of common stock at any time prior to December 31, 2007 at a
price of $0.93 per share.
In connection with these warrants, the Company will record financial expenses of
$1,096,698, which will be amortized ratably over the life of the convertible
debentures (3 years). This transaction was accounted according to APB No. 14
"Accounting for Convertible debt and Debt Issued with Stock Purchase Warrants"
and Emerging Issue Task Force No. 00-27 "Application of Issue No. 98-5 to
Certain Convertible Instruments" ("EITF 00-27"). The fair value of these
warrants was determined using Black-Scholes pricing model, assuming a risk-free
interest rate of 3.5%, a volatility factor 64%, dividend yields of 0% and a
contractual life of 5 years.
g. Stock option plans:
1. Options to employees and others (except consultants)
a. The Company has adopted the following stock option plans, whereby options may
be granted for purchase of shares of the Company's common stock. Under the terms
of the employee plans, the Board of Directors or the designated committee grants
options and determines the vesting period and the exercise terms.
1) 1991 Employee Option Plan - 2,115,600 shares reserved for issuance, of which
33,692 are available for future grants to employees as of December 31, 2002.
2) 1993 Employee Option Plan - as amended, 4,200,000 shares reserved for
issuance, of which 1,904,781are available for future grants to employees as of
December 31, 2002.
3) 1998 Employee Option Plan - as amended, 4,750,000 shares reserved for
issuance, of which 2,070,460 are available for future grants to employees and
consultants as of December 31, 2001.
4) 1995 Non-Employee Director Plan - 1,000,000 shares reserved for issuance, of
which 640,000 are available for future grants to directors as of December 31,
2002.
b. Under these plans, options generally expire no later than 10 years from the
date of grant. Each option can be exercised to purchase one share, conferring
the same rights as the other common shares. Options that are cancelled or
forfeited before expiration become available for future grants. The options
generally vest over a three-year period (33.3% per annum).
F-35
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
c. A summary of the status of the Company's plans and other share options
(except for options granted to consultants) granted as of December 31, 2002,
2001 and 2000, and changes during the years ended on those dates, is presented
below:
2002 2001 2000
-------------------------- -------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
AMOUNT PRICE AMOUNT PRICE AMOUNT PRICE
------------ ------------ ------------ ------------ ------------- ----------
$ $ $
------------ ------------ ----------
Options outstanding at beginning 4,240,228 $ 2.74 2,624,225 $ 3.82 2,820,679 $ 3.44
of year
Changes during year:
Granted (1) (3) 1,634,567 $ 0.87 2,172,314 $ 1.55 1,598,233 $ 4.58
Exercised (4) (2) (191,542) $ 1.29 (159,965) $ 1.31 (1,715,628) $ 3.84
Forfeited or cancelled (422,887) $ 1.92 (396,346) $ 4.11 (79,059) $ 4.93
Repriced (2):
Old exercise price - - - - (310,000) $ 4.95
New exercise price - - - - 310,000 $ 4.95
------------ ------------ ------------ ------------ ------------- ----------
Options outstanding at end of year 5,260,366 $ 2.26 4,240,228 $ 2.74 2,624,225 $ 3.82
============ ============ ============ ============ ============= ==========
Options exercisable at end of year 4,675,443 $ 2.26 2,643,987 $ 2.75 1,078,332 $ 3.81
============ ============ ============ ============ ============= ==========
(1) Includes 481,435, 1,189,749 and 870,000 options granted to related
parties in 2002, 2001 and 2000, respectively.
(2) On May 25, 2000, the Company repriced downwards 150,000 options from
$6.60 per share to $4.95. The Company also repriced upward 160,000 options
held by the same options holder from $3.375 per share to $4.95. The options
holder immediately exercised those options. In accordance with FIN 44 the
downward repricing resulted in a variable plan accounting, however, due to
the immediate exercise the Company recorded a compensation expense in the
amount of $26,250 at that date only.
(3) The Company recorded deferred stock compensation for options issued
with an exercise price below the fair value of the common stock in the
amount of $0, $18,000 and $37,924 as of December 31, 2002, 2001 and 2000,
respectively. Deferred stock compensation is amortized and recorded as
compensation expenses ratably over the vesting period of the option. The
stock compensation expense that has been charged in the consolidated
statements of operations in respect of options to employees in 2002, 2001
and 2000, was $6,000, $17,240 and $20,684, respectively.
