<PAGE>
As filed with the Securities and Exchange Commission on April 14, 2000
Registration No. 333-83945
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
AMENDMENT NO. 4
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
MEDIS TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)
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<CAPTION>
DELAWARE 8999 13-3669062
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
805 Third Avenue
New York, New York 10022
(212) 935-8484
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
----------
ROBERT K. LIFTON, Chairman of the Board
MEDIS TECHNOLOGIES LTD.
805 Third Avenue
New York, New York 10022
(212) 935-8484
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
----------
Copy to:
ELLIOT BRECHER, ESQ.
STEPHEN E. FOX, ESQ.
COOPERMAN LEVITT WINIKOFF LESTER & NEWMAN, P.C.
800 Third Avenue
New York, New York 10022
(212) 688-7000
Fax: (212) 755-2839
----------
Approximate date of commencement of proposed sale to the public: As soon
as possible after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box./ /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering./ /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
<PAGE>
The information in this preliminary prospectus is not complete and may
be changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission becomes effective. This
preliminary prospectus is not an offer to sell these securities nor does it seek
offers to buy these securities in any jurisdiction where the offer or sale is
not permitted.
----------
<PAGE>
Subject to completion, dated April 14, 2000
PROSPECTUS
MEDIS TECHNOLOGIES LTD.
----------
This is an offer to exchange shares of our common stock for outstanding
ordinary shares of Medis El Ltd. We presently beneficially own approximately 64%
of Medis El's outstanding ordinary shares.
----------
TERMS OF THIS EXCHANGE OFFER:
- - Each Medis El shareholder validly tendering his or her ordinary shares will
receive 1.37 shares of our common stock for each ordinary share tendered.
- - We will issue an aggregate of 5,299,722 shares of our common stock if all
outstanding Medis El ordinary shares not already owned by us are properly
tendered and not withdrawn.
- - This exchange offer will expire 5:00 p.m., New York City time, on
, 2000, unless extended.
- - You may withdraw any ordinary shares tendered by you at any time prior to
the expiration date of this exchange offer.
Please see the other important terms of this exchange offer under "The
Exchange Offer" which, together with the accompanying letter of transmittal, set
forth all of the terms of this exchange.
----------
FOR A DISCUSSION OF THE RISKS THAT YOU SHOULD CONSIDER BEFORE TENDERING
YOUR MEDIS EL LTD. ORDINARY SHARES IN THIS EXCHANGE OFFER, PLEASE READ THE RISK
FACTORS BEGINNING ON PAGE 9.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
----------
There is currently no public market for any of our securities. We
intend to have our common stock listed on the Nasdaq SmallCap Market under the
symbol MDTL upon the completion of this exchange offer.
----------
, 2000
<PAGE>
TABLE OF CONTENTS
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PAGE
----
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Prospectus Summary................................................................................................1
Risk Factors......................................................................................................9
Determination of Exchange Ratio..................................................................................18
The Exchange Offer...............................................................................................21
Dividend Policy..................................................................................................27
Price Range of Our Common Stock..................................................................................27
Price Range of Medis El's Ordinary Shares........................................................................28
Capitalization...................................................................................................29
Selected Consolidated Financial Data.............................................................................30
Selected Consolidated Financial Data of Medis El.................................................................31
Management's Discussion and Analysis of Financial Condition and Results of Operations............................32
Business.........................................................................................................38
Management.......................................................................................................56
Principal Stockholders...........................................................................................61
Certain Transactions.............................................................................................62
Description of Our Securities....................................................................................64
Description of Medis El's Securities.............................................................................65
Comparison of Rights of Stockholders of Medis Technologies
and Shareholders of Medis El...................................................................................65
United States Federal Income Tax Consequences....................................................................73
Legal Matters....................................................................................................74
Experts..........................................................................................................74
Where You Can Find More Information..............................................................................74
Index to Financial Statements...................................................................................F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information from this
prospectus and may not contain all the information that is important to you. To
understand our business and this exchange offering fully, you should read this
entire prospectus carefully, including the financial statements and related
notes beginning on page F-1.
MEDIS TECHNOLOGIES LTD.
We serve as agent or distributor of technologies owned wholly or in
part by Medis El Ltd., an Israeli corporation of which we beneficially own
approximately 64%. Our goal, working in conjunction with Medis El, is to become
a greenhouse for the development of highly advanced, innovative proprietary
technology products. Our business strategy is to seek out "cutting edge"
technologies, acquire rights to such technologies, patent them and develop them
in-house to the point that a working prototype can be developed. We will then
offer to third parties the opportunity, as a joint venturer or licensee, to
participate in the continuing research and development necessary to
commercialize the product and bring it to market or seek an outright sale of the
technology. Our beliefs and estimates as to the feasibility of our technologies
are based upon the understanding of and expectations relating to such
technologies by the technical advisors and scientists employed by Medis El,
whose views may not prove to be accurate.
These technologies, which are in varying stages of development,
presently include:
- - CELLSCAN
The CellScan is a patented technology designed for the viewing
and testing of cells, which we believe has or potentially will have
diagnostic applications in the detection of breast, prostate and
gynecological cancers, as well as other diseases such as
atherosclerosis and tuberculosis, in addition to facilitating the
development of individualized chemotherapy for cancer patients. We also
believe the CellScan has potential research applications in gene
therapy and drug and vaccine development.
- - FUEL CELLS
Medis El is developing fuel cells, based upon proprietary
technology, with a special focus on portable electronics, to power cell
phones, laptop computers and camcorders, which we believe will be more
efficient, cost less to manufacture and last longer than currently
available fuel cell technology.
- - TOROIDAL ENGINE AND COMPRESSOR
The patented toroidal engine is an internal combustion engine
that is designed to be one-half the size and weight and, we believe, at
least 30% more efficient than currently available internal combustion
engines. Medis El is also applying the principles of the toroidal
engine to develop a toroidal compressor for use in refrigeration units,
air conditioning units and for other applications that we expect to be
substantially smaller and more efficient than currently available
compressors.
1
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- - STIRLING CYCLE LINEAR TECHNOLOGY
The stirling cycle linear technology is a patented
refrigeration and air conditioning system that, if successfully
developed, is expected to provide greater energy efficiency and
environmental sensitivity than current refrigeration and air
conditioning systems, thereby potentially saving considerable energy
costs and reducing emissions which may harm the environment.
- - WATER TECHNOLOGIES
- DEVICE FOR EXTRACTING WATER FROM THE ATMOSPHERE. Medis El is
seeking proprietary protection for what may prove to be an
efficient, low-cost device that would possess the capability
to generate sufficient water from the atmosphere to satisfy an
average household's daily needs.
- DESALINATION. Medis El is seeking proprietary protection for
what may prove to be a new method to reduce the energy
required for water desalination, thus reducing the cost of
generating potable water.
- - RECIPROCATING ELECTRICAL MACHINE
The patented reciprocating electrical machine, if and when
developed, will utilize the back-and-forth motion of energy sources
such as wind or sea waves to convert that energy into electricity. We
believe the machine can reduce the cost of generating electricity by up
to 30% over conventional power sources.
- - DIRECT CURRENT REGULATING DEVICE
The patented direct current regulating device, if and when
developed, will enable the transmission of high levels of direct
current electrical energy without the need to convert such current into
alternate current electricity which, we believe, will eliminate the
need for AC power lines and will allow the transmission of electric
currents two-thirds higher than the current system.
Our offices are located at 805 Third Avenue, New York, New York 10022,
and our telephone number is (212) 935-8484. We were incorporated in Delaware on
April 7, 1992 and changed our name to Cell Diagnostics Inc. in May 1992. We
changed our name to Medis Technologies Ltd. on July 7, 1999. Medis El's offices
and research and development facilities are located in Yehud, Israel. It also
maintains a facility for production of certain aspects of the CellScan in the
high-tech community known as Har Hotzvim Industrial Park in Jerusalem, Israel.
Its Internet site can be accessed at http://www.medisel.com.
2
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OWNERSHIP STRUCTURE
The following charts illustrate our ownership structure prior to and
subsequent to the proposed exchange:
PRIOR TO EXCHANGE
------------ -------------------- ------------
ISRAEL AIRCRAFT PUBLIC AND
PRIVATE INDUSTRIES LTD. --- PRIVATE
SHAREHOLDERS (Israel Corporation) | SHAREHOLDERS
------------ -------------------- | ------------
| 64.5% | 35.5% | |
----------------------- | |
MEDIS TECHNOLOGIES LTD. | |
(Delaware Corporation) | |
----------------------- | |
| | | |
--------------------- | 100% | 12% | 24%
| 100% ---------------------- | |
- ---------------------- MEDIS INC. | |
CDS DISTRIBUTOR, INC. (Delaware Corporation) | |
(Delaware Corporation) ---------------------- | |
- ---------------------- | 64% | |
---------------------- | |
MEDIS EL LTD. | |
(Israel Corporation) ------- |
PUBLIC COMPANY ------------------
---------------------
| 86.5%
---------------------
MORE ENERGY LTD.
(Israel Corporation)
---------------------
SUBSEQUENT TO EXCHANGE
(assuming all Medis El
ordinary shares are tendered)
------------ --------------------
PUBLIC AND ISRAEL AIRCRAFT
PRIVATE INDUSTRIES LTD.
SHAREHOLDERS (Israel Corporation)
------------ --------------------
| 65.5% | 34.5%
-----------------------
MEDIS TECHNOLOGIES LTD.
(Delaware Corporation)
PUBLIC COMPANY
-----------------------
| |
--------------------- | 100%
| 100% |
- ---------------------- ----------------------
CDS DISTRIBUTOR, INC. MEDIS INC.
(Delaware Corporation) (Delaware Corporation)
- ---------------------- ----------------------
| 100%
--------------------
MEDIS EL LTD.
(Israel Corporation)
--------------------
| 86.5%
--------------------
MORE ENERGY LTD.
(Israel Corporation)
--------------------
3
<PAGE>
THE EXCHANGE OFFER
Terms of the exchange offer We are offering to exchange shares of our
common stock for Medis El ordinary shares at
an exchange rate of 1.37 of our shares of
common stock for each Medis El ordinary
share validly tendered. To be eligible to
receive our common stock pursuant to this
exchange offer, you must validly tender and
not withdraw your Medis El ordinary shares
on or prior to , 2000. If all
outstanding Medis El ordinary shares not
currently beneficially owned by us are
exchanged pursuant to this exchange offer,
a maximum of 5,299,722 shares of our common
stock will be exchanged for a maximum of
3,868,410 of Medis El's ordinary shares,
based on the number of Medis El ordinary
shares outstanding as of the date of this
prospectus. This offering is conditioned on
the tender and acceptance for exchange of at
least 1,735,842 of Medis El's ordinary
shares. All Medis El ordinary shares
tendered in this exchange will be acquired
by and owned by Medis Inc., our wholly-owned
subsidiary.
We also intend upon the successful
completion of this exchange offer to grant
to each of the current holders of options
under Medis El's stock option plan an option
to purchase a number of our shares based
upon the same exchange rate as this exchange
offer. Each grant is conditional upon such
option holder's agreement to forfeit his or
her existing Medis El options.
Determination of exchange ratio Our board of directors has determined the
exchange ratio of 1.37 based upon our
internal valuation of Medis El's
technologies and our business, which is
primarily the value of our distribution
rights to the CellScan and agency rights to
the stirling cycle linear technology. We
then arbitrarily lowered the valuation of
our business, thus raising the number of
shares of our stock exchanged for each Medis
El share tendered, based upon Israel
Aircraft's disagreement with such valuation
and our desire to make the offer more
attractive to Medis El shareholders. We are
not making a recommendation to Medis El
shareholders as to whether or not to accept
this exchange offer due to the overlap of
our and Medis El's board of directors and
the non-arms-length nature of this
transaction.
Return of ordinary shares If, immediately prior to the closing of
this exchange offer and prior to our
delivery to tendering shareholders of
our shares, we would own between 90% and
95% of Medis El's ordinary shares, we
will be required under Israeli law to
return up to 533,142 ordinary shares on a
pro rata basis to tendering shareholders.
Expiration date; extension;
amendments The exchange offer and withdrawal rights
will expire at 5:00 P.M., New York City
time, on , 2000, unless we extend the offer
in our sole discretion.
We will make a public announcement as
promptly as practicable upon any extension,
termination or amendment of this exchange
offer. If we extend our offer, we will make
an appropriate public announcement regarding
the extension no later than 9:00 a.m., New
York City time, on the next business day
after the previously scheduled expiration
4
<PAGE>
date. In the event of a fundamental
change in the information set forth in
this prospectus, we shall amend the
registration statement of which this
prospectus is a part and recirculate this
prospectus.
Procedures for tendering
Medis El ordinary shares If you wish to accept this exchange offer,
you must complete, sign and date the letter
of transmittal which accompanies this
prospectus and deliver the letter of
transmittal together with certificate(s)
representing the tendered shares, if
required, and any other required
documentation, to American Stock Transfer
and Trust Company, as exchange agent. If you
hold your shares through The Depository
Trust Company and wish to accept this
exchange offer, you may do so through DTC's
Automated Tender Offer Program, by which
each tendering participant will agree to be
bound by the accompanying letter of
transmittal.
Special procedures for
beneficial owners If your Medis El ordinary shares are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and you wish to tender such shares
in this exchange offer, you must:
- contact such registered holder
promptly and instruct such
registered holder to tender on your
behalf; or
- prior to completing and executing
the letter of transmittal and
delivering your Medis El ordinary
shares, either make appropriate
arrangements to register ownership
of your Medis El shares in your own
name or obtain a properly completed
stock power from the registered
holder.
The transfer of registered ownership may
take considerable time and may not be able
to be completed prior to the expiration
date.
Guaranteed delivery
procedures If you wish to tender your Medis El ordinary
shares but you are not immediately available
or you otherwise cannot deliver your shares,
the letter of transmittal or any other
documents required by the letter of
transmittal to the exchange agent prior to
the expiration date, you must tender your
shares according to the guaranteed delivery
procedures set forth in the section of this
prospectus entitled "The Exchange
Offer-Guaranteed Delivery Procedures."
Acceptance of Medis El's
ordinary shares and delivery
of our common stock Subject to the satisfaction or waiver of the
conditions to this exchange offer, we will
accept for exchange, through Medis Inc., any
and all Medis El ordinary shares which are
properly tendered prior to the expiration
date of this exchange offer. We will deliver
our shares of common stock on the earliest
practicable date following the expiration
date.
Withdrawal rights Subject to certain conditions, you may
5
<PAGE>
withdraw your tendered shares at any time
prior to the expiration date of this
exchange offer.
No fractional shares We will not distribute fractional shares to
any Medis El shareholder otherwise entitled
to receive a fractional share of our common
stock. Fractional
shares of our common stock shall be rounded
up or down to the nearest whole number, or
to the higher whole number if exactly
one-half share.
United States federal
income tax consequences of
the exchange offer You may be subject to certain United States
federal income tax consequences relating to
the exchange of our common stock for your
Medis El ordinary shares. Please see the
section of this prospectus entitled "United
States Federal Income Tax Consequences" for
a discussion of such consequences. We are
not including in this prospectus any
discussion of Israeli tax consequences which
may be applicable to Medis El shareholders
who are Israeli citizens or an Israeli
company.
Exchange agent American Stock Transfer & Trust Company, 40
Wall Street, New York, New York 10005, is
serving as the exchange agent in connection
with this exchange offer.
Failure to exchange your
Medis El ordinary shares We will issue our common stock in exchange
for Medis El's ordinary shares only after
timely receipt by the exchange agent of such
Medis El shares, a properly completed and
duly executed letter of transmittal and all
other required documents. Therefore, if you
desire to tender your shares in exchange for
our common stock, you should allow
sufficient time to ensure timely delivery.
Although we intend to notify Medis El's
shareholders of any defects or
irregularities with respect to their tender,
we are not under any duty to do so. You will
experience, among other things, a lack of a
public trading market and subsequent lack of
liquidity of your Medis El ordinary shares
if:
- you fail to tender your ordinary
shares for exchange; and
- we successfully complete this
exchange offer and delist Medis
El's ordinary shares from the
Nasdaq SmallCap Market.
Any questions you have regarding the exchange offer, including
tendering procedures for your Medis El ordinary shares, should be directed to
American Stock Transfer & Trust Company as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449 ext. 6820
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth our summary consolidated financial data
and should be read in conjunction with the consolidated financial statements and
related notes appearing elsewhere in this prospectus.
STATEMENT OF OPERATIONS DATA:
(in thousands except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ -- $ -- $ -- $ 8 $ --
Loss from operations............................ (231) (193) (2,811) (5,485) (7,790)
Net loss........................................ (1,623) (2,633) (1,544) (4,418) (5,965)
Basic and diluted net loss per share............ (0.47) (0.71) (0.33) (0.52) (0.61)
Weighted average shares outstanding............. 3,460 3,734 4,645 8,582 9,807
</TABLE>
BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31, 1999
------------------------------------------- -----------------------------------------
1995 1996 1997 1998 ACTUAL AS ADJUSTED(1) AS ADJUSTED(2)
---- ---- ---- ---- ------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficiency) $ (686) $ (1,728) $ 266 $ 3,536 $ 1,083 $ 1,083 $ 1,083
Total assets 3,819 3,621 14,433 14,755 10,226 52,083 103,510
Long term debt, excluding
current maturities 2,000 1,000 338 96 11 11 11
Accumulated deficit (9,117) (11,688) (13,232) (17,650) (23,615) (23,786) (23,996)
Total stockholders'
equity (deficiency) (2,980) (1,645) 11,378 12,406 8,561 50,701 102,472
</TABLE>
- ------------
(1) As adjusted to reflect our acquisition in the exchange offer of 80% of
Medis El's ordinary shares not owned by us, and the issuance of 2,378,104
shares of our common stock in exchange for these shares. Also gives effect
to acquired intangible technology assets and goodwill of $41,857,000 (net
of $171,000 of in-process research and development costs to be charged to
expense on the date of acquisition) resulting from the exchange. See Note A
to our unaudited pro forma consolidated balance sheet assuming 80% of the
shares are tendered.
(2) As adjusted to reflect our acquisition in the exchange offer of 100% of
Medis El's ordinary shares not owned by us, and the issuance of 5,299,722
shares of our common stock in exchange for these shares. Also gives effect
to acquired intangible technology assets and goodwill of $93,284,000 (net
of $381,000 of in-process research and development costs to be charged to
expense on the date of acquisition) resulting from the exchange. See Note A
to our unaudited pro forma consolidated balance sheet assuming 100% of the
shares are tendered.
7
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COMPARATIVE PER SHARE DATA
The following tables sets forth certain of our historical and pro forma
per-share data and certain of Medis El's historical and equivalent per-share
data.
This data should be read in conjunction with our and Medis El's
selected consolidated financial data and consolidated financial statements and
related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA (2) PRO FORMA (3)
------ ------------- -------------
<S> <C> <C> <C>
MEDIS TECHNOLOGIES LTD.
Book value per share (1) $ 0.86 $ 4.10 $ 6.70
====== ====== ======
Cash dividends per share $ -- $ -- $ --
====== ====== ======
Net (loss) per share $(0.61) $(1.27) $(1.79)
====== ====== ======
<CAPTION>
EQUIVALENT
ACTUAL (1) PRO FORMA (4)
---------- -------------
MEDIS EL LTD.
<S> <C> <C>
Book value per share(1) $ 0.16 $ 0.12
====== ======
Cash dividends per share $ -- $ --
====== ======
Net loss per share $(0.45) $(0.33)
====== ======
</TABLE>
- -----------
(1) Book value per share is computed by dividing stockholders' equity by the
number of shares of common stock outstanding. Pro forma amounts were
computed by dividing pro forma stockholders' equity by the pro forma number
of shares outstanding.
(2) Pro forma amounts reflect the acquisition in the exchange offer of 80% of
Medis El's ordinary shares not owned by us and the issuance of 2,378,104
shares of our common stock in exchange for such shares.
(3) Pro forma amounts reflect the acquisition in the exchange offer of 100% of
Medis El's ordinary shares not owned by us and the issuance of 5,299,722
shares of our common stock in exchange for such shares.
(4) Equivalent pro forma amounts are computed by multiplying the number of
shares used in each calculation by 1.37 in order that the per share amounts
are equated to the respective values for one share of the company being
acquired.
8
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RISK FACTORS
You should carefully consider the following risk factors, as well as
the other information contained in this prospectus, before exchanging your Medis
El ordinary shares for our common stock. Unless otherwise noted, the risk
factors set forth below apply to us and Medis El, and affect you whether you are
our stockholder or Medis El's shareholder, as we have conducted all of our
operating activities through Medis El and we beneficially own approximately 64%
of Medis El. To the extent Medis El's business and operating results are
materially adversely affected, our business and operating results will be
similarly affected.
RISKS RELATED TO OPERATIONAL MATTERS
WE HAVE NOT BEEN PROFITABLE AND MAY NOT BECOME PROFITABLE, IN WHICH EVENT WE MAY
BE UNABLE TO FUND FURTHER RESEARCH AND DEVELOPMENT OF OUR TECHNOLOGIES OR
CONTINUE TO CARRY ON DAY-TO-DAY OPERATIONS
We have experienced net losses since our inception in April 1992 and on
a consolidated basis with Medis El since 1997. There can be no assurance that we
will ever achieve profitability if Medis El is unable to successfully develop
and market one or more of its technologies or if they fail to achieve widespread
acceptance. Our inability to become profitable may force us to curtail or
temporarily discontinue our research and development programs and our day-to-day
operations. Furthermore, there can be no assurance that profitability, if
achieved, can be sustained on an ongoing basis. As of December 31, 1999, we had
an accumulated deficit of approximately $23,615,000. We anticipate incurring
substantial future losses until such time as:
- - Medis El successfully develops one or more of its technologies; and
- - it enters into license, sales or joint venture agreements with third
parties pursuant to which such third parties successfully
commercialize, market and sell the developed products.
We do not expect this to happen, if at all, until, at a minimum, 15
months from the date of this prospectus.
MEDIS EL'S TECHNOLOGIES, MANY OF WHICH ARE IN EARLY STAGES OF DEVELOPMENT, MAY
NOT BE CAPABLE OF COMMERCIAL EXPLOITATION DUE TO CONCEPTUAL ERRORS OR
TECHNOLOGICAL SETBACKS, WHICH WOULD PREVENT US FROM GENERATING REVENUES
Developing a technology into a marketable product is a risky, time
consuming and expensive process. You may anticipate that in seeking to develop
our technologies, we will encounter setbacks, discrepancies requiring time
consuming and costly redesigns and changes and the possibility of outright
failure. Each of our development stage technologies and the further refinement
of the CellScan are subject to these risks.
WE WILL BE UNABLE TO MARKET OR SELL ANY OF OUR TECHNOLOGIES IF WE ARE
UNSUCCESSFUL IN ENTERING INTO ALLIANCES, JOINT VENTURES OR LICENSING AGREEMENTS
WITH THIRD PARTIES
As we do not have nor do we intend to develop our own marketing
capabilities, our ability to market and sell our technologies will depend
entirely upon entering into alliances, joint ventures or licensing agreements
with third parties possessing such capabilities. There can be no assurance that
we will be successful in entering into such alliances, joint ventures or
agreements, and failure would prevent
9
<PAGE>
us from marketing and selling our technologies if and when ready for commercial
exploitation.
IF THE MARKET REJECTS THE USE OF OUR TECHNOLOGIES, MANY OF WHICH ARE UNFAMILIAR,
WE WILL BE UNABLE TO GENERATE REVENUES
We, together with Medis El, are developing products that represent
alternatives to traditional products and methods, and as a result, our products
may be slow to achieve, or may not achieve, market acceptance since potential
customers may seek further validation of the efficiency and efficacy of the
products before making an investment. This is particularly true where the
technology underlying the product is untried and where implementation of the
technology requires a significant capital commitment, such as with our
reciprocating electrical machine and direct current regulating device.
OUR EFFORTS TO PROTECT MEDIS EL'S INTELLECTUAL PROPERTY MAY NOT OFFER SUFFICIENT
PROTECTION, WHICH COULD HINDER OUR GROWTH AND SUCCESS
We regard Medis El's patents, trade secrets, copyrights and similar
intellectual property rights as essential to our growth and success. Medis El
relies upon a combination of patent, copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements and contractual
provisions with employees and with third parties to establish and protect its
proprietary rights. Medis El owns, directly or indirectly through subsidiaries
or companies in which it has an interest, patents for certain technologies and
is currently applying for additional patents. There can be no assurance that
Medis El will succeed in receiving patent and other proprietary protection in
all markets it enters, or, if successful, that such protection will be
sufficient. If Medis El successfully develops and markets any or all of its
technologies, we expect to face efforts by larger companies and other
organizations or authorities to undermine Medis El's patent by challenging or
copying its intellectual property. Moreover, intellectual property rights are
not protected in certain parts of the world. We intend to vigorously defend
Medis El's intellectual property against any challenges that may arise. However,
an infringement action by us may be very costly and require the diversion of
substantial funds from our operations and may require management to expend
efforts that might otherwise be devoted to our operations.
CLAIMS BY THIRD PARTIES THAT OUR TECHNOLOGY INFRINGES UPON THEIR PATENTS MAY, IF
SUCCESSFUL, PREVENT US FROM FURTHER DEVELOPING OR SELLING OUR TECHNOLOGIES
Although we do not believe our business activities infringe upon the
rights of others nor are we aware of any pending or contemplated actions to such
effect, we can give no assurance that our business activities will not infringe
upon the proprietary rights of others, or that other parties will not assert
infringement claims against us.
IF WE DO NOT OBTAIN ADDITIONAL FINANCING, WHICH WE HAVE NO ASSURANCE OF
OBTAINING, WE MAY BE FORCED TO CURTAIL OUR RESEARCH AND DEVELOPMENT EFFORTS AND
OUR OPERATIONS
Our ability to sustain our research and development program and our
ongoing survival may depend upon continuous outside funding of operations. As of
February 1, 2000, we and Medis El had cash and cash equivalents of approximately
$4,300,000, which we expect to be sufficient to support our activities for at
least 12 months from such date after possible one-time charges such as the
repurchase of a CellScan machine and purchase of additional shares of our
non-wholly-owned subsidiaries. We have historically been a major source of funds
for Medis El, having lent or invested in Medis El approximately $10,340,000
since its inception. There can be no assurance that we will have the required
funds on hand or commitments for such funds to meet Medis El's future financial
obligations, if necessary, or that a
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third party will be willing to make such funds available. Our and Medis El's
failure to raise additional funds could require us to curtail development of one
or more of our technologies. Furthermore, Medis El's failure to successfully
develop or market its technologies may materially adversely affect its or our
ability to raise additional funds. In any event, it is not possible to make any
reliable estimate of the funds required to complete the development of each of
the technologies, or of the funds required to establish or otherwise procure
adequate manufacturing capacity or to market the products on a worldwide basis.
If available funds should prove insufficient, there can be no assurance that we
or Medis El will be able to procure the required additional funding, which would
curtail development of one or more of Medis El's technologies.
OUR ABILITY TO MARKET THE CELLSCAN MAY BE LIMITED BY UNITED STATES AND FOREIGN
GOVERNMENT REGULATIONS AND WE MAY INCUR SUBSTANTIAL COSTS IN OBTAINING APPROVAL
AND IN MAINTAINING COMPLIANCE WITH SUCH REGULATIONS
We believe that we will be unable to market or sell the CellScan in the
United States other than for limited research or investigational use, as defined
in the FDA's regulations, unless and until the FDA has exempted the CellScan
from its market clearance requirements or, if not so exempted, until the FDA
either clears a notification under Section 510(k) of the Federal Food, Drug and
Cosmetics Act or approves an application for premarket approval. We believe that
FDA approval will require not less than 2 years and may require a substantially
longer time to obtain either 510(k) clearance or premarket approval, which
approval is uncertain and can be expensive to obtain. We do not intend to apply
for such clearance or premarket approval ourselves. Rather, we expect our
marketing partner or a purchaser of the technology to apply for, acquire and
maintain regulatory compliance. However, we are required under our distribution
arrangement with Medis El to fund up to $1,500,000 of the costs necessary to
obtain regulatory approval, while Medis El would be required to fund the next
$500,000 and provide to us an unsecured loan for the $500,000 after that. These
costs to obtain the necessary FDA approval are not readily ascertainable. It is
possible that neither we nor Medis El nor both of us will possess or be able to
secure adequate resources to fund the FDA approval process.
There can be no assurance that the CellScan, if and when submitted to
the FDA, will ultimately receive clearance for use as a diagnostic device.
Nations other than the United States have varying patterns of regulation
governing the use of medical diagnostic devices, some of which require clearance
or approval comparable to the regulatory pattern in the United States. In those
jurisdictions where more than perfunctory clearance or approval is required, the
CellScan will not be able to be marketed unless and until the required clearance
or approval is obtained.
IF WE WERE TO LOSE MEMBERS OF OUR SENIOR MANAGEMENT AND COULD NOT FIND
APPROPRIATE REPLACEMENTS IN A TIMELY MANNER, WE MAY HAVE DIFFICULTY SEEKING NEW
PRODUCTS FOR DEVELOPMENT AND MARKETING SUCH PRODUCTS FOR COMMERCIAL EXPLOITATION
Our and Medis El's success depends to a significant extent upon Zvi
Rehavi and the scientists, engineers and technicians that seek out, recognize
and develop Medis El's technologies and to a lesser extent on a number of
management and technical personnel employed by Medis El. The loss of the
services of Mr. Rehavi or any of Medis El's technical talent could have a
material adverse effect on Medis El's ability to seek new products for
development and market such products for commercial exploitation. Medis El
possesses key-person life insurance of $245,000 on Mr. Rehavi. Although all of
Medis El's employees are subject to employment agreements with Medis El, the
majority of which are automatically renewable on an annual basis, either party
may terminate such agreement upon notice to the other. The length of such notice
varies depending upon the individual, from 30 days to 180 days in length. Our
future success will depend to a great extent upon Medis El's and our continued
ability to
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attract and retain highly skilled technical, managerial and marketing personnel.
Competition for such personnel is intense and we cannot assure investors that
Medis El or we will be able to attract and/or retain such personnel.
WE MAY BE EXPOSED TO PRODUCT LIABILITY RISKS IF OUR TECHNOLOGIES ARE
SUCCESSFULLY COMMERCIALIZED AND MARKETED, WHICH MAY CAUSE SUBSTANTIAL ADDITIONAL
EXPENSE AND POSSIBLE ADVERSE PUBLICITY
The sale of any of our products, especially the CellScan as a medical
diagnostic device, in the marketplace may expose us to potential liability risks
and adverse publicity with respect to such products. Although we have product
liability insurance for the CellScan, there can be no assurance that a product
liability claim would not exceed the amount of coverage under such insurance
which could cause substantial additional out-of-pocket expense to defend against
or to pay damages.
OUR RIGHT TO ISSUE PREFERRED STOCK MAY FACILITATE MANAGEMENT ENTRENCHMENT WHICH
MAY DELAY, DEFER OR PREVENT A CHANGE IN OUR CONTROL, WHICH MAY NOT BE IN THE
BEST INTERESTS OF OUR STOCKHOLDERS
Our board of directors has the authority to issue up to 10,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of these shares without approval of
our shareholders. Any future issuance of shares of preferred stock could be
employed by our present management to delay, defer or prevent a change in our
control or to discourage bids for our common stock at a premium above its market
price solely to retain their respective management positions, which may not be
in the best interests of our stockholders, generally. We have no present plans
to issue any shares of preferred stock.
THE LARGE AMOUNT OF ACQUIRED INTANGIBLE TECHNOLOGY ASSETS AND GOODWILL ON OUR
BALANCE SHEET WILL BE CHARGED AS AN EXPENSE AGAINST FUTURE EARNINGS AND
ADVERSELY AFFECT STOCKHOLDERS EQUITY, WHICH COULD CAUSE OUR STOCK PRICE TO DROP
On December 15, 1997, we acquired the 40% share of Medis Inc. not owned
by us for an aggregate purchase price of $13,125,000, of which $12,227,000 was
allocated to acquired technology assets and goodwill. Additionally, our
acquisition of shares of Medis El in the open market resulted in additional
intangible assets and goodwill of $138,000 during 1999. At December 31, 1999,
the unamortized balance of such technology assets and goodwill aggregated
$7,242,000. Such balance will be charged to expense on a straight line basis
over the remaining useful lives of such assets, which is approximately three
years. Such expense and the consequent adverse effect on our stockholders'
equity may have a material adverse effect on our stock price.
Additionally, upon the successful completion of this exchange offer, we
will acquire either an additional 16% interest in Medis El, if 80% of Medis El
shares are tendered, or 36% interest in Medis El, if 100% of Medis El shares are
tendered. Consequently, based on Medis El's stock price on February 29, 2000, we
estimate that we will acquire technology assets and goodwill aggregating
$41,857,000 if 80% of Medis El shares are tendered and technology assets and
goodwill aggregating $93,284,000 if 100% of Medis El shares are tendered.
Acquired technology assets, which relate to the CellScan technology, will be
charged to expense over its remaining useful life at the date of acquisition,
which is approximately three years as of December 31, 1999. Goodwill acquired in
this exchange offer will be charged to expense over its useful life of five
years. Additional charges to expense relating to these assets may have the same
effect on our stock price as discussed above.
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RISKS ASSOCIATED WITH FOREIGN COUNTRIES
HOSTILITIES WITH NEIGHBORING COUNTRIES OR THE INTERRUPTION OR CURTAILMENT OF
TRADE BETWEEN ISRAEL AND ANY OF ITS TRADING PARTNERS COULD MATERIALLY ADVERSELY
AFFECT MEDIS EL'S ABILITY TO COMPLETE EACH TECHNOLOGY'S DEVELOPMENT OR ITS
ABILITY TO SUPPLY JOINT VENTURE PARTNERS OR LICENSEES
Medis El's offices and most of its manufacturing, research and
development facilities are located in the State of Israel. Medis El and
consequently we are directly affected by the political, economic and military
conditions in Israel. Any major hostilities involving Israel or the interruption
or curtailment of trade between Israel and the United States or Israel and
Europe could have a material adverse effect on Medis El's ability to complete
the development of any of the technologies or its ability to supply the
technology to development partners or vendors. Furthermore, any interruption or
curtailment of trade between Israel and any other country in which Medis El has
strategic relationships could similarly adversely affect such relationships. In
addition, all male adult permanent residents of Israel under the age of 54,
unless exempt, are obligated to perform up to 44 days of military reserve duty
annually and are subject to being called to active duty at any time under
emergency circumstances. Some of Medis El's employees are currently obligated to
perform annual reserve duty. We are unable to assess what impact, if any, these
factors may have upon our future operations.
In addition, high inflation and the devaluation of Israel's currency,
the New Israeli Shekel, compared to the U.S. dollar may have a negative impact
on Medis El's NIS-based obligations over time upon substantial price increases
caused by inflation.
RUSSIA'S POLITICAL AND ECONOMIC INSTABILITY COULD MATERIALLY ADVERSELY AFFECT
MEDIS EL'S ABILITY TO COMPLETE DEVELOPMENT OF THE TOROIDAL ENGINE AND TOROIDAL
COMPRESSOR
The development of the toroidal engine and compressor are taking place
in Russia. Russia has experienced and is continuing to experience both political
and economic instability, including, recently, the sudden resignation of
President Boris Yeltsin and subsequent ascension of Vladimir Putin to such
position, the successive turnover of persons holding the positions of prime
minister and other upper level government ministers, the devaluation of the
ruble and problems affecting the bailout of Russia's economy by the
International Monetary Fund. In addition, recent terrorist bombings in populated
areas and armed conflicts involving separatist groups in Chechnya and elsewhere
in the former Soviet Empire has resulted in widespread demands for the return to
a more autocratic government structure. We are unable to assess what impact, if
any, these factors may have upon the continued development of the toroidal
engine and compressor.