(4) In September 2002 and December 2001, the employees exercised 100,000
and 33,314, respectively, options for which the exercise price was not paid
at the exercise date. The Company recorded the owed amount of $73,000 and
$43,308, respectively, as "Note receivable from shareholders" in the
statement of shareholders' equity. In accordance with EITF 95-16, since the
original option grant did not permit the exercise of the options through
loans, and due to the Company's history of granting non-recourse loans,
this postponement in payments of the exercise price resulted in a variable
plan accounting. However, the Company did not record any compensation due
to the decrease in the market value of the Company's shares during 2001 and
2002. During the year 2002 the notes in the amount of $43,308 were entirely
repaid and note at the amount of $36,500 was forgiven and appropriate
compensation was recorded.
F-36
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
d. The options outstanding as of December 31, 2002 have been separated into
ranges of exercise price, as follows:
TOTAL OPTIONS OUTSTANDING EXERCISABLE OPTIONS OUTSTANDING
--------------------------------------------------- ----------------------------------
WEIGHTED
AMOUNT AVERAGE AMOUNT
RANGE OF OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
PRICES 2002 LIFE EXERCISE PRICE 2002 EXERCISE PRICE
------------ -------------- ---------------- ---------------- --------------- ----------------
$ YEARS $ $
------------ ---------------- ---------------- ----------------
0.30-2.00 3,422,797 6.91 1.15 3,011,530 1.12
3.00-4.00 421,069 3.84 3.00 419,669 3.00
4.00-6.00 1,356,500 7.45 4.60 1,189,244 4.64
6.00-8.00 50,000 2.43 7.49 45,000 7.56
8.00 10,000 4.75 9.06 10,000 9.06
---------------- ---------------- ---------------- ---------------- ----------------
5,260,366 6.75 2.26 4,675,443 2.26
================ ================ ================ ================ ================
Weighted-average fair values and exercise prices of options on dates of grant
are as follows:
EQUALS MARKET PRICE EXCEEDS MARKET PRICE LESS THAN MARKET PRICE
----------------------------- ------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- ------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- ---------- -------- -------- -------- ---------
Weighted average $ 1.265 $ 1.579 $ 4.580 $ - $ 1.466 $ 7.125 $ 0.755 $ 1.300 $ 5.270
exercise prices
Weighted average fair 0 0 0
value on grant date $ 0.560 $ 0.50 $ 4.12 $ - $ 0.560 $ 3.760 $ 0.250 $ 0.79 $ 6.60
2. Options issued to consultants:
a. The Company's outstanding options to consultants as of December 31, 2002, are
as follows:
2002 2001 2000
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
AMOUNT PRICE AMOUNT PRICE AMOUNT PRICE
------------ ------------- ------------ ------------- ------------- -------------
$ $ $
------------- ------------- -------------
Options outstanding at 245,786 $ 5.55 175,786 $ 6.57 141,814 $ 3.09
beginning of year
Changes during year:
Granted (1) - - 130,000 $ 6.02 198,500 $ 5.86
Exercised - - (60,000) $ 5.13 (164,528) $ 2.72
Repriced (2):
Old exercise price - - (56,821) $ 9.44 - -
New exercise price - - 56,821 $ 4.78 - -
------------ ------------ -------------
Options outstanding at
end of year 245,786 $ 5.55 245,786 $ 5.55 175,786 $ 6.56
============ ============= ============ ============= ============= =============
Options exercisable at
end of year 125,786 $ 6.42 125,786 $ 6.42 149,044 $ 6.80
============ ============= ============ ============= ============= =============
F-37
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
(1) 120,000 options out of 130,000 options granted in 2001 to the Company's
selling and marketing consultants are subject to the achievement of the targets
specified in the agreements with these consultants. The measurement date for
these options has not yet occurred, as these targets have not been met, in
accordance with EITF 96-18. When the targets is achieved the Company will record
appropriate compensation upon the fair value at the same date at which the
targets is achieved.
(2) During the year 2001 the Company repriced 56,821 options to its service
providers. The fair value of repriced warrants was calculated as a difference
measured between (1) the fair value of the modified warrants determined in
accordance with the provisions of SFAS 123, and (2) the value of the old warrant
immediately before its terms were modified, determined based on the shorter of
(a) its remaining expected life or (b) the expected life of the modified option.