IT MAY BE DIFFICULT TO SERVE PROCESS ON OR ENFORCE A JUDGMENT AGAINST OUR
ISRAELI OFFICERS AND DIRECTORS, MAKING IT DIFFICULT TO BRING A SUCCESSFUL
LAWSUIT AGAINST US, MEDIS EL OR OUR OFFICERS AND DIRECTORS, INDIVIDUALLY OR IN
THE AGGREGATE
Service of process upon our and Medis El's directors and officers, many
of whom reside outside the United States, may be difficult to obtain within the
United States. Furthermore, any judgment obtained in the United States against
Medis El may not be collectible within the United States to the extent Medis
El's assets are located outside the United States. This could limit the ability
of our stockholders to sue us or Medis El based upon an alleged breach of duty
or other cause of action. We have been informed by our Israeli legal counsel
that there is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act of 1934, as amended, in original
actions instituted in Israel. However, subject to limitation, Israeli courts may
enforce United States final executory judgments for liquidated amounts in civil
matters, obtained after a trial before a court of competent jurisdiction,
according to the rules of private international law currently prevailing in
Israel,
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which enforce similar Israeli judgments, provided that:
- - due service of process has been effected and the defendant was given a
reasonable opportunity to defend;
- - the obligation imposed by the judgment is executionable according to
the laws relating to the enforceability of judgments in Israel and
such judgment is not contrary to public policy, security or
sovereignty of the State of Israel;
- - such judgments were not obtained by fraud and do not conflict with any
other valid judgments in the same manner between the same parties; and
- - an action between the same parties in the same matter is not pending
in any Israeli court at the time the lawsuit is instituted in the
foreign court.
Foreign judgments enforced by Israeli courts generally will be payable
in Israeli currency, which can then be converted into United States dollars and
transferred out of Israel. The judgment debtor may also pay in dollars. Judgment
creditors must bear the risk of unfavorable exchange rates.
MEDIS EL SHAREHOLDERS NOT VOLUNTARILY TENDERING THEIR SHARES MAY, UNDER
CERTAIN CIRCUMSTANCES, BE REQUIRED TO TENDER THEIR SHARES, WITH THE ONLY
RECOURSE AVAILABLE BEING AN ACTION BROUGHT IN THE ISRAELI COURT SYSTEM TO
DETERMINE THE FAIR VALUE OF THE CONSIDERATION GIVEN FOR SUCH SHARES
Israeli law provides that if enough shareholders tender so that we,
immediately prior to the closing of this exchange offer, would own more than
95% of Medis El's ordinary shares, all of Medis El's shareholders not
tendering their shares shall be required to tender. The only remedy such
shareholders' would have is to apply to the Israeli court system to determine
whether the consideration we offered for Medis El's ordinary shares is less
than fair value, which could be inconvenient or difficult to commence for a
non-Israeli shareholder and may be prohibitively expensive.
IF AN ISRAELI COURT DETERMINES THAT OUR CONSIDERATION FOR EACH SHARE TENDERED
IS LESS THAN FAIR VALUE, WE MAY BE REQUIRED TO ISSUE ADDITIONAL SHARES, WHICH
WOULD CAUSE OUR STOCKHOLDERS TO INCUR IMMEDIATE DILUTION IN FUTURE EARNINGS
PER SHARE.
If a shareholder petitions an Israeli court to determine the fair
value of a Medis El ordinary share, and such court determines that 1.37
shares of our common stock for each Medis El share is less than fair value,
we will be required to issue such number of additional shares of our stock to
all of Medis El's shareholders as would equal the difference between the fair
value of each ordinary share as determined by the court and the value of 1.37
of our shares. The issuance of such additional shares of our common stock may
cause our stockholders to incur immediate dilution in future earnings per
share, if any.
RISKS RELATED TO THIS OFFERING
OUR CURRENT STOCKHOLDERS WILL CONTINUE TO CONTROL OUR AFFAIRS, WHICH MAY
PRECLUDE OTHER STOCKHOLDERS FROM INFLUENCING OUR CORPORATE DECISIONS
Upon completion of this exchange offer, our five largest current
stockholders, which includes some of our officers and directors and a
corporation controlled by such officers and directors, collectively, will
beneficially own approximately 43% of the then issued and outstanding shares of
our common stock. These stockholders may be able to effectively exercise control
over all matters requiring approval by our stockholders, including the election
of directors and approval of significant corporate
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transactions.
WE INTEND TO RETAIN ALL OF OUR FUTURE EARNINGS, IF ANY, FOR USE IN OUR BUSINESS
OPERATIONS AND DO NOT EXPECT TO PAY DIVIDENDS TO OUR SHAREHOLDERS
We have not paid any dividends on our common stock to date and do not
anticipate declaring any dividends until such time as we are profitable, which
we estimate to be, at a minimum, fifteen months from the date of this
prospectus. Our board presently intends to retain all earnings, if any, for use
in our business operations.
IF WE ARE UNABLE TO DEVELOP A PUBLIC MARKET FOR OUR SHARES, OUR STOCKHOLDERS MAY
HAVE DIFFICULTY SELLING OR TRADING OUR COMMON STOCK
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that such a market will develop at the
conclusion of this offering or, if such a market should develop, that it will be
sustained. Even though we believe our strategies, successes and failures
parallel those of Medis El, the historical market for Medis El's ordinary shares
may not be indicative of the future market for our common stock. The lack of a
sustainable trading market may make it difficult for our stockholders to sell or
otherwise trade their common stock.
OUR INABILITY TO ACHIEVE A NASDAQ LISTING FOR OUR COMMON STOCK COULD ADVERSELY
AFFECT BOTH THEIR LIQUIDITY AND MARKET PRICE
If we do not satisfy the initial listing requirements of the Nasdaq
SmallCap Market, we expect our common stock to be traded in the over-the-counter
market. We anticipate that they will be quoted on the OTC Bulletin Board, an
NASD sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq Stock Market, as well as in the NQB Pink
Sheets. The liquidity and prices of our securities may be adversely affected if
our common stock is quoted on the OTC Bulletin Board and the NQB Pink Sheets
instead of the Nasdaq SmallCap Market.
FAILURE TO LIST OUR COMMON STOCK ON THE NASDAQ SMALLCAP MARKET WOULD SUBJECT US
TO THE SEC'S "PENNY STOCK RULES" IF OUR COMMON STOCK FALLS BELOW $5.00 PER
SHARE, WHICH MAY DISCOURAGE BROKER-DEALERS FROM EFFECTING TRANSACTIONS IN OUR
COMMON STOCK
If we are unable to list our common stock on the Nasdaq SmallCap Market
upon the completion of this exchange offer and the trading price of our common
stock were to fall below $5.00 per share, trading in our securities would be
subject to the requirements of the SEC's penny stock rules. These rules require
the delivery prior to any penny stock transaction of a disclosure schedule
explaining the penny stock market and all associated risks and impose various
sales practice requirements on broker-dealers who sell penny stocks to persons
other than established customers and accredited investors, which are generally
defined as institutions or an investor with a net worth in excess of $1,000,000
or annual income exceeding $200,000 or $300,000 together with a spouse. For
these types of transactions the broker-dealer must make a special suitability
determination for the purchaser and have received the purchaser's written
consent to the transaction prior to sale. In addition, broker-dealers must
disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in our common stock which
could severely limit its market price and liquidity.
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WE SHORTLY INTEND TO REGISTER ALL OF OUR SHARES OF COMMON
STOCK UNDERLYING OUTSTANDING OPTIONS AND WARRANTS, AS WELL AS A SIGNIFICANT
NUMBER OF OUR CURRENTLY OUTSTANDING SHARES OF COMMON STOCK TO PERMIT THEIR
OFFER AND SALE BY THEIR RESPECTIVE OWNERS UPON THE CLOSING OF, AND PROMPTLY
AFTER THE CLOSING OF, THIS EXCHANGE OFFER, WHICH COULD ADVERSELY AFFECT THE
PRICE OF OUR PUBLICLY TRADED COMMON STOCK
We intend to file a registration statement covering approximately
9,200,000 shares of our common stock for the respective accounts of certain of
our current stockholders, including certain of our officers and directors and
their affiliates, which, when declared effective, will permit such persons to
publicly offer all or lesser portions of such shares for public sale.
We also intend to file an additional registration statement covering
shares of stock issuable upon exercises of options granted under our stock
option plan promptly after the closing of this exchange offer. Based on the
number of outstanding options as of the date of this prospectus, subsequent to
the successful completion of this exchange offer, we expect the number of such
shares to approximate 900,000, which number includes options to be issued to
Medis El option holders at an exchange rate of 1.37 subsequent to the successful
completion of this exchange offer.
Future sales of substantial amounts of our common stock in the public
market, or even the ability of our stockholders to sell substantial amounts of
stock, could adversely affect the market price for our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
WE INTEND, IF THIS EXCHANGE OFFER IS SUCCESSFUL, TO DELIST MEDIS EL FROM THE
NASDAQ SMALLCAP MARKET, IN WHICH CASE MEDIS EL'S SHAREHOLDERS WHO DO NOT TENDER
THEIR SHARES WILL LIKELY FIND IT DIFFICULT TO DISPOSE OF, OR TO OBTAIN
QUOTATIONS AS TO THE PRICE OF, MEDIS EL'S ORDINARY SHARES
The successful completion of this exchange offer will reduce the number
of holders of Medis El's ordinary shares and the number of such shares that
might otherwise trade publicly, and will adversely affect the liquidity and
market value of the remaining shares held by the public. We intend, after the
successful completion of this exchange offer, to delist Medis El's ordinary
shares from the Nasdaq SmallCap Market. In such event, Medis El's non-tendering
shareholders would likely find it more difficult to dispose of, or to obtain
quotations, as to the price of Medis El's ordinary shares.
OUR LARGE NUMBER OF WARRANTS AND OPTIONS OUTSTANDING, IF EXERCISED, AND FUTURE
SALES, IF ANY, OF OUR EQUITY SECURITIES WILL CAUSE OUR INVESTORS TO INCUR
IMMEDIATE DILUTION IN FUTURE EARNINGS PER SHARE, IF ANY, AND IN EACH
NON-EXERCISING STOCKHOLDER'S PERCENTAGE OWNERSHIP OF OUR STOCK
Upon the completion of this exchange offer and the concurrent exchange
in accordance with the exchange ratio of options to acquire our common stock for
those covering Medis El ordinary shares, we will have warrants and options
outstanding to purchase approximately 2,565,420 shares of our common stock
which, if exercised, will cause our stockholders to incur substantial dilution
in future earnings per share, if any, and in our non-exercising stockholders'
percentage ownership of such common stock. Additionally, future sales of our
equity, if any, will also cause our stockholders to incur substantial dilution
in future earnings per share, if any, and in their respective percentage
ownership of our stock.
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NON-UNITED STATES CITIZENS EXCHANGING THEIR ORDINARY SHARES FOR OUR SHARES OF
COMMON STOCK MAY CAUSE SUCH HOLDERS OF ORDINARY SHARES ADVERSE TAX CONSEQUENCES.
We have not included in this prospectus a discussion of the tax
consequences that may affect non-U.S. Medis El shareholders upon the exchange of
their Medis El ordinary shares for shares of our common stock. Tendering Medis
El ordinary shares in this exchange offer may cause the holders of such shares
adverse tax consequences. We advise each of Medis El's shareholders to consult
such holder's own tax advisor as to the specific tax consequences of this
exchange offer to such holder.
FORWARD LOOKING STATEMENTS FOUND IN THIS PROSPECTUS MAY NOT BE ACCURATE
INDICATORS OF OUR FUTURE PERFORMANCE
This prospectus contains certain forward-looking statements and
information relating to Medis Technologies Ltd. and Medis El Ltd. We identify
forward-looking statements in this prospectus using words such as the following
and other similar statements:
"believes" "intends" "plans" "expects"
"predicts" "may" "will" "would"
"should" "contemplates" "anticipates"
These statements are based on our beliefs as well as assumptions we
made using information currently available to us by Medis El and others. Because
these statements reflect our current views concerning future events as they
relate to us and Medis El, these statements involve certain risks, uncertainties
and assumptions which may be significantly more adverse than the results or
expectations discussed in the forward-looking statements.
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DETERMINATION OF EXCHANGE RATIO
The determination of the exchange ratio was arrived at in a series of
meetings and telephonic discussions among:
- - Robert K. Lifton, our chairman and chief executive officer, who is also
Medis El's chairman;
- - Howard Weingrow, our president, treasurer and a director, who is also a
director of Medis El; and
- - Jacob Weiss, the corporate vice president and general counsel of Israel
Aircraft Industries Ltd., our single largest stockholder, which is also an
approximately 12% shareholder of Medis El. Mr. Weiss is also a director of
both us and Medis El.
In determining the exchange ratio, we considered the use of
conventional valuation criteria such as comparable company analysis, comparable
market price analysis and comparable book value analysis, but concluded that the
use of these modalities would be inappropriate. We do not believe that there are
any comparable companies to either Medis Technologies or Medis El and since we
were not a public company, a comparable market price analysis would have been
inappropriate. A comparative book value analysis at March 31, 1999 reflected
$3,369,000 for Medis El and $3,112,000 for us after eliminating our equity
interest in Medis El, yielding a ratio of 1.08 to 1.00. We did not believe,
however, that such a comparison was appropriate because it did not take into
account the value of the shares of Medis El owned by us. Furthermore, other
conventional valuation criteria such as comparing discounted cash flow were
believed to be inappropriate given that both we and Medis El had negligible
current cash flow and future cash flows could not reasonably be estimated from
operations.
Instead, we based our determination of the exchange ratio upon the
assumption that the value of our business can be indirectly derived from the
market value of Medis El's stock, which we presumed reflected the market's
perception of the value of Medis El's technologies.
We assumed in determining the value of our business that the CellScan,
being the most commercially advanced of Medis El's technologies, and upon which
Medis El had spent the most money to develop, represented 75% of Medis El's
total market value. Medis El's market capitalization at that time was
approximately $72,000,000, based upon a then $7.00 per share market price. The
CellScan therefore represented $54,000,000 of the then market value of Medis El.
We then sought to value our U.S. distribution rights to the CellScan technology.
Based on:
- - our understanding of the industry for the closest comparable technologies
to the CellScan such as flow cytometer, we believed that the U.S. would
represent approximately 50% of the potential world market for the CellScan;
and
- - our expectations in accordance with our distribution agreement that our
distribution relationship with Medis El would result in a profit equal to
50% of the manufacturer's net profit upon each sale of a CellScan and a
test kit,
we valued the distribution rights as equal to 25% of the total value of the
CellScan technology. Based upon such valuation, we concluded the then value of
our distribution rights to the CellScan technology to be $13,500,000.
We then sought to value our agency rights to our stirling cycle linear
technology. We assumed that based on the linear technology's proximity to
commercialization and sums spent for development thus far, this technology
should be valued at 10% of Medis El's market capitalization of $72,000,000, or
$7,200,000. Using 10% as a starting point, which represents our agency fees upon
the sale of a finished
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product pursuant to our exclusive agency agreement with Medis El, we arbitrarily
valued the agency rights, net of anticipated costs such as:
- - developing and implementing marketing campaigns;
- - locating potential licensees and coordinating the preparation and
negotiation of licensing arrangements; and
- - maintaining sufficient facilities and staff to implement the terms of the
agency,
as equal to 8% of the total value of the linear technology. Based upon such
valuation, we concluded the then value of our agency rights to the stirling
cycle linear technology to be approximately $576,000.
Therefore, the value we attributed to our business based on our
distribution and agency rights was $14,076,000. We then added the value of our
ownership in Medis El to our business value, which was obtained by taking
6,643,000, the number of Medis El's ordinary shares we owned, and multiplying
that number by Medis El's per share market price at that time of $7.00, giving a
market value to our ownership of Medis El at $46,501,000. We then added the
market value of our ownership in Medis El to the value of our assumed
distribution and agency rights, resulting in an assumed business value of
$60,577,000.
We then arbitrarily reduced our assumed business value by $2,500,000 to
$58,077,000, to reflect the following considerations:
- - the fact that Medis El's cash position at March 31, 1999 exceeded our cash
position by approximately $1,745,000; and
- - the fact that we are required to contribute $1,500,000 towards the cost of
applying for regulatory clearance pursuant to our distribution rights
agreement.
Dividing such value by our then outstanding 9,900,000 shares, we
arrived at a per share value of $5.87 per share of our common stock.
We then calculated an initial exchange ratio by dividing Medis El's
then market price, $7.00, by $5.87, yielding an exchange ratio of 1.19.
We presented all of these factors to Israel Aircraft, who expressed the
view that the values we assigned to our business should be reduced, which
consequently would increase the number of our shares to be offered for each
Medis El share tendered and, in particular, increase the number of our shares to
be issued to Israel Aircraft. Based on these discussions with Israel Aircraft,
we then arbitrarily lowered the value of our business to $50,501,000, which
raised the proposed exchange ratio to 1.37 shares of our common stock for each
ordinary share of Medis El tendered. Medis El shareholders would therefore
receive more of our shares for each Medis El share tendered which would make our
offer more attractive to Medis El shareholders.
Upon the conclusion of these discussions, the feasibility of the
exchange offer compared to other alternatives, such as merging Medis El into a
U.S. company created for such purpose and then doing an initial public offering,
and the proposed exchange ratio were presented to the other members of our board
of directors, who are also members of Medis El's board of directors. The full
board of directors reviewed the feasibility of the exchange offer and the
determination of the proposed exchange ratio and determined:
- - the exchange offer to be the most feasible alternative based on cost
factors, timing and Israeli law
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issues; and
- - the determination of the exchange ratio to be fair and equitable.
Based upon Israel Aircraft's key role in the discussions, we believe
that it will tender its Medis El ordinary shares, although Israel Aircraft made
no binding commitment to such effect.
While we attempted to be both objective and fair in placing a value on
Medis El's technologies and our distribution and agency rights with respect to
such technologies, we did not use conventional means of valuation modalities.
Further, because of the overlapping nature of both boards, the negotiations to
establish the exchange ratio must be viewed as non-arms-length. Consequently,
the exchange ratio may be deemed to have been arbitrarily determined. We did not
obtain an opinion from an investment banker concerning the fairness from a
financial point of view of the terms of this exchange offer from the perspective
of a Medis El shareholder nor did we or Medis El appoint and fund a special
committee of our board to help determine the exchange ratio, as we had limited
funds available to implement this exchange offer and the sums needed for such
purposes, in our judgment, were better spent on our operations. The board of
directors of Medis El, which is the same as our board of directors, is not
making a recommendation as to whether or not to accept this exchange offer in
view of the non-arms-length nature of this transaction. You, as a Medis El
shareholder, should make your own determination based upon your own investment
objectives, following careful consideration of the information contained in this
prospectus.
As a result of this transaction, the respective equity interests of
Messrs. Lifton and Weingrow and Israel Aircraft in Medis Technologies will be
reduced and the respective equity interests of Messrs. Weiss, Eiran and Nahmoni
in Medis Technologies will increase from no interest to less than 1%. For a
table setting forth the exact number and percentage of shares owned by our
officers, directors and affiliates prior to and upon completion of this exchange
offer, please see the section of this prospectus entitled "Principal
Stockholders."
20
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We are offering to exchange 1.37 of our shares of common stock for each
properly tendered Medis El ordinary share. Only whole shares of our common stock
will be issued in exchange for Medis El ordinary shares. If any fractional share
is called for upon the exchange of any Medis El ordinary share, such fractional
share shall be rounded up or down to the nearest whole number, or to the higher
whole number if exactly one-half share. We will not issue certificates or scrip
representing fractional shares of our common stock.
As of the date of this prospectus, Medis El had 10,662,840 ordinary
shares outstanding. As of the same date, we beneficially owned 6,794,430, or
approximately 64%, of such ordinary shares. We intend to offer our shares in
this exchange through Medis Inc., our wholly-owned subsidiary. All Medis El
ordinary shares tendered in this exchange will be acquired by and held by Medis
Inc.
If all outstanding Medis El ordinary shares not currently beneficially
owned by us are exchanged pursuant to this exchange offer, approximately
5,299,722 shares of our common stock will be exchanged for a maximum of
3,868,410 of Medis El's ordinary shares outstanding, based upon the number of
Medis El ordinary shares outstanding as of the date of this prospectus.
PURPOSE OF THE EXCHANGE OFFER
Our board of directors determined to increase our ownership of Medis El
after Medis El's acquisitions in September and October 1998 of the technologies
underlying the fuel cells and toroidal engine and compressor and the granting of
patents in September 1998 for the direct current regulating device. We then
concluded that a publicly-held American corporation with a readily
understandable and familiar capital and corporate governance structure, which
has distribution and commercialization rights to, and ownership of, the
technologies, will enhance our ability to serve as an effective financing
vehicle for the technologies' further development. Moreover, we concluded, based
upon our discussions with potential and existing investors, that such persons
prefer investing in American companies over Israeli companies.
After we determined to become a publicly held company, and following
discussions with counsel in the course of which we explored alternative
acquisition mechanisms with differing corporate law and tax ramifications, we
concluded on or about April 1999 that an exchange offer would be the most
feasible manner to effect our plan and began negotiating the exchange ratio with
Israel Aircraft and the process to effect the exchange.
ACCEPTANCE OF MEDIS EL SHARES
This offering is conditioned upon:
- - the exchange of at least 1,735,842 of Medis El's ordinary shares so that we
beneficially own at least 80% of such shares; and
- - our common stock being registered pursuant to Section 12 of the Securities
Exchange Act of 1934.
Furthermore, under Israeli law, if enough Medis El shareholders tender so
that, immediately prior to the closing of this exchange offer and prior to
our delivery to tendering shareholders of our shares,
21
<PAGE>
we would beneficially own more than 90% but no more than 95% of Medis El's
ordinary shares, we will be required to return such number of shares, on a
pro rata basis to all tendering shareholders, so that we would beneficially
own 90% of such shares. If, however, enough Medis El shareholders tender so
that, upon acceptance of such shares, we would beneficially own more than 95%
of Medis El's ordinary shares, Medis El shareholders not voluntarily
tendering will be required to tender their shares and accept our
consideration for such shares, with the only remedy being an appraisal action
in the Israeli court system.
PROCEDURES FOR TENDERING MEDIS EL SHARES
This prospectus, the letter of transmittal and other relevant materials
will be mailed to registered Medis El shareholders and will be furnished to
brokers, dealers, commercial banks, trust companies and similar persons whose
names, or the names of whose nominees, appear on Medis El's shareholder list
kept with American Stock Transfer and Trust Company, its transfer agent, or, if
applicable, who are listed as participants in a clearing agency's security
position listing.
Only a registered Medis El shareholder may tender his or her shares in
this exchange offer. To tender, a shareholder must complete, sign and date the
letter of transmittal accompanying this prospectus, guarantee the signatures if
required, and mail or otherwise deliver the letter of transmittal to American
Stock Transfer and Trust Company, our exchange agent, prior to the expiration
date. In addition, either:
- - certificates for such Medis El shares must be received by the exchange
agent along with the properly completed and duly executed letter of
transmittal and any other required documents;
- - a timely confirmation of a book-entry transfer of such Medis El shares, if
such procedure is available, into the exchange agent's account at The
Depository Trust Company pursuant to the procedure for book-entry transfer
described below, together with the letter of transmittal or a properly
transmitted agent's message, as described below, must be received by the
exchange agent prior to the expiration date; or
- - the holder must comply with the guaranteed delivery procedures described
below.
Each tender will constitute an agreement between such tendering shareholder and
us in accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
We shall be deemed to have accepted validly tendered Medis El ordinary
shares when, as and if we have given oral or written notice of such to the
exchange agent. The exchange agent will act as agent for the tendering holders
of Medis El ordinary shares for the purposes of:
- - receiving our common stock from us; and
- - transmitting such common stock to tendering shareholders.
Under no circumstances will interest be paid by us by reason of any delay in
making such exchange.
The method of delivery of Medis El ordinary shares, the letter of
transmittal and all other required documents to the exchange agent, or delivery
through the book entry transfer facility, is at the election and risk of the
holder. Instead of delivery by mail, it is recommended that you use an overnight
or hand delivery service, properly insured. If delivery is by mail, registered
mail with return receipt requested, properly insured, is recommended. In all
cases, sufficient time should be allowed to assure delivery to the exchange
agent before the expiration date. Delivery will be deemed made only when
actually received by the exchange agent. No letter of transmittal or certificate
representing Medis El ordinary shares should be sent to us. You may request your
broker, dealer, commercial bank, trust company or nominee to effect the above
transactions on your behalf.
22
<PAGE>
If your Medis El ordinary shares are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish to
tender such shares in this exchange offer, you should:
- - contact such registered holder promptly and instruct such registered holder
to tender on your behalf; or
- - prior to your completing and executing the letter of transmittal and
delivering your Medis El shares, either make appropriate arrangements to
register ownership of such Medis El shares in your name or obtain a
properly completed stock power from the registered holder.
The transfer of registered ownership may take considerable time and may not be
able to be completed prior to the expiration date. You are advised to allow for
sufficient time to make all appropriate arrangements.
SIGNATURES
Signatures on a letter of transmittal must be guaranteed by a member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act which is a member of
one of the recognized signature guarantee programs identified in the letter of
transmittal, unless the tendered Medis El ordinary shares are tendered:
- - by a registered shareholder who has not completed the box entitled "Special
Delivery Instructions" on the letter of transmittal; or
- - for the account of an institution listed above that may guarantee a letter
of transmittal.
If the letter of transmittal is signed by a person other than the
registered shareholder, such shares must be endorsed or accompanied by a
properly completed stock power, properly signed by the registered shareholder.
If the letter of transmittal or any shares or stock powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
AUTOMATED TENDER OFFER PROGRAM
American Stock Transfer and Trust Company and DTC have confirmed
that any financial institution that is a participant in DTC's system may
utilize DTC's Automated Tender Offer Program to tender your ordinary shares.
Accordingly, participants in such program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, electronically transmit their acceptance of this exchange
offer by causing DTC to transfer the shares to the exchange agent in
accordance with DTC's program procedures for transfer. DTC will then send an
agent's message, as defined below, to the exchange agent.
The term "agent's message," as used above, means a message transmitted
by DTC, received by the exchange agent prior to the expiration date and forming
part of the book-entry confirmation, which states that DTC has received an
express acknowledgment from a participant in the DTC program that such
participant is tendering Medis El ordinary shares which are the subject of such
book entry
23
<PAGE>
confirmation, that such participant has received and agrees to be bound by the
applicable notice of guaranteed delivery, and that the agreement may be enforced
against such participant.
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of tendered Medis El ordinary shares will be determined
by us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all shares not properly tendered or
any shares our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular shares. Our interpretation of the terms
and conditions of the exchange offer and the instructions in the letter of
transmittal will be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of Medis El shares must be cured
within such time as we shall determine. Although we intend to notify Medis El
shareholders of any defects or irregularities with respect to their respective
tenders of Medis El shares, neither we, the exchange agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Medis El's ordinary shares will not be deemed to have been made until such
defects or irregularities have been cured or waived.
While we have no present plan to acquire any Medis El shares which are
not tendered in the exchange offer, we reserve the right in our sole discretion
to purchase or make offers for any Medis El shares that remain outstanding
subsequent to the expiration date or to terminate this exchange offer and, to
the extent permitted by applicable law, purchase Medis El shares in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of this exchange offer.
EXPIRATION DATE; EXTENSION; AMENDMENTS
The expiration date shall be 5:00 p.m., New York City time, on
______________, 2000 unless we, in our sole discretion, extend the exchange
offer, in which case the expiration date shall be the latest date and time to
which we extend this exchange offer.
We reserve the right, in our sole discretion:
- - to delay accepting any Medis El shares;
- - to extend the exchange offer; or
- - to terminate this exchange offer,
by giving notice of such delay, extension or termination to the exchange agent.
Any such delay, extension or termination will be followed by our notification to
the exchange agent and registered Medis El shareholders of any delay, extension
or termination, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. If the exchange
offer is amended in a manner determined by us to constitute a material change,
we will distribute a prospectus supplement with such amendment, and we will
extend the exchange offer for a period of five to ten business days, depending
upon the significance of the amendment, applicable securities laws, and the
manner of disclosure to the registered holders, if the exchange offer would
otherwise expire during such five to ten business day period. Without limiting
the manner in which we may choose to make a public announcement of any delay,
extension, amendment or termination of the exchange offer, and subject to
applicable law, we shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
24
<PAGE>
RETURN OF MEDIS EL SHARES
If:
- - less than 1,735,842 of Medis El's ordinary shares are tendered in this
exchange;
- - we do not accept tendered Medis El ordinary shares for any valid reason
pursuant to the terms and conditions of this exchange offer; or
- - we are required to return tendered shares, on a pro rata basis, as
discussed above,
certificates for such tendered shares will be returned without expense to the
tendering shareholder, or, in the case of shares tendered by book-entry transfer
into the exchange agent's account at DTC pursuant to the book-entry transfer
procedures described below, such shares will be credited to an account
maintained with DTC as promptly as practicable.
BOOK-ENTRY TRANSFER
The exchange agent will make, within two business days after the date
of this prospectus, a request to establish an account with respect to Medis El
shares at DTC, and any financial institution that is a participant in DTC's
systems may make book-entry delivery of Medis El shares by causing DTC to
transfer such Medis El shares into the exchange agent's account at DTC in
accordance with DTC's procedures for transfer. However, although delivery of
Medis El shares may be effected through book-entry transfer at DTC, the letter
of transmittal, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the exchange
agent on or prior to the expiration date or pursuant to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
Medis El shareholders who wish to tender their shares and whose shares
are not immediately available or who cannot deliver their shares, the letter of
transmittal or any other required documents to the exchange agent prior to the
expiration date, may nonetheless effect a tender of their ordinary shares if:
- - the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the U.S. or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act which is a member of one of the
recognized signature guarantee programs identified in the letter of
transmittal;
- - prior to the expiration date, the exchange agent receives from any of the
above such institutions a properly completed and duly executed notice of
guaranteed delivery substantially in the form provided by us setting forth:
- the name and address of the shareholder;
- the certificate number(s) of such shares; and
- the aggregate number of shares tendered,
stating that such holder is tendering his or her shares and guaranteeing
that, within five business days after the expiration date, the letter of
transmittal together with the certificate(s) representing the shares in
proper form for transfer or a book-entry confirmation, as the case may be,
and any other documents required by the letter of transmittal, will be
deposited by any of the above institutions with the exchange agent, or the
exchange agent receives a properly transmitted message from DTC regarding
the acknowledgment by such shareholder of certain conditions of
25
<PAGE>
tendering; and
- - such properly executed letter of transmittal or a properly transmitted
agent's message, as well as the certificate(s) representing all tendered
shares in proper form for transfer or a book-entry confirmation and all
other documents required by the letter of transmittal, are received by the
exchange agent within five business days after the expiration date.
Upon request to the exchange agent, you will be sent a notice of
guaranteed delivery if you wish to tender your shares according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL RIGHTS
You may withdraw your tendered Medis El ordinary shares prior to the
expiration date of this exchange offer upon submitting to the exchange agent a
written notice of withdrawal specifying your name, the number and amount of
securities withdrawn and the name or names in which the securities are so
registered, if registered in a name other than the tendering security holder.
The signature(s) on the notice of withdrawal must be guaranteed
pursuant to the same guarantee procedures for letters of transmittal as set
forth above in "Procedures for Tendering Medis El Shares," unless such shares
have been tendered for the account of an eligible institution listed in such
section.
If Medis El ordinary shares have been tendered pursuant to the
procedures for book-entry tender, any notice of withdrawal must specify the name
and number of the account at the book-entry transfer facility to be credited
with the withdrawn ordinary shares and must otherwise comply with such
book-entry transfer facility's procedures. If certificates have been delivered
or otherwise identified to the exchange agent, the name of the registered holder
and the serial numbers of the particular certificates evidencing the ordinary
shares withdrawn must also be furnished to the exchange agent prior to the
physical release of such certificates.
All questions as to the form and validity, including time of receipt,
of any notice of withdrawal will be determined by us, in our sole discretion,
which determination shall be final and binding. Neither we, the exchange agent
nor any other person will be under any duty to give notification of any defects
or irregularities in any notice of withdrawal or will incur any liability for
failure to give any such notification. Any ordinary shares properly withdrawn
will be deemed not to have been validly tendered for purposes of this exchange
offer. However, withdrawn ordinary shares may be retendered by following one of
the procedures described in this prospectus at any time prior to the expiration
date.
ACCEPTANCE OF MEDIS EL SHARES AND DELIVERY OF COMMON STOCK
Our common stock issued pursuant to this exchange offer will be
delivered to Medis El shareholders who properly tendered their ordinary shares
on the earliest practicable date following the expiration date, assuming all
conditions to this exchange offer have been satisfied or waived.
EXCHANGE AGENT
American Stock Transfer & Trust Company has been appointed exchange
agent for the exchange offer. Questions and requests for assistance, requests
for additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery should be directed to American
Stock Transfer and Trust Company addressed as follows:
40 Wall Street
26
<PAGE>
New York, NY 10005
Telephone Number: (800) 937-5449 ext. 6820
By Facsimile Transmission: (718) 236-4588
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telegraph, telephone or in person by our and our affiliates' officers and
regular employees.
American Stock Transfer & Trust Company, as exchange agent, will
receive reasonable and customary compensation for its services and will be
indemnified against certain liabilities and expenses in connection with its
services, including certain liabilities under the federal securities laws. We
will not pay any fees or commissions to any broker or dealer or other persons
for soliciting tenders of shares pursuant to this exchange offer. Brokers,
dealers, commercial banks and trust companies will be reimbursed by us for
reasonable expenses incurred by them in forwarding material to their customers.
The cash expenses to be incurred in connection with this exchange offer
will be paid by us and are estimated in the aggregate to be approximately
$535,000. Such expenses include registration fees, fees and expenses of the
exchange agent, accounting and legal fees and printing costs, among others.
We will pay all transfer taxes, if any, which are not based on income,
applicable to the exchange of Medis El's ordinary shares pursuant to this
exchange offer. If, however, a transfer tax is imposed for any reason other than
the exchange of Medis El's ordinary shares pursuant to this exchange offer, then
the amount of any such transfer taxes, whether imposed on the registered
shareholder or any other persons, will be payable by the tendering shareholder.
If satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the letter of transmittal, the amount of such transfer taxes will
be billed directly to such tendering shareholder.
Participation in this exchange offer is voluntary. Medis El
shareholders are urged to consult their financial and tax advisors in making
their own decisions on what action to take.
DIVIDEND POLICY
Neither we nor Medis El have paid dividends on our capital stock to
date. Our payment of future dividends, if any, will be contingent upon our
revenues and earnings, if any, capital requirements and general financial
condition. The payment of any such dividends will be within the discretion of
our board of directors. Our board presently intends to retain all earnings, if
any, for use in our business operations. Accordingly, we do not anticipate
declaring any dividends in the foreseeable future.
PRICE RANGE OF OUR COMMON STOCK
We do not have an established public trading market for our common
stock. We are therefore unable to estimate the price of our stock if and when it
is listed on the Nasdaq SmallCap Market upon which we have applied for listing
subject to the successful completion of this exchange offer. Whether we own all
or less than all of Medis El's ordinary shares, the historical market for Medis
El's ordinary shares may not be indicative of the future market for our common
stock.
27
<PAGE>
In order for our common stock to qualify for initial quotation on the
Nasdaq SmallCap Market, we, among other things, must have:
- - at least $4,000,000 in net tangible assets, a $50,000,000 market
capitalization or $750,000 in net income in the latest fiscal year or two
of the last three fiscal years; and
- - $5,000,000 in market value of our public float; and
- - a minimum bid price of $4.00 per share.
We currently satisfy the net tangible asset requirement and expect to
satisfy the remaining initial listing requirements upon the successful
completion of this exchange offer.
For continued listing we, among other things, must have either:
- - at least $2,000,000 in net tangible assets, a $35,000,000 market
capitalization or $500,000 in net income in the latest fiscal year or two
of the last three fiscal years; and
- - $1,000,000 in market value of our public float; and
- - a minimum bid price of $1.00 per share.
If we are unable to satisfy the Nasdaq SmallCap Market's maintenance
criteria in the future, our common stock may be delisted from the Nasdaq
SmallCap Market. As a consequence of such delisting, a stockholder would likely
find it more difficult to dispose of, or to obtain quotations as to, our common
stock.