As a result of the repricing, the Company has recorded an additional
compensation at the amount of $21,704, and included this amount in marketing
expenses.
b. The Company accounted for its options to consultants under the fair value
method of SFAS No. 123 and EITF 96-18. The fair value for these options was
estimated using a Black-Scholes option-pricing model with the following
weighted-average assumptions:
2002 2001 2000
---------------- --------------- ---------------
Dividend yield - 0% 0%
Expected volatility - 82% 95%
Risk-free interest - 3.5-4.5% 6.5%
Contractual life of up to - 10 years 5 years
c. In connection with the grant of stock options to consultants, the Company
recorded stock compensation expenses totaling $0, $139,291 and $796,128 for the
years ended December 31, 2002, 2001 and 2000, respectively, and included these
amounts in marketing expenses.
3. Dividends:
In the event that cash dividends are declared in the future, such dividends will
be paid in U.S. dollars. The Company does not intend to pay cash dividends in
the foreseeable future.
4. Treasury Stock:
Treasury stock is the Company's common stock that has been issued and
subsequently reacquired. The acquisition of common stock is accounted for under
the cost method, and presented as reduction of stockholders' equity.
F-38
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 13:- INCOME TAXES
a. Taxation of U.S. parent company (EFC):
As of December 31, 2002, EFC has operating loss carryforwards for U.S. federal
income tax purposes of approximately $15 million, which are available to offset
future taxable income, if any, expiring in 2010-2015. Utilization of U.S net
operating losses may be subject to substantial annual limitations due to the
"change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating loses before utilization.
b. Israeli subsidiary (EFL):
1. Tax benefits under the Law for the Encouragement of Capital Investments, 1959
(the "Investments Law"):
EFL's manufacturing facility has been granted "Approved Enterprise" status under
the Investments Law, and is entitled to investment grants from the State of
Israel of 38% on property and equipment located in Jerusalem, and 10% on
property and equipment located in its plant in Beit Shemesh, and to reduced tax
rates on income arising from the "Approved Enterprise," as detailed below.
The approved investment program is in the amount of approximately $500,000. EFL
effectively operated the program during 1993, and is entitled to the tax
benefits available under the Investments Law. EFL is entitled to additional tax
benefits as a "foreign investment company," as defined by the Investments Law.
In 1995, EFL received approval for a second "Approved Enterprise" program for
investment in property and equipment, in the amount of approximately $6,000,000,
and approval for grants at the abovementioned rates, for these approved property
and equipment.
The entitlement to the above benefits is conditional upon the Company's
fulfilling the conditions stipulated by the Investments Law, regulations
published thereunder and the instruments of approval for the specific
investments in "approved enterprises." In the event of failure to comply with
these conditions, the benefits may be canceled and the Company may be required
to refund the amount of the benefits, in whole or in part, including interest.
As of December 31, 2002, according to the Company's management, the Company has
fulfilled all conditions.
The main tax benefits available to EFL are:
a) Reduced tax rates:
During the period of benefits (seven to ten years), commencing in the first year
in which EFL earns taxable income from the "Approved Enterprise," a reduced
corporate tax rate of between 10% and 25% (depending on the percentage of
foreign ownership, based on present ownership percentages of 15%) will apply,
instead of the regular tax rates.
F-39
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 13:- INCOME TAXES (CONT.)
The period of tax benefits, detailed above, is subject to limits of 12 years
from the commencement of production, or 14 years from the approval date,
whichever is earlier. Hence, the first program will expire in the year 2004 and
the second in the year 2008. The commencement of production according to the
third program has not been determined yet by the investment center and so there
is no ability to determine the period of the tax benefits according to this
program. The benefits have not yet been utilized since the Company has no
taxable income, since its incorporation.
b) Accelerated depreciation:
EFL is entitled to claim accelerated depreciation in respect of machinery and
equipment used by the "Approved Enterprise" for the first five years of
operation of these assets.
2. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985
Results for tax purposes are measured in real terms of earnings in NIS after
certain adjustments for increases in the Consumer Price Index. As explained in
Note 2b, the financial statements are presented in U.S. dollars. The difference
between the annual change in the Israeli consumer price index and in the
NIS/dollar exchange rate causes a difference between taxable income and the
income before taxes shown in the financial statements. In accordance with
paragraph 9(f) of SFAS No. 109, EFL has not provided deferred income taxes on
this difference between the reporting currency and the tax bases of assets and
liabilities.