PRICE RANGE OF MEDIS EL'S ORDINARY SHARES
Medis El's ordinary shares have traded on the Nasdaq SmallCap Market
under the symbol MDSLF since the effective date of its initial public offering
on December 21, 1993. The closing high and low sales prices of its ordinary
shares, as reported by Nasdaq, for the quarters indicated are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
June 30, 1997..................................................... 6.750 5.000
September 30, 1997................................................ 8.150 5.250
December 31, 1997................................................. 7.000 4.750
March 31, 1998.................................................... 9.250 5.000
June 30, 1998..................................................... 9.050 6.563
September 30, 1998................................................ 7.438 3.875
December 31, 1998................................................. 8.125 3.875
March 31, 1999.................................................... 8.000 6.000
June 30, 1999..................................................... 7.500 6.125
September 30, 1999................................................ 7.688 6.000
December 31, 1999................................................. 7.000 5.188
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
March 31, 2000.................................................... 40.000 5.750
</TABLE>
As of February 1, 2000, there were 74 record holders and approximately
645 beneficial owners of Medis El's ordinary shares. Based upon information
furnished by American Stock Transfer and Trust Company, the transfer agent of
Medis El's ordinary shares, we believe that, as of such date, approximately 83%
of Medis El's ordinary shares were held by at least 510 beneficial holders who
are United States shareholders, which percentage includes our shareholdings. The
high and low closing price of Medis El's ordinary shares on _________, 2000, the
last full trading day before we announced this exchange offer, was $____ per
share.
Following the successful completion of this exchange offer, we intend
to terminate registration under the Exchange Act upon application to the SEC and
delist Medis El's ordinary shares from the Nasdaq SmallCap Market. Termination
of registration of Medis El's ordinary shares under the Exchange Act would
reduce the information required to be furnished by Medis El to its shareholders,
the SEC and the public and would make certain provisions of the Exchange Act,
such as filing an annual report, no longer applicable. Upon delisting, Medis
El's shareholders who have not exchanged their shares would likely find it more
difficult to dispose of, or to obtain quotations, as to the price of such
shares. It is possible that Medis El's ordinary shares would be traded in the
over-the-counter market or by other sources. The extent of the public market for
Medis El's ordinary shares and the availability of such quotations would,
however, depend upon the number of holders and/or the aggregate market value of
the shares remaining at such time, the interest in maintaining a market in the
shares on the part of securities firms, the termination of registration of Medis
El's ordinary shares under the Exchange Act and other factors.
CAPITALIZATION
The following table sets forth our capitalization as of December 31,
1999 and as adjusted to give effect to (1) the issuance of 2,378,104 shares of
our common stock assuming our acquisition of 80% of the outstanding shares of
Medis El pursuant to this exchange offer or (2) the issuance of 5,299,722 shares
of our common stock assuming our acquisition of 100% of the outstanding shares
of Medis El pursuant to this exchange offer. This table should be read in
conjunction with our consolidated financial statements and the notes to such
statements and the other financial information included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------
ACTUAL AS ADJUSTED (1) AS ADJUSTED (2)
------------- --------------- ---------------
<S> <C> <C> <C>
Short term borrowings ............................... $ 86,000 $ 86,000 $ 86,000
Long term debt-excluding current maturities ......... $ 11,000 $ 11,000 $ 11,000
Minority interest in subsidiary ..................... 627,000 344,000 --
Stockholders' equity:
Common Stock, $.01 par value shares authorized;
issued and outstanding: 9,988,619 shares actual;
12,366,723 and 15,288,341 shares as adjusted ... 100,000 124,000 153,000
Additional paid in capital .......................... 32,450,000 74,737,000 126,689,000
Accumulated deficit ................................. (23,615,000) (23,786,000) (23,996,000)
------------- --------------- ---------------
Deferred compensation ............................... (374,000) (374,000) (374,000)
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C>
Total stockholders' equity ...................... 8,561,000 50,701,000 102,472,000
------------- --------------- ---------------
Total capitalization ................................ $ 9,199,000 $ 51,056,000 $ 102,483,000
============= =============== ===============
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years
ended December 31, 1995 and 1996 and the selected consolidated balance sheet
data as of December 31, 1995, 1996 and 1997 have been derived from audited
financial statements not included in this prospectus. The selected consolidated
statement of operations data for the years ended December 31, 1997, 1998, and
1999 and the selected consolidated balance sheet data as of December 31, 1998
and 1999 have been derived from our audited financial statements included
elsewhere in this prospectus. Such consolidated financial statements include the
financial statements of Medis Inc. and Medis El beginning on December 15, 1997.
Prior to that date, our investment in Medis Inc. and Medis El had been accounted
for using the equity method of accounting. The historical results are not
necessarily indicative of results to be expected for any future period. The data
should be read in conjunction with the consolidated financial statements and the
notes to such statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues .......................................... $ -- $ -- $ -- $ 8,000 $ --
Cost of sales ..................................... -- -- -- 3,000 --
------------ ------------ ------------ ----------- -----------
Gross profit ...................................... -- -- -- 5,000 --
Operating expenses
Research and development costs, net ............. -- -- 1,406,000 1,646,000 2,749,000
Selling, general and administrative expenses .... 231,000 193,000 1,303,000 1,399,000 2,467,000
Amortization of intangible assets ............... -- -- 102,000 2,445,000 2,574,000
------------ ------------ ------------ ----------- -----------
Total operating expenses .......................... 231,000 193,000 2,811,000 5,490,000 7,790,000
------------ ------------ ------------ ----------- -----------
Loss from operations .............................. (231,000) (193,000) (2,811,000) (5,485,000) (7,790,000)
Other income (expenses)
Interest and other income ....................... 85,000 9,000 64,000 63,000 150,000
Interest expense ................................ (535,000) (1,660,000) (381,000) (101,000) (22,000)
------------ ------------ ------------ ----------- -----------
Loss before minority interest ..................... (681,000) (1,844,000) (3,128,000) (5,523,000)
Equity in net losses of unconsolidated subsidiaries (942,000) (789,000) -- -- --
Minority interest in loss of subsidiaries ......... -- -- 1,584,000 1,105,000 1,697,000
Net loss .......................................... $(1,623,000) $(2,633,000) $(1,544,000) $(4,418,000) $(5,965,000)
============= ============ ============ ============ ============
Basic and diluted net loss per share .............. $ (0.47) $ (0.71) $ (0.33) $ (0.52) $ (0.61)
============= ============ ============ ============ ============
Weighted average shares outstanding ............... 3,460,000 3,734,129 4,645,232 8,581,774 9,807,101
============= ============ ============ ============ ============
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working capital (deficiency) ............... $ (686,000) $ (1,728,000) $ 266,000 $ 3,536,000 $ 1,083,000
Total assets ............................... 3,819,000 3,621,000 14,443,000 14,755,000 10,226,000
Long-term debt, excluding current maturities 2,000,000 1,000,000 338,000 96,000 11,000
Accumulated deficit ........................ (9,117,000) (11,668,000) (13,232,000) (17,650,000) (23,615,000)
Total stockholders' equity (deficiency) .... (2,980,000) (1,645,000) 11,378,000 12,406,000 8,561,000
</TABLE>
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MEDIS EL
The selected consolidated statement of operations data for the years
ended December 31, 1995 and 1996 and the selected consolidated balance sheet
data as of December 31, 1995, 1996 and 1997 have been derived from audited
financial statements not included in this prospectus. The selected consolidated
statement of operations data for the years ended December 31, 1997, 1998, and
1999 and the selected consolidated balance sheet data as of December 31, 1997
and 1998 have been derived from our audited financial statements included
elsewhere in this prospectus. The historical results are not necessarily
indicative of results to be expected for any future period. The data should be
read in conjunction with the financial statements, related notes and other
financial information included elsewhere in this report.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues ............... $ 198,000 $ 32,000 $ -- $ 8,000 --
Gross profit ........... 17,000 21,000 -- 5,000 --
Research and development
costs, net (1) ...... 1,023,000 815,000 1,406,000 1,646,000 $ 2,747,000
Net loss ............... $ (2,240,000) $ (1,962,000) $ (2,647,000) $ (2,967,000) (4,661,000)
Net loss per share-basic
and diluted ......... $ (0.26) $ (0.22) $ (0.28) $ (0.31) (0.45)
============== ============== ============== ============== ==============
Weighted average number
of shares outstanding 8,650,000 8,790,000 9,325,000 9,624,000 10,293,000
============== ============== ============== ============== ==============
</TABLE>
- ---------------------
(1) Total research and development costs were offset in part by grants from the
Government of Israel for the years 1995 and 1996.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working capital .......... $ 2,324,000 $ 3,939,000 $ 1,209,000 $ 3,376,000 $ 858,000
Total Assets ............. 3,651,000 4,943,000 2,323,000 4,880,000 2,606,000
Long-term debt ........... 681,000 489,000 293,000 96,000 11,000
Accumulated loss ......... (9,988,000) (11,950,000) (14,597,000) (17,564,000) (22,225,000)
Total shareholders' equity 2,093,000 3,869,000 1,344,000 4,079,000 1,721,000
</TABLE>
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We serve as agent and distributor of certain technologies owned wholly
or in part by Medis El Ltd., an Israeli corporation of which we beneficially own
approximately 64%. To date we have devoted all of our efforts and resources to
help provide financing and assist in commercializing Medis El's technologies.
The financial presentation below is based upon our historical financial
statements which include the results of operations of Medis El beginning
December 15, 1997. Prior to that date, our investment in Medis El was accounted
for using the equity method of accounting. As we have conducted all of our
operating activities through Medis El, the presentation reflects primarily the
results of operations of Medis El. However, the presentation also includes
activities performed by us and are therefore different from the historical
financial statements of Medis El.
RESULTS OF OPERATIONS
From our inception in April 1992 through December 31, 1999, we have
generated a cumulative net loss of $23,615,000. We expect to incur additional
operating losses during 2000 and perhaps beyond, principally as a result of our
continuing anticipated research and development costs, and due to anticipated
limited sales of Medis El's technologies. Due to our limited funds available for
such purposes, we do not expect to substantially increase in the future our
research and development expenses beyond current levels until we are able to
generate revenues or receive funds from third parties for research and
development. If our funds continue to decrease due to our current spending
levels and we are unable to generate revenues or receive funds from third
parties for research and development, we expect to curtail development of one or
more technologies. Furthermore, for so long as our technologies remain in the
development or testing phase, we do not expect our selling, general and
administrative expenses to increase substantially from historical levels. If we
begin to market and sell any of our technologies, we will increase such expenses
to the extent necessary, which we expect to fund out of our revenues.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
We sustained a net loss of $5,965,000 during the year ended December
31, 1999 compared to $4,418,000 in 1998. The increase can primarily be
attributed to a significant rise in research and development costs and increased
selling, general and administrative expenses, partially offset by increased
interest income due to higher average cash balances and lower interest expense
due to lower debt balances during the year ended December 31, 1999, as compared
to the year ended December 31, 1998.
Research and development costs were up sharply at $2,749,000 for 1999,
as compared to $1,646,000 during 1988. This increase can be largely attributed
to increased research and development activity pertaining to the CellScan,
stirling cycle linear technology and fuel cells, costs aggregating $115,000 to
acquire an additional 11.5%interest in More Energy, depreciation expense of
$358,000 as compared to $101,000 for the year ended December 31, 1998 and costs
incurred of $255,000 to write off our inventory of cell carriers, antigens and
neuritors, a technology licensed to Medis El, to research and development
expense. These factors were somewhat offset by a payment of $200,000 Medis El
received under a December 1998 technology development agreement with The
Coca-Cola Company in which it:
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<PAGE>
- - paid $100,000 to obtain a right of first refusal to obtain exclusive rights
to use the stirling cycle, fuel cells and other technologies in its field
of business; and
- - paid $100,000 to assist in the development of the stirling cycle technology
for use in its field of business.
Such payments aggregating $200,000 were recorded as a credit to research and
development costs for the year ended December 31, 1999.
Selling, general and administrative expenses for the year ended
December 31, 1999 were $2,467,000 compared to $1,399,000 for the year ended
December 31, 1998. This increase can be primarily attributed to a charge of
$437,000 to selling and general administrative expenses in the fourth quarter of
1999 pursuant to the terms of a settlement agreement with an Argentinean company
and a substantial increase to approximately $425,000 in legal and accounting
fees relating to this offering and related expenses.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
We received additional operating resources during 1998 from an influx
of equity capital which greatly improved our financial position. Total
shareholders' equity at December 31, 1998 was $12,406,000 compared to
$11,378,000 at December 31, 1997, with working capital at $3,536,000 at December
31, 1998 compared to $266,000 at December 31, 1997. We sustained a net loss of
$4,418,000 for the year ended December 31, 1998, compared to $1,544,000 for the
year ended December 31, 1997, primarily due to the amortization of acquired
intangible technology assets and goodwill amounting to $2,445,000 compared to
$102,000 for 1997, which increased total operating expenses for the year to
$5,490,000 from $2,811,000 in 1997. Such acquired intangible technology assets
and goodwill were generated upon the acquisition of a minority interest in Medis
Inc., our wholly-owned subsidiary. The aggregate purchase price of the minority
interest was valued at $13,125,000, generating acquired intangible technology
assets and goodwill approximating $12,227,000 which are being amortized over a
five year period.
We had revenues of $8,000 for the year ended December 31, 1998 compared
to no revenues for the year ended December 31, 1997. The revenues came from the
sale of a single neuritor, based upon an unsolicited request for the product.
We devoted somewhat more resources to research and development
activities, incurring research and development costs of $1,646,000 for the year
ended December 31, 1998, compared to $1,406,000 for the year ended December 31,
1997. Medis El channeled resources to the refinement of the CellScan and
development of the stirling cycle linear technologies, toroidal engine and fuel
cell technology.
Interest expense decreased to approximately $101,000 for the year ended
December 31, 1998 from $381,000 for the year ended December 31, 1997. This
decrease was substantially due to the retirement of long term debt in 1998
aggregating approximately $941,000. The holders of $650,000 of such debt
exchanged such debt for 325,000 shares of Medis El's common stock held by us.
Selling, general and administrative expenses for the year ended
December 31, 1998 increased slightly to $1,399,000, compared to $1,303,000 for
the year ended December 31, 1997.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through the
proceeds of investor equity financing, long-term bank loans, grants from the
Chief Scientist of the Ministry of Industry and Commerce of Israel with respect
to the CellScan, initial sales of our products and fees from the granting of
exclusive distributorship rights.
In 1997, holders of $2,314,290 of our senior secured subordinated notes
surrendered such notes as payment for 578,573 shares of our common stock
underlying warrants. Also in 1997, we issued 60,000 additional shares of our
common stock upon the exercise of warrants against our receipt of the aggregate
exercise price of $240,000. In 1998, we issued a total of 1,150,002 shares of
our common stock and 358,334 warrants for an aggregate of $4,600,008. In 1999,
we issued a total of 581,004 shares of our common stock and 193,668 warrants for
an aggregate of $2,324,016. The proceeds of such offerings were used:
- - to repay Medis El the sum of $2.3 million pursuant to a promissory note
entered into between us and one of our subsidiaries, which had been
assigned to Medis El through a capital contribution;
- - to purchase shares of Medis El; and
- - for selling, general and administrative expenses.
In 2000, as of the date of this prospectus, we issued a total of
637,000 shares of our common stock and 240,833 warrants for an aggregate of
$2,895,400. We intend for the proceeds of such offering to be used:
- - to fund the further research and development of our products; and
- - for selling, general and administrative expenses.
In January 1998, a single investor purchased 300,000 of Medis El's
ordinary shares in a private placement for an aggregate of $1,334,000, which
lowered our percentage ownership in Medis El from approximately 67% to
approximately 65%. Also during 1998, we paid to Medis El $4,300,000 out of the
$4,600,008 discussed above, representing $2,000,000 of proceeds from the
issuance of 400,000 of Medis El's ordinary shares to us and $2,300,000 of final
principal and interest payments on the promissory note between Medis El and us.
In May 1999, we purchased 318,181 of Medis El's ordinary shares in a private
placement for an aggregate of $1,750,000. In 2000, as of the date of this
prospectus, employees, including Medis El's executive vice president and vice
president-finance, and a director exercised an aggregate of 66,100 options to
purchase a like number of Medis El's ordinary shares, for an aggregate exercise
price of approximately $336,000. In February 2000, we purchased 107,759 of Medis
El's ordinary shares in a private placement for an aggregate of $2,500,000. The
proceeds of such offerings and option exercises were used and Medis El intends
to use for research and development and selling, general and administrative
expenses. Medis El does not intend to issue any more of its shares to third
parties subsequent to the successful completion of this exchange offering, as we
intend that all future financings of Medis El will be effected through Medis
Technologies.
As of December 31, 1999, we had bank loans outstanding of $97,000, the
long-term portion of which was $11,000. These loans are guaranteed by the State
of Israel and collateralized by a floating lien on all of Medis El's assets. The
loans are repayable in New Israeli Shekels, linked to the dollar, and bear
interest at the rate of LIBOR plus 2.4% to 2.6% per annum.
For the year ended December 31, 1999, we used $3,362,000 in connection
with our operating activities, as compared to $2,659,000 for the year ended
December 31, 1998 and $2,612,000 for the year ended December 31, 1997. The
increase was primarily attributable to the increase in the net loss for the
34
<PAGE>
year due to a rise in research and development, somewhat offset by the
differences in changes in certain working capital components.
For the year ended December 31, 1999, we used $72,000 in investing
activities, compared to net cash used in investing activities of $617,000 in
1998 and $356,000 in 1997. The change was principally attributed to an
investment in a short-term deposit in 1998, contrasted with maturities of
short-term deposits in 1999 and 1997.
As of February 1, 2000, we had approximately $4,300,000 in cash and
cash equivalents. Our working capital and capital requirements at any given time
depend upon numerous factors, including, but not limited to:
- - the progress of research and development programs;
- - the status of Medis El's technologies;
- - the results of pre-clinical testing and clinical trials;
- - the timing and costs involved in obtaining regulatory approvals; and
- - the level of resources that Medis El devotes to the development of its
technologies, patents, marketing and sales capabilities.
Another contributing factor is the status of collaborative arrangements
with businesses and institutes for research and development.
Management expects that our present funds, after one-time costs such
as:
- - the expected exercise of options representing an additional 50% of the
outstanding shares of New Devices Engineering for an aggregate of $60,000;
- - the expected reimbursement of funds aggregating $35,000 for patent filing
costs incurred by a shareholder of New Devices Engineering; and
- - expenses incurred in this offering,
are sufficient to support our and Medis El's present activities for at least 12
months. However, to the extent we are required to fund the costs necessary to
obtain regulatory approval of the CellScan, our current funds will not be
sufficient to support our and Medis El's activities for such time. Beyond such
time, or, if we are required within the next 12 months to fund the regulatory
approval of the CellScan, prior to such time, we will require capital infusions
of cash from investors, whether private investors or through companies or other
organizations assisting in the development of our technologies, to continue our
operations. We expect such operations to require funding of approximately
$3,800,000 per year. To the extent we are unable to acquire additional funds, we
will curtail research and development of one or more technologies until such
time as we acquire additional funds.
TAX MATTERS
As of December 31, 1999, for U.S. federal income tax purposes, we had
net operating loss carry-forwards of approximately $4,686,000. For Israeli
income tax purposes, we had net operating loss carry-forwards of approximately
$23,500,000. Since our inception, we have not had any taxable income. Also,
neither we nor Medis El have ever been audited by the United States or Israeli
tax authorities since incorporation. Pursuant to United States federal tax
regulations, our ability to utilize the United States net operating loss
carry-forwards may be limited due to changes in ownership, as defined in the
Internal Revenue Code.
35
<PAGE>
GRANTS OBTAINED FROM THE STATE OF ISRAEL
Medis El received approximately US $1,800,000 in research and
development grants from the Office of the Chief Scientist of the Ministry of
Commerce and Industry of the State of Israel from its inception to 1997. This is
based upon a policy of the government of Israel to provide grants of between 50%
and 66% of qualifying approved research and development expenditures to promote
research and development by Israeli companies. Medis El received 50% of
qualifying approved research and development expenditures, with $1,629,000 of
such funds being allotted for the CellScan and $167,000 allotted for the
neuritor. Pursuant to the grant arrangement, Medis El is required to pay 3% of
its sales of products developed with the grant funds until the grant amounts are
paid in full. There is no requirement to repay the grants if the products
developed with the grant funds are not sold. If Medis El sells the underlying
technology prior to repaying the grant funds, it must first seek permission from
the Israeli government for such sale. Prior to Medis El receiving grant funds in
1992, Medis El assumed from Israel Aircraft its obligation relating to the
repayment of grants of approximately $805,000. As of the date of this
prospectus, Medis El's total contingent obligation for the repayment of grants,
which includes the $805,000, is $2,576,000. Medis El is not presently receiving
any grants from the State of Israel. We believe that Medis El will continue to
be eligible to receive future research and development grants should it again
seek to initiate applications for such grants subsequent to the successful
completion of the exchange offer, as grants are more readily attainable for
Israeli companies with larger foreign ownership as a way to attract more foreign
capital into Israeli companies. However, we have not confirmed such eligibility
with the proper authorities as we do not intend to seek to obtain research and
development grants in the immediate future.
Under the Law for the Encouragement of Capital Investments, 1959, Medis
El was issued a certificate of approval as an "Approved Enterprise." Under the
law, Medis El elected the "combined path," pursuant to which Medis El had the
right to receive a government guaranteed bank loan of 66% of the amount of the
approved investment. In addition, Medis El had the right to receive a grant of
25% of the approved investment, in which case the loan would be reduced by the
amount of the grant. Medis El received investment grants of approximately
$97,000 and loans of approximately $893,000. The investment grants were used to
invest in equipment, furniture and fixtures and commercial vehicles. The loan
proceeds were used for the above as well as to acquire know-how, leasehold
improvements, marketing and working capital. The loans are bank loans from Bank
Leumi Le Israel and are guaranteed by the State of Israel and are secured by
substantially all of Medis El's assets. At December 31, 1999, the remaining
balance on the loans was approximately $97,000. Additionally, the tax liability
in respect of Medis El's income deriving from its Approved Enterprise activities
is calculated at a rate of 20% of income for a ten year period, with tax on
dividends distributed of 15%, instead of 25%. These tax benefits can be utilized
at least through 2006. Disclosure about Market Risk
IMPACT OF INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS, LIABILITIES
AND ASSETS
In connection with its currency use, Medis El operates in a mixed
environment. Most acquisitions and payroll are paid in local currency.
Consideration for virtually all sales and Medis El's bank loans are either in
dollars or dollar-linked currency. As a result, not all monetary assets and all
monetary liabilities are linked to the same base in the same amount at all
points in time, which may cause losses in terms of Israeli currency adjusted for
the effects of changes in its purchasing power. In order to help minimize such
losses, Medis El currently invests its liquid funds in both dollar-linked and
Shekel based assets.
For many years prior to 1986, the Israeli economy was characterized by
high rates of inflation
36
<PAGE>
and devaluation of the Israeli currency against the United States dollar and
other currencies. However, since the institution of the Israeli Economic Program
in 1985, inflation, while continuing, has been significantly reduced and the
rate of devaluation has been substantially diminished. During 1989 and 1990, the
dollar declined in value relative to major world currencies. Because
governmental policies in Israel linked exchange rates to a weighted basket of
foreign currencies of Israel's major trading partners, the exchange rate between
the NIS and the dollar remained relatively stable during this period. However,
Israel effected devaluations of the NIS against the dollar as follows:
1991 11.5 %
1992 21.1 %
1993 8.0 %
1994 1.1 %
1995 3.9 %
1996 3.7 %
1997 8.8 %
1998 17.6 %
1999 (0.17) %
During the three years ended December 31, 1991 and the four years ended
December 31, 1996, the rate of inflation in Israel exceeded the rate of
devaluation of the NIS against the dollar, but in 1998, 1997 and 1992, the rate
of devaluation of the NIS against the dollar exceeded the rate of inflation in
Israel. In 1999, the rate of Israeli inflation was 1.3% and the NIS appreciated
by .17% against the dollar.
IMPACT OF POLITICAL AND ECONOMIC CONDITIONS
The state of hostility which has existed in varying degrees in Israel
since 1948, its unfavorable balance of payments and its history of inflation and
currency devaluation, all represent uncertainties which may adversely affect our
business.
YEAR 2000 COMPLIANCE
We, including Medis El, have addressed year 2000 compliance in our
systems, accounting software, computer hardware and existing products, which
includes the CellScan and prototypes of our stirling cycle linear compressor and
fuel cell technology, and have communicated with our significant third party
vendors with respect to their respective states of readiness.
In order to assess year 2000 compliance of our products and systems, we
identified those systems critical to our operations and the operations of our
technologies and, based upon tests to such products and systems, believed that
all of our systems and technologies, to the extent developed, were materially
compliant. We expended approximately $10,000 to assess and address the year 2000
problem.
We did not experience any material failures or disruptions either on or
after January 1, 2000, whether internally or by reason of our significant third
party vendors, however, due to the uncertainties that are inherent in year 2000
remediation, we can give no assurances that our efforts will prevent future
disruptions.
Although we believe that we have adequately addressed the year 2000
issue, it is possible that future failures or disruptions stemming from year
2000 issues may yet result in material failures or disruptions to our systems,
products or prototypes.
37
<PAGE>
BUSINESS
THE EVOLUTION OF OUR BUSINESS
We were formed in April 1992 to enter into a joint venture with Israel
Aircraft Industries Ltd., a company wholly owned by the State of Israel and a
leader in aerospace technology. Together, we founded and financed the activities
of Medis El Ltd., an Israeli company, which was established to develop and
commercialize a technology known as the CellScan. Beginning in 1992 and through
its initial public offering in December 1993 until 1996, Medis El was
principally engaged in the development and clinical testing of the CellScan,
which it planned to manufacture and market when development was completed. Medis
El had its own facilities to manufacture a limited number of CellScans. It had
entered into arrangements in which certain distribution rights to the CellScan
were sold and initiated a direct sales program for a few territories where no
distributorship had been granted. Distribution rights to the CellScan in the
United States, its territories and possessions had already been granted to us
through one of our wholly-owned subsidiaries at the time of our formation. As
part of our distributorship rights, we were obligated to assist in funding the
effort to obtain FDA approval of the CellScan as a diagnostic tool.
Over the ensuing years, Medis El began to rethink its singular reliance
on the CellScan and its business strategy of manufacturing and marketing its
products. Problems in the development of the CellScan, discussed below, led it
to seek other technologies for development. Furthermore, the difficulties of
finding qualified distributors capable of working with and selling the CellScan
and recognition of the need for large amounts of capital to carry out a
manufacturing and marketing program led it to conclude that a better plan would
be to either develop the CellScan to the point where it could enter into an
arrangement with a joint venturer or licensee which had the marketing ability
and the capital to manufacture and market the CellScan, or seek the outright
sale of the technology.
In seeking out other technologies that it might be capable of
developing successfully, Medis El sought to take advantage of the talents in its
organization and its relationship with Israel Aircraft. In 1994, it acquired and
began work on the stirling cycle linear technology which Israel Aircraft had
initiated for possible military use. In this development program, it started
working with some of its contacts in the scientific community who emigrated from
the former Soviet Union. Medis El then added other technologies in related
fields of engineering as it expanded its relationships with emigres from the
former Soviet Union. In connection with these new technologies, Medis El
concluded that it should focus on developing them into working prototypes and
then licensing their use in return for royalty payments, rather than expend
large-scale capital and other resources to manufacture and market the products
in-house.
As a result of these actions, Medis El now seeks to operate as a
greenhouse for the development of highly advanced, innovative, proprietary
technology products which it intends to license, sell or joint venture with
large international corporations. As part of this new strategy, we became Medis
El's exclusive agent in North America for coordinating all licensing
arrangements with respect to all of Medis El's technologies except the CellScan,
for which our original 1992 distribution agreement still applies.
We and Israel Aircraft each beneficially owned 50% of Medis El upon its
formation in July 1992. In December 1997, Medis El was restructured so that we
beneficially owned a majority of Medis El's ordinary shares and Israel Aircraft
exchanged part of its beneficial interest in Medis El for a large minority
interest in us, leaving it with an approximately 12% direct ownership of Medis
El. As a consequence of the restructuring, the sharing of officers and directors
with Medis El, and in view of our
38
<PAGE>
distribution rights to the CellScan and agency rights to Medis El's other
technologies, we and Medis El are intimately connected and our strategies,
successes and failures parallel each other.
OUR PRODUCTS AND TECHNOLOGY
As part of its new strategy, Medis El focuses its efforts on the
lengthy and expensive process of conceiving its products, preparing and
submitting patents for its technologies and concurrently applying its in-house
technological capabilities to maximize the development of the technologies to a
point of exploitation through licensing, sales and joint ventures.
All of the technologies which Medis El owns in whole or in part are in
the development or testing phase. While we believe that each of these products
has advantages over products now on the market, we are unable to state with any
certainty how the technologies will compete in the marketplace. Nor will we know
fully their drawbacks and disadvantages until such time as our products are
successfully developed and marketed. Furthermore, we can give no assurance that
any of our products will be successfully developed or, if successfully
developed, will be commercially feasible. Our beliefs and estimates as to the
feasibility of the technologies are based upon the understanding of such
technologies by the technical advisors and scientists employed by Medis El,
whose views may not prove to be accurate.
Medis El's technologies presently include:
CELLSCAN
The CellScan is a system for the viewing and testing of cells.
Current cell scanning techniques involve the use of either a traditional
microscope or a "flow" cytometer, which passes large numbers of cells by a
viewer at a time without the ability to retrieve any one cell for further
study. The CellScan, which is a "non-flow" or "static" cytometer, allows
viewing of thousands of cells in a living state and provides the ability to
revisit and probe each cell a number of times. The CellScan also permits real
time monitoring of ongoing cellular events. We believe that the CellScan is
the first technology available capable of doing this in a timely and cost
efficient manner. Instead of having an individual cell monitored and then
lost, the cells are arranged on a "cell carrier" which consists of a 4 square
millimeter matrix of 10,000 wells, each of which is designed to hold one cell
in a semi-immobilized state without injury to the cell or its surface. Each
cell to be studied is stimulated and monitored to detect changes in the
intensity and direction of light emanating from the cell which can then be
measured and recorded.
The CellScan was originally developed by scientists at Bar Ilan
University in Israel to diagnose cancer based upon investigations reported in
scientific publications that disease can be detected by testing the response
of the immune system to antigens, which are immune system stimulants, for
specific diseases. Those scientists believed that, using the CellScan
technology, simple and effective tests for breast cancer and other diseases
could be developed. Pursuant to an agreement entered into in 1991, Bar Ilan
granted to Israel Aircraft a perpetual worldwide license to develop,
manufacture and sell the CellScan, and to sublicense the right to manufacture
and sell the device. The license includes all of Bar-Ilan's rights to the
CellScan patents, know-how and inventions, including any subsequently
acquired, and all improvements to such intellectual property. In August 1992,
Israel Aircraft assigned all of its rights under the license to Medis El.
From Medis El's inception, the CellScan was being developed, marketed
and tested as a machine to screen for and detect breast cancer by means of a
blood test. It was also thought at that time that the CellScan could be applied
for other uses, such as for the detection of other diseases and for cell biology
research. Medis El sold a small number of CellScans to various hospitals and
institutions around the
39
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world but, from inception, there were problems with inconsistency of results
from tests to diagnose various cancers at these institutions. This culminated in
1998 in a failure of a CellScan placed at a predecessor of North Shore LIJ
Health Systems, Inc. in New York to achieve results achieved with the CellScan
owned by the Rebecca Sief Medical Center in Sefad in tests performed between
1994 and 1997 for the diagnosis of prostate cancer. The inconsistent results
were attributed to the difficulties in operating the CellScan and differences
from machine to machine caused by unknown variables, so that diagnostic results
were dependent on the quality and characteristics of the particular CellScan and
in some instances, the level of experience of the personnel conducting tests
using the CellScan. As a result, in 1998 Medis El redesigned the CellScan
substantially to improve its accuracy, repeatability and ease of handling. Such
redesign included a new optical system and new software.
Starting in 1997, Medis El also realized that the CellScan had
significant potential as an alternative to flow cytometers for research
applications in addition to its originally conceived role as a diagnostic tool.
We believe, based upon our knowledge of the industry, the size of this market to
be between $750 million and $1 billion annually. Applications of the CellScan as
a research tool are expected to include developing drugs, vaccines and antigens,
and aspects of gene therapy. This focus on the CellScan as a research tool
resulted in the introduction of an argon laser to the CellScan rather than the
existing helium cadmium laser. The argon laser was chosen since it is the laser
broadly used by scientists in cell research. However, because the intensity of
the argon laser is much stronger than the helium cadmium laser, cells could only
be exposed to the laser light for a briefer period of time. To allow for the
increased intensity of the new argon laser, the argon laser CellScan was
redesigned with a new shutter and new software to control the laser and provide
readings of the results. Medis El is comparing results of diagnostic tests using
both lasers with a view to replace the helium cadmium laser with the argon laser
for all applications. Results of tests to date show that the argon laser
CellScan performs at least as well as the helium cadmium laser CellScan. Tests
of the new system for diagnostic and other uses are now ongoing at the Rebecca
Sief Medical Center since March 1999, Medis El's laboratories since April 1999
and North Shore LIJ Health Systems, Inc. since September 1999.
In parallel with the development and refinement of the CellScan since
Medis El first acquired a license to this technology, Medis El concentrated on
refining existing antigens and developing new antigens for use with the
CellScan. A specific antigen is needed for the CellScan to diagnose each
disease. There can be no assurance that Medis El will be able successfully to
develop or acquire antigens for any or all of the cancers and diseases which it
expects to diagnose using the CellScan. We believe that if the CellScan is
perfected and sold in significant quantities, of which there can be no
assurance, more antigens will be developed through use of the CellScan both by
Medis El and unrelated parties which will in turn create more applications for
the CellScan as a diagnostic tool.
The CellScan as currently developed is substantially complete. Medis El
is developing the next version of the CellScan, using smaller and less expensive
scanners, electronics and optics, as a lower priced, desktop model and is
working to have a prototype of such model by the end of 2000. We expect
remaining development costs for the desktop model to be less than $500,000.
HOW THE CELLSCAN WORKS
The CellScan measures the intensity and direction of light emitted from
cells marked with fluorescent dye and stimulated with an antigen or chemical.
The cells are exposed to a laser light to measure the surface reaction of each
cell to the stimulant.
There are four steps involved in monitoring cells using the CellScan:
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- - SELECTING AND LOCALIZING INDIVIDUAL CELLS WITHIN A CELL POPULATION.
Lymphocyte cells, which constitute part of the body's immune systems to
fight disease, from a blood sample are placed in wells on the disposable
cell carrier matrix. Because each well is tagged, the cell carrier permits
each cell to be tested and retested so that a statistical norm of the
intensity and direction of light can be established which is statistically
more reliable than an individual reading of the cells; we know of no other
presently available equipment capable of such retesting procedures.
- - STIMULATING THE CELLS. The cells are then stimulated by a specific antigen
or chemical developed for such purpose and exposed to beams of laser light
at the rate of at least 5,000 times per second to activate a detectable
response in each cell's surface.
- - MEASURING AND RECORDING THE RESPONSE. The detectable response is analyzed
for qualitative and quantitative changes in the intensity and direction of
light emanating from each individual cell, which can be measured and
recorded.
- - ANALYSIS. The results can then be analyzed to conclude, for instance,
whether a patient has a particular disease for which the test was made, in
the case of a diagnostic test.
APPLICATIONS AND INSTITUTIONS
Potential applications of the CellScan which hold out the promise of
broad use include aiding in the early detection of certain cancers and other
diseases, including breast, prostate and gynecological cancers and tuberculosis
and atherosclerosis, as well as individualized patient chemotherapy. Medis El
from time to time seeks to place the CellScan at medical and research
institutions around the world in order to test applications and to develop new
applications for the system in additional fields.
The applicability of the CellScan in diagnosing various cancers and
diseases are currently being researched, or there is an intention to research,
at the following institutions:
- - REBECCA SIEF MEDICAL CENTER. Researchers at the Rebecca Sief Medical Center
in Sefad, Israel are currently researching the applicability of the
CellScan as it relates to the detection of prostate cancer, breast cancer
and tuberculosis. An article detailing the Center's research as it relates
to prostate cancer reflecting favorable conclusions with respect to the
CellScan has been published in the June 1999 issue of the Journal of
Urology. Broader testing of the CellScan for breast cancer detection at the
Center and other Israeli institutions has recently begun. Researchers have
had promising results in the application of the CellScan for the detection
of tuberculosis.