3. Tax benefits under the Law for the Encouragement of Industry (Taxation),
1969:
EFL is an "industrial company," as defined by this law and, as such, is entitled
to certain tax benefits, mainly accelerated depreciation, as prescribed by
regulations published under the inflationary adjustments law, the right to claim
public issuance expenses and amortization of know-how, patents and certain other
intangible property rights as deductions for tax purposes.
4. Tax rates applicable to income from other sources:
Income from sources other than the "Approved Enterprise," is taxed at the
regular rate of 36%.
5. Tax rates applicable to income distributed as dividends by EFL:
The effective taxes on income distributed by EFL to its parent company, EFC,
would increase as a result of the Israeli withholding tax imposed upon such
dividend distributions. The overall effective tax rate on such distribution
would be 28%, in respect of income arising from EFL's "Approved Enterprise," and
44% in respect of other income. EFL does not have any earnings available for
distribution as dividend, nor does it intend to distribute any dividends in the
foreseeable future.
6. Tax loss carryforwards:
As of December 31, 2002, EFL has operating loss carryforwards for Israeli tax
purposes of approximately $93 million, which are available, indefinitely, to
offset future taxable income.
F-40
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 13:- INCOME TAXES (CONT.)
c. European subsidiaries:
Income of the European subsidiaries, which is derived from intercompany
transactions, is based on the tax laws in their countries of domicile.
d. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets resulting from tax loss carryforward are as
follows:
DECEMBER 31,
-----------------------------------
2002 2001
--------------- ----------------
U.S. dollars
-----------------------------------
Operating loss carryforward $ 29,257,118 $ 12,162,581
Reserve and allowance 303,204 477,522
--------------- ----------------
Net deferred tax asset before valuation allowance 29,560,322 12,640,103
Valuation allowance (29,560,322) (12,640,103)
--------------- ----------------
$ - $ -
=============== ================
The Company and its subsidiaries provided valuation allowances in respect of
deferred tax assets resulting from tax loss carryforwards and other temporary
differences. Management currently believes that it is more likely than not that
the deferred tax regarding the loss carryforwards and other temporary
differences will not be realized. The change in the valuation allowance as of
December 31, 2002 was $16,920,219.
e. Loss before taxes on income:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
U.S. dollars
---------------------------------------------------------------
Domestic $ (5,250,633) $ (5,828,828) $ (2,021,661)
Foreign (13,254,195) (11,457,960) (9,959,297)
------------------- ------------------- -------------------
$ (18,504,358) $ (17,286,788) $ (11,980,958)
=================== =================== ===================
F-41
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development expenses, net:
YEAR ENDED DECEMBER 31
---------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
Research and development costs $ 685,919 $ 455,845 $ 1,065,065
Less royalty-bearing grants - - 195,170
--------------- --------------- ---------------
$ 685,919 $ 455,845 $ 869,895
=============== =============== ===============
b. Financial income, net:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
U.S. dollars
------------- -- ------------- -- -------------
Financial expenses:
Interest, bank charges and fees $ (89,271) $ (49,246) $ (67,480)
Foreign currency translation differences 15,202 (16,003) (219,043)
------------- ------------- -------------
(74,069) (65,249) (286,523)
------------- ------------- -------------
Financial income:
Interest 174,520 327,830 830,704
------------- ------------- -------------
Total $ 100,451 $ 262,581 $ 544,181
============= ============= =============
NOTE 15:- RELATED PARTY DISCLOSURES
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
U.S. dollars
----------------------------------------------------------
Transactions:
Reimbursement of general and administrative expenses $ 36,000 $ 23,850 $ 28,880
================= ================= =================
Financial income (expenses), net from notes receivable
and loan holders (see Notes 6 and 12.e.2) $ (7,309) $ (36,940) $ 230,924
================= ================= =================
F-42
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 16:- SEGMENT INFORMATION
a. General:
The Company and its subsidiaries operate primarily in two business segments (see
Note 1a for a brief description of the Company's business) and follow the
requirements of SFAS No. 131.
The Company previously managed its business in three reportable segments
organized on the basis of differences in its related products and services. With
the discontinuance of Consumer Batteries segment (see Note 1.e-Discontinued
Operation) and acquiring two subsidiaries (see Notes 1.b.and c.), two reportable
segments remain: Electric Fuel Batteries, and Defense and Security Products. As
a result the Company reclassified information previously reported in order to
comply with new segment reporting.