- - SHEBA MEDICAL CENTER AND TEL HASHOMER HOSPITAL. Researchers at the Sheba
Medical Center and Tel Hashomer Hospital in Tel Aviv, Israel have been
researching the applicability of the CellScan as it relates to the
detection of atherosclerosis. An article describing promising initial
results was published in the August 1999 issue of the Journal "Clinical
Cardiology."
- - SCHOTTENSTEIN CELLSCAN CENTER. The Schottenstein CellScan Center at
Bar-Ilan University is researching various applications for the CellScan,
including the possibility of a modular CellScan capable of flow cytometry
in addition to its non-flow capabilities and an optical tweezer able to
move a cell from the grid to a test tube. The further development of these
and other potential applications requires additional funds, which we have
no obligation to supply. We intend, however, to explain the benefits of
funding the continuation of such research to companies we hope to enter
into relationships with to manufacture, market and sell the CellScan. Medis
El
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from time to time provides Bar-Ilan with upgrades to its CellScan at no
charge.
- - PASTEUR INSTITUTE. Researchers at the Pasteur Institute in Paris have
researched the applicability of the CellScan in studying cell appoptosis,
or cell death, as it relates to HIV. We believe that the Pasteur Institute
will continue its study upon the placement of an upgraded CellScan at their
facilities, which we plan to do.
- - NORTH SHORE LIJ HEALTH SYSTEMS, INC. Medis El sent a research CellScan to
North Shore LIJ in July 1999 which it uses or intends to use to research
the applicability of the CellScan on papilloma, tuberculosis and lyme
disease.
- - ICHILOV HOSPITAL. A CellScan placed at the Ichilov Hospital, which is
affiliated with Tel Aviv Medical Center, was used by Professor S.
Chaitchik to research the reaction of cancerous cells to certain drugs
in connection with developing a protocol for finding the correct
chemotherapeutic drug for a particular individual's cancer. Professor
Chaitchik recently retired from such hospital and has since come to
Medis El, along with the hospital's CellScan machine, to continue his
research at Medis El's facilities. Early results at Medis El's
facilities are promising and if Professor Chaitchik's tests are
ultimately proved to be successful, the CellScan could help determine
the effectiveness of certain drugs on cancerous cells, thus creating
more effective treatments for cancer patients. There can be no assurance
that Professor Chaitchik's tests will be successful or that such tests,
if successful, can be duplicated by others. Medis El, with Professor
Chaitchik, is applying for approval to perform his tests on the cells of
patients of a cancer clinic in Israel.
- - VETERANS HOSPITAL IN TAIWAN. Medis El has upgraded the CellScan in the
Veteran's Hospital in Taiwan to research the applicability of the CellScan
to diagnose gynecological cancer using an antigen developed by researchers
at the Johns Hopkins Hospital in Baltimore, Maryland.
- - UNIVERSITY OF TEL AVIV. Members of the Department of Biochemistry at the
University of Tel Aviv are conducting experiments to determine whether the
CellScan has applications in gene therapy and targeted drug delivery.
Except for one machine each at the Rebecca Sief Medical Center, the
Schottenstein CellScan Center, the Veterans Hospital in Taiwan and a CellScan
being used by Professor Chaitchik, all of which were purchased by the respective
owners during or prior to 1995, all of the CellScans currently or contemplated
being used for research are owned by Medis El and are on loan to such
facilities. The production of all of the CellScan machines on loan was funded by
equity and debt financing.
SALES AND MARKETING
We have begun a process of seeking out a company with an existing
medical device distribution network or a pharmaceutical company to assist in
marketing, selling and distributing the CellScan or to purchase the CellScan
technology in its entirety. As of the date of this prospectus, we have shown the
CellScan to a company engaged in the manufacture of flow cytometers.
We anticipate that any company engaged in the marketing and sale of the
CellScan would sell the machine and test kits as separate products. A test kit
is required for each test using the CellScan, which includes a cell carrier and,
depending on the test required, the specific antigen required for such test, if
any.
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GOVERNMENT REGULATIONS AND CLINICAL TRIALS
Pursuant to our revised business plan, we do not intend to bear
responsibility for seeking regulatory clearance in any country in which the
CellScan will be marketed as a diagnostic tool, if required. Instead, such
responsibility will be placed with the companies we intend to enter into
arrangements with to market and sell the CellScan. We are, however, required
under our distribution agreement with Medis El to fund up to $1,500,000 of the
costs necessary to obtain regulatory approval and Medis El fund the next
$500,000 and provide to us an unsecured loan for the $500,000 after that. The
costs to obtain the necessary FDA approval are not readily ascertainable.
Summarized below are certain of the regulatory hurdles that we believe such
company or companies must clear prior to marketing and selling the CellScan as a
diagnostic tool.
UNITED STATES. The United States Food and Drug Administration regulates
the manufacture, distribution and production of medical devices in the United
States. We anticipate that the CellScan, when used for diagnostic purposes, will
be regulated as a medical device by the FDA and, as such, will require FDA
regulatory clearance or premarket approval prior to commercialization in the
United States. Such clearance or premarket approval, however, is not required
for use of the CellScan in its research capacity.
We expect that the CellScan will very likely require premarket approval
before it may be commercially distributed for diagnostic use. Moreover, it
should be assumed that data from well-controlled multi-center clinical trials
will be required to support a premarket approval application for diagnostic use.
We believe that the whole FDA approval process will require not less
than 2 years and may require a substantially longer time. Development of
necessary clinical data and submission of a premarket approval application for
the CellScan's diagnostic use will be a lengthy and expensive process. There can
be no assurance that our anticipated strategic partners will ever be able to
obtain any necessary FDA regulatory clearance or approval for commercial
distribution.
We believe that for certain applications other than cancer detection,
the CellScan may be considered "substantially equivalent" to legally marketed
medical devices and thus could be cleared for commercial distribution without
the need for clinical trials and other testing. For such applications,
substantial equivalence is evaluated in the context of intended use, analysis,
test matrix, characteristics, and risk to patient of false results. There can be
no assurance that the FDA would find the CellScan substantially equivalent for
these applications; thus, premarket approval might be required for other
applications in addition to cancer detection, and there can be no assurance that
the FDA will ever grant premarket approval for this device for any applications.
If the CellScan is permitted to be marketed in the United States, its
manufacturer will be required to comply with the FDA's Quality System
Regulations, including routine inspections by the FDA and other regulatory
agencies for compliance with these and other regulations, including medical
device reporting requirements. Non-compliance can result in, among other things:
- - fines;
- - injunctions;
- - recall or seizure of products; and
- - criminal prosecution.
ISRAEL. The CellScan is not currently being used in such a manner that
would require licensing
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by the Israeli Ministry of Health. However, it is possible that if the CellScan
is used for medical diagnosis, it would require authorization, by either the
medical manager of the hospital in which the tests are being performed or the
General Manager of the Israeli Health Ministry, according to the nature of the
experiment. Furthermore, the use of the test kits, which utilize antigens, may
require a license independent of any that may be required for the CellScan.
There can be no assurance that we will receive authorization to perform
additional tests, if required, by the appropriate agency upon application.
OTHER JURISDICTIONS. Nations other than the United States have varying
patterns of regulation governing the use of medical diagnostic devices, some of
which require clearance or approval comparable to the regulatory pattern in the
United States and others of which do not require any or only perfunctory
clearance or approval. In those jurisdictions where more than perfunctory
clearance or approval is required, the CellScan may not be able to be marketed
unless and until the required clearance or approval is obtained.
LICENSE FEES
Medis El is required to pay Bar-Ilan a royalty through 2005 at the rate
of 6.5% of proceeds of sales, after deducting sales commissions and other
customary charges, and 4.5% of any fees received on account of the grant of
territorial rights, and for the ensuing ten years a royalty of 3.5% of all
revenues, whether from sales or fees.
In addition, Medis El is required to pay $100,000 to Bar-Ilan during
the first year in which Medis El's post-tax profits relating to the CellScan
exceed $300,000. Medis El is permitted to assign its rights under the license,
but subject to such assignee assuming all of the rights and obligations of Medis
El under the license. The license contains provisions relating to the joint
protection of the licensed patent rights and other provisions customary in such
instruments.
COMPETITION
We do not know of a product on the market or being developed that has
the combination of current and potential applications as the CellScan.
Nevertheless, each application of the CellScan taken individually, faces
competition from a number of sources. As a diagnostic tool, the CellScan
competes with:
- - traditional cancer screening methods, such as mammograms for breast cancer,
PSA tests for prostate cancer and x-ray techniques such as MRI; and
- - traditional blood screening technologies,
which work to varying degrees. Additionally, current blood scanning techniques
involve the use of microscopy and flow cytometry, which may be cheaper, more
familiar to the scientific community and readily obtainable compared to the
CellScan. There can be no assurance that the marketplace will recognize the
value of the CellScan or replace existing technology with the CellScan, in which
case we will be unable to compete with companies marketing and selling such
devices.
FUEL CELLS
Scientists at More Energy Ltd., an 86.5% subsidiary of Medis El, are
developing direct liquid methanol fuel cells which are expected to be small
enough to power cellular phones, laptop computers, camcorders and other portable
electronic devices with a view to providing significantly more operating time
and a longer lifespan than the batteries currently used for such products. They
are also working
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with larger fuel cells which could be used as an efficient and environmentally
friendly energy source for home and automobile use.
Liquid fuel cells are generally made up of three components:
- - electrodes, which are devices that emit protons and electrons;
- - a hydrogen-based fuel such as methanol; and
- - electrolytes, which is a liquid that, when combined with a
hydrogen-based fuel, allows protons to flow from one electrode to another,
creating electrical energy.
The fuel cells produce electrical energy in an electrochemical reaction upon the
simultaneous extraction of hydrogen from the methanol and exposure of components
of the fuel cell to oxygen from the air.
We are developing our fuel cell technology as an alternative to
currently available technology, such as disposable and rechargeable batteries,
based upon our perception of its:
- - potential efficiency;
- - ability to operate at a lower cost;
- - ability to operate longer without refueling; and
- - environmental benefits which include the absence of harmful emissions, as
the fuel cells' waste product is water, and the absence of special disposal
requirements compared to batteries.
We believe our fuel cell technology has important advantages such as:
- - more power delivered relative to the fuel cells' size and weight;
- - our small direct liquid methanol fuel cells fueled by a proprietary
electrolyte solution containing methanol operate longer without refueling;
- - a longer lifespan of the fuel cells' electrodes, which increases the life
of the fuel cell, thus enabling it to be refueled more often before it has
to be replaced; and
- - lower cost to produce.
We attribute these advantages to:
- - the use of a special proprietary polymer coating on the electrode which
has the ability to efficiently conduct electrons;
- - the use of a proprietary catalyst which allows a substantial reduction
in the platinum component of the electrode; and
- - the thin-film coating of our highly electrically conductive polymers on
the electrodes which protects the electrodes from contamination and
extends the life cycle of the fuel cell.
We anticipate that upon the successful development of the fuel cells,
of which there can be no assurance, we intend, with our joint venturer or
licensor, to market and sell the fuel cells as well as disposable electrolyte
cartridges to power the fuel cells as separate products.
We further anticipate that the polymer will have, in addition to its
applications in the fuel cells,
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stand-alone applications in such fields as:
- - anti-static packaging materials;
- - active matrix polymer displays; and
- - plastic-coated electrodes and sensors,
and the catalyst will have stand-alone applications in such fields as:
- - electro-synthesis;
- - organic synthesis;
- - producing mineral fertilizer; and
- - reforming, cleaning and purifying industrial and automotive gases and
exhaust fumes.
THE PRESENT STATE OF THE TECHNOLOGY
We have developed a prototype direct liquid fuel cell in modular
form fueled by methanol and an electrolyte solution. Initial laboratory
testing of the prototype demonstrated an output of approximately 1.3-1.4
volts at approximately 0.25 watts. When four modules are combined in a
single layer, with dimensions of approximately 4" x 1" x 1/4", the combined
fuel cell output is approximately 1.8-2.0 volts at approximately 1.0 watt. We
believe that combining two such layers made up of eight modules will
demonstrate an output of approximately 3.2-3.8 volts at approximately 2.0
watts. The new generation cell phones require a power supply of approximately
3.6-3.8 volts at approximately 1.8-2.0 watts. We are conducting tests to
further improve the performance of the fuel cells to:
- - maximize the percentage of methanol or other alcohol product in the
electrolyte, thus allowing for longer life between refueling;
- - develop new, more efficient electrodes;
- - extend the lifespan of the electrode; and
- - develop the appropriate refueling technique.
We believe that the fuel cells, if and when fully developed for use
in cellular phones, for instance, will be capable of substantially more
hours of talk and standby time between each refueling; however, we are
presently unable to ascertain with certainty the exact number of hours.
We have also developed a prototype large fuel cell fueled by
hydrogen and oxygen which demonstrated in laboratory tests an output of at
least 0.4 watts of electrical power per square centimeter of electrode
surface while using approximately 0.25 milligrams of platinum per square
centimeter of electrode surface. Based on our knowledge of the industry, we
know of no competitor with a greater output of wattage per cubic centimeter
of electrode surface under comparative conditions.
We are focusing on further developing the direct liquid methanol fuel
cells for use in portable electronic products prior to focusing on the further
development of the hydrogen fuel cells.
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We anticipate improving the direct liquid methanol fuel cells to a
point where we will seek to enter into licensing or joint venture arrangements
with third parties in 2001.
COMPETITION
There are numerous companies, institutions and governments around the
world inventing or which have invented fuel cells for uses similar to our
planned fuel cells, including for the automobile, home use and portable
electronics markets. Many of such entities have expended and have the
capabilities to expend funds far in excess of any capability we could have.
Among such entities are some of the largest and wealthiest companies in the
world employing the greatest talents in the field. However, based upon published
literature, we do not believe that any of these companies have successfully
developed a commercially acceptable fuel cell that has the advantages of our
electrodes, although some of them have indicated that they are close to
marketing their own products.
TOROIDAL INTERNAL COMBUSTION ENGINE AND COMPRESSOR
TOROIDAL ENGINE
The toroidal engine is a donut-shaped internal combustion engine. Medis
El believes that a toroidal engine comparable to but that is one-half the size
and weight of a conventional internal combustion engine found in today's
automobiles will be far more efficient and cost less to manufacture. We believe
that the toroidal engine has the capability of increasing engine efficiency by
at least thirty percent, thus substantially improving mileage per gallon of
fuel. We expect that the engine will also be more efficient than a diesel
engine, yet still use regular gasoline which will not create the emissions or
suffer other problems of using diesel fuel. Additionally, a smaller version can
be adapted for motorbikes, scooters, lawn mowers and other small engine-powered
products.
The engine is being developed pursuant to Medis El's patents by a team
of scientists employed at AOOT OKB Motorostroyeniya, a Russian company having no
affiliation with us or any of our principals, under consulting contracts with
Medis El. AOOT has developed prototype 12-15 horsepower engines, which could
power a motorbike, for example, which will be sent to our Israeli offices for
use as demonstration models to generate interest and licensing opportunities.
AOOT has started development of a prototype 75-100 horsepower engine, which
could power a small automobile, which it contemplates will be completed and
ready for testing by June 2000.
TOROIDAL COMPRESSOR
AOOT has completed development of a toroidal compressor that is
intended for use in refrigeration units, air conditioning units and other
compressor applications. Based on the same general principles and Medis El
patents as the toroidal engine, the weight and size of the compressor is
substantially smaller and lighter than current state-of-the-art compressors and
appears to be cheaper to manufacture than existing compressors. Such a
compressor is expected to provide greater energy efficiency and will undergo
testing to determine whether it provides such energy efficiency.
REFRIGERATION. We believe that a traditional Rankine-cycle cooling
system, which is a thermodynamic cycle now used in most refrigeration and air
conditioning systems which uses chloro-fluorocarbons such as freon, driven by
our toroidal compressor in a refrigeration unit would have certain advantages
over existing technology such as:
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- - energy savings of between 30% and 50%;
- - enabling manufacturers to meet new energy standards; and
- - smaller size and weight and lower manufacturing costs.
Another possibility which we are exploring for refrigeration
applications is developing a stirling cycle expander driven by our toroidal
compressor. This option could offer the low cost, size and weight of the
toroidal compressor coupled with the environmentally sensitive stirling cycle
expander. Drawings as to the feasibility of such a system are being prepared by
Medis El's technical staff.
AIR CONDITIONING. We believe that the toroidal compressor has
additional applications in powering air conditioning units. Based on our
calculations, we believe our toroidal compressor can increase the efficiency of
central home air conditioners to meet a 14-15 SEER, a commonly used rating for
energy efficiency in appliances where each SEER level represents a 10% increase
in efficiency. Existing central home air conditioner units in the United States
must currently meet a minimum of 10 SEER and may be required to meet a 12 SEER
based upon recently announced proposed energy efficiency standards for new air
conditioners by the Department of Energy.
Medis El owns a 25% interest in New Devices Engineering A.K.O. Ltd., a
privately held company that owns a patent and related applications to the
toroidal internal combustion engine, and has an option which it currently
intends to exercise to acquire an additional 50% interest in New Devices. The
option price aggregates $60,000 and expires on June 30, 2000. We intend to
exercise the options prior to the expiration date. Medis El has already filed
and intends further filings in its own name for additional patents for the
toroidal engine and compressor which cover new inventions beyond the patents
currently in existence.
COMPETITION
The toroidal engine, if and when developed, is expected to compete with
internal combustion engines found in today's automobiles. We expect automobile
manufacturers to be very reluctant to replace such engines due to the need to
retool manufacturing plants and a perceived reluctance of the public to purchase
an untried technology. However, automobile manufacturers are increasingly being
required to develop new types of automobiles to meet new environmental standards
imposed by federal and state governments and we believe that a successfully
developed toroidal engine would offer a way to meet those standards.
Competition may also be expected from the many companies and
universities attempting to develop alternatives to today's internal combustion
engines, including engines powered by fuel cells, electricity and solar power or
combinations of the above, none of which are as of yet widely commercially
offered. To the extent that alternatives to today's engine are cheaper to
manufacture, more efficient or more familiar to the general public, we may be
unable to compete effectively.