The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies. The
Company evaluates performance based upon two primary factors, one is the
segment's operating income and the other is based on the segment's contribution
to the Company's future strategic growth.
b. The following is information about reported segment gains, losses and assets:
ELECTRIC DEFENSE AND
FUEL SECURITY
BATTERIES PRODUCTS ALL OTHER TOTAL
----------------- ---------------- ----------------- -----------------
2002
Revenues from outside customers 1,662,296 $ 4,724,443 $ - $ 6,406,739
Depreciation expense and amortization (252,514) (676,753) (194,013) (1,123,280)
Direct expenses (1) (3,062,548) (4,353,770) (2,905,743) (10,322,061)
----------------- ---------------- ----------------- -----------------
Segment gross loss $ (1,652,766) $ (306,080) $ (3,099,756) (5,038,602)
================= ================ =================
Financial income 100,451
-----------------
Net loss from continuing operation $ 4,938,151
=================
Segment assets (2) $ 2,007,291 $ 1,683,825 $ 575,612 $ 4,266,728
================= ================ ================= =================
Expenditures for segment assets $ 246,664 $ 58,954 $ 70,486 $ 376,104
================= ================ ================= =================
2001
Revenues from outside customers $ 2,093,632 $ - $ - $2,093,632
Depreciation expense (304,438) - (225,575) (530,013)
Direct expenses (1) (2,295,501) - (3,556,486) (5,851,987)
----------------- ---------------- ----------------- -----------------
Segment gross loss $ (506,307) $ - $ (3,782,061) (4,288,368)
================= ================ =================
Financial income net 262,581
-----------------
Net loss from continuing operations $ (4,025,787)
=================
Segment assets (2) $ 2,044,257 $ 1,175,521 $ 702,915 $ 2,744,172
================= ================ ================= =================
Expenditures for segment assets $ 229,099 $ 229,099 $ 323,985 $ 553,084
================= ================ ================= =================
F-43
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 16:- SEGMENT INFORMATION (CONT.)
ELECTRIC DEFENSE AND
FUEL SECURITY
BATTERIES PRODUCTS ALL OTHER TOTAL
----------------- ---------------- ----------------- -----------------
2000
Revenues from outside customers $ 1,478,495 $ - $ 11,446 $1,489,941
Depreciation expense (310,408) - (203,834) (514,242)
Direct expenses (1) (1,754,003) - (3,150,558) (4,904,561)
----------------- ---------------- ----------------- -----------------
Segment gross loss $ (585,916) $ - $ (3,342,946) (3,928,862)
================= ================ =================
Financial income net 544,181
-----------------
Net loss from continuing operations $ (3,384,681)
=================
Segment assets (2) $ 2,020,771 $ - $ 662,575 $ 2,683,346
================= ================ ================= =================
Expenditures for segment assets $ 284,939 $ 284,939 $ 310,988 $ 595,927
================= ================ ================= =================
(1) Including sales and marketing, general and administrative expenses.
(2) Including property and equipment and inventory.
c. Summary information about geographic areas:
The following presents total revenues according to end customers location for
the years ended December 31, 2002, 2001 and 2000, and long-lived assets as of
December 31, 2002, 2001 and 2000:
2002 2001 2000
------------------------------ ------------------------------ ------------------------------
TOTAL LONG-LIVED TOTAL LONG-LIVED TOTAL LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------------- -------------- -------------- -------------- -------------- ---------------
U.S. dollars
----------------------------------------------------------------------------------------------
U.S.A. $ 2,787,250 $ 6,710,367 $ 1,057,939 $ 60,531 $ 813,658 $ 26,412
Germany 38,160 - 526,766 - 44,117 -
England 47,696 - 36,648 - 30,885 -
Thailand 291,200 - - - - -
Israel 2,799,365 3,367,320 13,773 2,160,275 19,279 2,262,465
Other 443,068 - 458,506 - 582,003 -
-------------- -------------- -------------- -------------- -------------- ---------------
$ 6,406,739 $ 10,077,687 $ 2,093,632 $ 2,220,806 $ 1,489,942 $ 2,288,877
============== ============== ============== ============== ============== ===============
* Reclassified
d. Revenues from major customers:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
%
----------------------------------------------------
Electric Fuel Batteries:
Customer A - 22% -
Customer B 7% 20% 17%
Customer C 2% 13% 20%
Customer D 8% 12% -
Deference and security: Products 43% - -
F-44
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 16:- SEGMENT INFORMATION (CONT.)
e. Revenues from major products:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
MAJOR PRODUCT SEGMENT 2002 2001 2000
------------- ------- ------------- ------------- -------------
EV Electric Fuel Batteries 460,562 894,045 310,441
WAB Electric Fuel Batteries 647,896 951,598 1,168,055
Security and defense Electric Fuel Batteries 573,838 247,989 -
------------- ------------- -------------
Total Electric Fuel Batteries 1,662,296 2,093,632 1,478,495
Car armoring Defense and Security Products 2,744,382 - -
Interactive use-of-force training Defense and Security Products 1,980,061 - -
------------- ------------- -------------
Total Defense and Security 4,724,443 - -
Other Other - - 11,446
------------- ------------- -------------
Total 6,406,749 2,093,632 1,489,942
============= ============= =============
NOTE 17:- CONVERTIBLE DEBENTURES
Pursuant to the terms of a Securities Purchase Agreement dated December 31,
2002, the Company issued and sold to a group of institutional investors an
aggregate principal amount of 9% secured convertible debentures in the amount of
$3.5 million due June 30, 2005. These debentures are convertible at any time
prior to June 30, 2005 at a conversion price of $0.75 per share, or a maximum
aggregate of 4,666,667 shares of common stock (see also Note 12.f.5).
In determining whether the convertible debentures include a beneficial
conversion option in accordance with EITF 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features or Continently Adjustable
Conversion Ratios" and EITF 00-27, the total proceeds were allocated to the
convertible debentures and the detachable warrants based on their related fair
values. In connection with these convertible debentures, the Company will record
financial expenses of $585,365. The $585,365 will be accreted from the date of
issuance to the stated redemption date - June 30, 2005 - as financial expenses.
F-45
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 18:- PROFIT DISTRIBUTION
On September 30, 2002, MDT distributed in cash to its shareholders profit in the
amount of NIS 4,000,000 (approximately $841,288), out of which $412,231 was paid
to the minority interest.
- - - - - - - -
F-46
SUPPLEMENTARY FINANCIAL DATA
QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE TWO YEARS ENDED DECEMBER 31, 2002
QUARTER ENDED
--------------------------------------------------------------------
2002 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------ --------------------------------------------------------------------
Net revenue................................. $ 570,545 $ 425,053 $ 3,262,711 $ 2,148,430
Gross profit................................ $ 186,917 $ 48,807 $ 1,593,770 $ 155,497
Net loss from continuing operations......... $ (990,097) $ (1,005,877) $ (923,122) $ (2,019,054)
Net loss from discontinued operations....... $ (2,324,109) $ (1,654,108) $ (8,716,422) $ (871,567)
Net loss for the period..................... $ (3,314,208) $ (2,659,985) $ (9,369,544) $ (2,890,621)
Net loss per share - basic and diluted...... $ (0.11) $ (0.09) $ (0.29) $ (0.08)
Shares used in per share calculation........ 30,149,210 30,963,919 33,441,137 34,758,048
2001
------------------------------
Net revenue................................. $ 503,619 $ 400,879 $ 632,344 $ 556,790
Gross profit (loss)......................... $ 121,633 $ (3,117) $ 43,326 $ (60,896)
Net loss from continuing operations......... $ (531,866) $ (1,107,576) $ (771,238) $ (1,615,109)
Net loss from discontinued operations....... $ (2,893,088) $ (3,483,264) $ (3,639,318) $ (3,245,329)
Net loss for the period..................... $ (3,424,954) $ (4,590,840) $ (4,410,556) $ (4,860,438)
Deemed dividend to certain shareholders of
common stock.............................. $ - $ (1,196,667) $ - $ -
Net loss attributable to shareholders of
common stock.............................. $ (3,424,954) $ (5,787,507) $ (4,410,556) $ (4,860,438)
Net loss per share - basic and diluted...... $ (0.16) $ (0.25) $ (0.19) $ (0.18)
Shares used in per share calculation........ 21,802,499 23,562,099 23,612,097 26,648,319
F-47