We will also be competing for research dollars from automobile
manufacturers and others to assist in funding the continued research and
development of our design, however, there can be no assurance that we will
receive funds from others for the further development of our product. Nor can
there be any assurance that we will compete effectively with other research and
development companies seeking similar funding who may have better industry
contacts or whose technological development has advanced further than ours.
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STIRLING CYCLE LINEAR TECHNOLOGY
Medis El's stirling cycle linear technology is a patented
development-stage refrigeration and air conditioning system for use in home and
office refrigerators, freezers and air conditioners and automobile air
conditioners. The system consists of a linear compressor and a displacer - or
expander - which utilizes an efficient thermodynamic technique known as the
"stirling cycle." We believe the technology is capable of providing greater
energy efficiency than current refrigeration and air conditioning systems and
would lower energy consumption and reduce emissions which may harm the
environment.
We believe that the stirling cycle is being considered by companies in
the field of refrigeration due to the need for efficient and environmentally
friendly alternatives to existing technology. However, no one as yet has
designed a commercially acceptable system. We believe that Medis El's stirling
cycle system may offer a solution to current stirling cycle cooling system
problems, such as the use of inferior rotary bearings, compressor dynamic
seal-related problems, debris and lubricant contamination and helium leakage.
Medis El's compressor uses a cylinder-piston assembly containing a piston moving
back and forth on air bearings. Since the piston has only clearing seals and no
rotating parts, there is minimal dissipation of energy and consequently little
heat loss and wear on the system. Additionally, since the system's displacer
uses helium as its working gas, which is a natural gas found in the atmosphere
that has no known depleting effect on the ozone layer, it is environmentally
friendly. Current refrigeration and cooling systems use freon or a freon
compound as refrigerants. These substances contain chlorofluorocarbons, which
are commonly believed to deplete the ozone layer and contribute to the
"greenhouse effect" and global warming. We believe the greater efficiency will
enable manufacturers to meet new elevated environmental standards for
refrigeration system efficiency, including the U.S. Department of Energy's
announcement that refrigerators produced in 2001 will have to use 30% less
electricity than those on the market today.
We will seek to charge any third party to which we license our stirling
cycle technology a license fee of approximately 3%-5% of the wholesale price of
the product, which, for a refrigerator, for example, would be approximately
$10-$20 per unit. There can be no assurance that we will be successful in
licensing the stirling cycle technology or that we will succeed in negotiating
license fees of 3%-5%.
AUTOMOBILES
In addition to potential applications in home and office air
conditioners and refrigerators, Medis El is examining use of the stirling cycle
technology as a way to improve the efficiency of automobile air conditioner
compressors, which we believe could reduce the amount of power required for air
conditioning by up to 50%. We further believe that the draw-down of power from
the automobile's motor could reduce fuel consumption so the car can have more
power for other operations. In addition, we believe the stirling cycle
technology can benefit electric and hybrid vehicles, which use a combination of
fuel cells and traditional fuel such as gasoline, because the system is expected
to draw only one-half of the electricity compared to present air conditioning
systems. We believe the stirling cycle technology can also be adapted for
heating, and Medis El is currently planning the development of a heat pump for
automobiles.
THE PRESENT STATE OF THE TECHNOLOGY
In December 1998, Medis El entered into a technology development
agreement with The Coca-Cola Company, among other things, to jointly develop the
stirling cycle technology for application in such company's line of business.
Medis El was paid $100,000 pursuant to the agreement to grant a right
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of first refusal to obtain exclusive rights for the sole use of the stirling
cycle and other technology in the beverage industry and an additional
$100,000 to assist in the development of the stirling cycle technology for
use in the beverage industry. This $200,000 payment was recorded as a credit
to research and development costs. A prototype of the linear motor was
developed and submitted for analysis pursuant to the agreement.
Upon joint scientific review of the technology as presented in
August 1999, both parties concluded that, in order to operate at the level of
efficiency required for the product to be commercially acceptable, Medis El
would have to make significant design improvements. Consequently, Medis El is
designing a new prototype, which we expect to have available for review by
the third quarter of 2000. If Coca-Cola ultimately decides to use the
technology, it is required to pay to Medis El $500,000 to fund tooling and
manufacturing. Medis El would be entitled to a royalty to be agreed upon for
each unit manufactured for use pursuant to the agreement. Assuming no further
setbacks or unforeseen difficulties or problems arising with respect to
developing the technology, of which there can be no assurance, we anticipate
having a working model to show to potential distributors by the end of 2000
and being able to go to market by the end of 2001.
We have had preliminary discussions with Bosch Siemans Household
Appliances, which advised us that it produces approximately two million
refrigerators and freezers annually, with respect to Bosch Siemans' use of our
stirling cycle technology in its refrigerators and freezers. It is awaiting
completion of the stirling cycle system for analysis, which we intend to deliver
if and when the technology is successfully developed.
Medis El is currently engaged in discussions with other companies in
the U.S. and Europe regarding their use of the stirling cycle technologies.
COMPETITION
There are currently a number of companies developing variations of the
stirling cycle technology for home and automobile cooling and refrigeration. We
do not believe any of such companies have a model ready for commercialization.
There can be no assurance that, if our stirling cycle technology is successfully
developed and commercialized, we will be the only entrant to the marketplace
with a working product or that we will compete successfully against any of such
competing products. While we believe our stirling cycle design is superior to
others being developed, a combination of factors including availability of
distribution channels, lower manufacturing costs of competing products or
general lack of acceptance from the general public, could make it difficult for
us to compete effectively with other stirling cycle systems currently being
developed or other products that claim greater efficiency, environmental
sensitivity or some combination of the two.
We are also competing for research dollars from appliance manufacturers
and other companies to assist in funding the continued research and development
of our design. Although, to date, we have received funding from one
multi-national company, discussed above, and others have expressed interest in
our design, there can be no assurance that we will receive additional funds from
our existing collaborator or receive funds from others interested in our
product, nor can there be any assurance that we will compete effectively with
other research and development companies seeking similar funding who may have
better industry contacts or whose technological development has advanced further
than ours.
WATER TECHNOLOGIES
Medis El owns the rights to technologies which, if successfully
developed, would be used to
50
<PAGE>
generate potable water.
DEVICE FOR EXTRACTING WATER FROM THE ATMOSPHERE
Medis El is developing and will be seeking proprietary protection for
what may prove to be a low-cost household device that would possess the
capability to generate sufficient water from the atmosphere to satisfy an
average household's daily needs. It presently appears that the invention will
require a much higher energy cost for generating water than the present cost of
desalination so the invention's value will be limited to those areas where
desalination is not economically feasible and potable water is scarce.
DESALINATION
Medis El is developing and will be seeking proprietary protection for
what may prove to be a new method to reduce the energy required for
desalination, thus reducing the cost of generating potable water.
OUR OTHER TECHNOLOGIES
Medis El has temporarily suspended research of and seeking third party
relationships concerning the following technologies due to its inability to
commit further limited resources to such undertakings. Medis El intends to
continue the research and development of such technologies upon our obtaining
additional funds for such purpose.
RECIPROCATING ELECTRICAL MACHINE
The patented reciprocating electrical machine, if and when developed,
will seek to use the reciprocating motions of energy sources such as wind or sea
waves to convert such energies' back-and-forth motion into electricity. The
reciprocating machine is based on principles incorporated into the stirling
cycle linear technology. We believe it can reduce the cost of generating
electricity by up to 30% and would be cleaner and environmentally safer than
traditional power sources. We believe this machine could be particularly useful
in a country that depends heavily on importing fossil fuels for its energy needs
but has access to other energy sources.
COMPETITION
We expect to compete with the many alternative forms of power
generating equipment being developed or marketed, including the use of windmills
and solar power, all of which are accepted by the marketplace in varying
degrees. The marketplace has traditionally been slow to accept alternative forms
of energy and may not accept additional entrants, particularly with economically
riskier new approaches, into the crowded electric generating market.
DIRECT CURRENT REGULATING DEVICE
In addition to its patents for the toroidal internal combustion engine
and compressor, New Devices Engineering also owns patents for a technology yet
to be developed that switches and regulates direct current, or DC, electricity
in ranges of several thousand amperes, which is a base unit of electric current.
Using currently-installed electric wire, the direct current regulating device is
expected to enable the transmission of two-thirds more current than the current
system and would eliminate the need for alternate current, or AC, power lines,
which make up two of the four wires presently used to supply
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<PAGE>
electricity, and the transformers which convert DC to AC. Furthermore, the
elimination of transformers could end the electromagnetic emission from
electrical power lines thought by some to cause diseases in people living or
working in its vicinity. Medis El believes that the device can also be applied
to regulate and stabilize the temperature inside electric furnaces during steel
melting in ways that will be more economical and accurate than current
regulating devices for such purposes.
COMPETITION
We expect to compete with existing technologies and expect utilities to
be very reluctant to accept a new method for transmitting electric current.
OTHER
We have recently entered into an agreement with an unaffiliated
third party giving us an option to analyze an advanced composite pipe
technology developed and owned by such party and subsequently enter into a
joint venture to develop the technology. We are currently analyzing the
technology, which offers the possibility of creating piping which withstands
higher levels of temperature and pressure and can be manufactured at lower
cost than currently available fiberglass piping. If we decide to exercise the
option, we will be required to, among other things, finance the operations of
the joint venture for two years at $600,000 per year. We paid $7,500 for the
option, which expires on June 24, 2000.
PATENTS
Medis El relies on certain proprietary technology and seeks to protect
its interests through a combination of licensed patents, know-how, trade secrets
and security measures, including confidentiality agreements. Medis El's policy
is to secure, directly or through licensing arrangements, patent protection for
significant innovations to the fullest extent practicable.
The following sets forth information on United States patents and
patents pending relating to Medis El's technologies. This list does not include
other worldwide patents and filings relating to Medis El's technologies. Each of
the issued patents listed below generally expire 17 years from the issuance date
in parenthesis.
<TABLE>
<CAPTION>
PATENTS WHOLLY OWNED BY MEDIS EL
<S> <C>
"Synchronous Twin Reciprocating Piston Covers a linear compressor designed for
Apparatus" refrigeration systems and utilizes a technique
known as the stirling cycle, which works on a
#5,693,991 (December 2, 1997) gas cycle.
"Displacer Assembly For Stirling Cycle System" Covers an assembly that converts a pulse from a
compressor via a thermodynamic cycle to cold or heat.
#5,907,201 (May 25, 1999)
"Synchronous Reciprocating Electric Machines" Covers a device that converts reciprocating movement
of any type into electricity or converts electricity into
#5,903,069 (May 11, 1999) reciprocating motion.
"Toroidal Internal Combustion Engine" Covers a rotary engine with one or more toroidal
chambers defined by rotors that rotate within cylindrical
#09/146,362 (September 3, 1998) (pending) housings.
#09/250,239 (February 16, 1999) (pending)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PATENTS LICENSED TO MEDIS EL
"System and Method for Cell Selection" Covers both a method and an apparatus for selecting cells,
#4,729,949 (March 8, 1988) including a method of measuring and moving cells and a cell
#4,675,065 (June 23, 1987) carrier with first and second outer surfaces.
#5,272,081 (December 21, 1993)
"Manufacture of Microsieves and Resulting Covers an improvement to known photoresist methods to
Microsieves" form a microsieve.
#4,772,540 (September 20, 1988)
"Apertured Cell Carrier" Defines first and second outer surfaces and comprises an
#5,506,141 (April 9, 1996) ordered array of holes through the holes being in
identifiable positions on the carrier and sized to contain
individual living cells.
</TABLE>
Medis El is the exclusive worldwide licensee of Bar-Ilan's patents,
patent applications and any other proprietary rights relating to the CellScan.
Bar-Ilan owns, or has applied for, corresponding patents in Europe, Japan,
Israel, Canada and various other countries, of which Medis El is the licensee.
Patent applications filed in foreign countries are subject to laws, rules and
procedures which differ from those of the United States, and even if foreign
patent applications issue, some foreign countries provide significantly less
patent protection than the United States.
PATENTS OWNED BY NEW DEVICES ENGINEERING A.K.O. LTD.
<TABLE>
<CAPTION>
<S> <C>
"Toroidal Engine" Covers an internal combustion engine that comprises a
#5,797,366 (August 25, 1998) toroidal combustion chamber housing within which slides at
least one piston.
"Direct Current Regulating Device" Covers a gas discharge tube for regulating the flow
#5,814,943 (September 29, 1998) of high power direct current, and a method for its use.
PATENTS OWNED BY MORE ENERGY LTD.
"A New Class of Electrocatalysts and a Gas Relates to electrochemisty and, more particularyly, to a class
Diffusion Electrode Based Thereon For Fuel of electrocatalysts based on highly electroconducting polymers,
Cells" a gas diffusion electrode based thereon for fuel cells.
#09/377,749 (August 20, 1999)
(pending)
</TABLE>
The status of patents involves complex legal and factual questions,
including the breadth of claims allowed. Accordingly, there can be no assurance
that patent applications filed by Medis El, or its
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<PAGE>
present or future licensors, will result in patents being issued or that these
or future patents will afford protection against competitors with similar
technology. There can be no assurance that the patents on which Medis El
principally relies, or in the future may rely, will not be invalidated or that
any issued patent will provide protection that has commercial significance.
Litigation may be necessary to protect Medis El's patent position. Such
litigation can be costly and time consuming and there can be no assurance that
Medis El would be successful if such litigation were instituted. The
invalidation of patents owned or licensed to Medis El could have a material
adverse effect on Medis El and, consequently, us.
There can be no assurance that Medis El's patents will provide broad
protection against any of its competitors. In addition, no assurances can be
given that patents issued to or relied upon by Medis El will not be infringed
upon or designed around by others or that others will not obtain patents that
Medis El will need to license or design around. Moreover, to the extent products
are covered by third party patents, development and marketing of such products
by Medis El could require a license under such patents. If existing or future
patents containing broad claims are upheld by the courts, the holders of such
patents could require Medis El to obtain licenses from them. If Medis El is
found to be infringing third party patents, there can be no assurance that
licenses that might be required for Medis El's products would be available on
reasonable terms, if at all.
KNOW-HOW AND TRADE SECRETS
In addition to patent protection, Medis El relies on the laws of unfair
competition and trade secrets to protect its licensed or proprietary rights.
Medis El attempts to protect its trade secrets and other proprietary information
through agreements with its distributors, through confidentiality agreements
with employees, consultants, potential joint ventures and licensees and other
security measures.
FACILITIES
We presently maintain our executive offices in premises of
approximately 3,000 square feet at 805 Third Avenue, New York, New York 10022
under a sublease from the Stanoff Corporation, which is controlled by Robert K.
Lifton, our chairman and chief executive officer, and Howard Weingrow, our
president. We pay approximately $27,000 for rent per year. The sublease is on a
month to month basis. We believe our facilities are adequate for our present
purposes.
Medis El's executive offices, research laboratory and technology center
are located at a leased facility of approximately 7,000 square feet in Yehud,
Israel. The rental expense for this lease, which expires in November 2000 with a
one-year option extending to November 2001 on most of the facility, is
approximately US $91,000 per year. Medis El also leases a facility of
approximately 1,500 square feet in Jerusalem, Israel for the manufacturing of
its CellScan cell carriers which expires on December 31, 2001, with a two year
option extending to December 31, 2003. The annual aggregate rent is
approximately US $26,000. Medis El believes its facilities are adequate for its
present purposes.
LEGAL PROCEEDINGS
On November 22, 1999, Medis El entered into a settlement agreement
with an Argentinian company to dismiss with prejudice an action pending in
the Supreme Court of the State of New York, County of New York, entitled
CELLSCAN ARGENTINA, S.A. V. MEDIS EL LTD., ET. AL. In this action, Cellscan
Argentina sought an aggregate of $10,000,000 in compensatory and punitive
damages in connection with a 1993 distribution agreement between CellScan
Argentina and Medis El and a related purchase of a
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<PAGE>
CellScan machine. The settlement requires Medis El to purchase back from
Cellscan Argentina its CellScan for $100,000, issue 60,000 of Medis El's
ordinary shares to Cellscan Argentina and issue warrants to purchase 30,000 of
Medis El's ordinary shares for $5.00 per share, expiring two years from the date
of the warrant. The purchase price was paid and the shares and warrants were
issued in December 1999. The defendants were represented in this matter by
Cooperman Levitt Winikoff Lester & Newman, P.C.
In June 1999, Medis El entered into an agreement with a Peruvian
company owning a CellScan. Pursuant to the agreement, as supplemented, in
consideration of Medis El upgrading the company's CellScan free of charge, the
company agreed to relinquish any future claims against Medis El subject to
an option to require Medis El to reacquire its CellScan for $110,000. The
Peruvian company has since exercised the option.
We are not otherwise party to any material litigation, and we are not
aware of any threatened litigation that would have a material adverse effect on
us or our business.
ECONOMIC CONDITIONS IN ISRAEL
UNFAVORABLE BALANCE OF PAYMENTS: Israel has an unfavorable balance of
payments due principally to defense expenditures which absorb a substantial
portion of the Israeli government's budget, excluding debt service. Defense
expenditures in 1998 absorbed approximately 19.8% of the State's budget,
excluding debt service. As a result, the share of the State's resources
available for economic development and other national purposes is limited.
Israel's foreign debt has been financed principally by military and economic aid
from the United States, personal remittances, sales of bonds primarily in the
United States, inter-governmental, institutional and free market loans and
contributions from the international Jewish community. Israel has never
defaulted on the payment of either principal or interest on any of its
indebtedness.
ISRAELI INFLATION AND CURRENCY DEVALUATION: During the years 1986 to
1998, the Israeli consumer price index increased by an average of approximately
13.7% annually, compared to 445% and 185% in years 1984 and 1985, respectively.
The consumer price index increased by 1.3% for the year ended December 31, 1999.
The following table sets forth for the period indicated the closing,
average, highest and lowest currency exchange rate between Israel and the United
States. The closing, highest and lowest exchange rate is the rate of the NIS for
one dollar as reported by the Bank of Israel. Average exchange rate is the
twelve monthly average rates divided by twelve.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Closing U.S. dollar exchange rate 3.018 3.135 3.251 3.536 4.160 4.153
Average U.S. dollar exchange rate 3.011 3.011 3.188 3.449 3.800 4.140
Highest U.S. dollar exchange rate 3.060 3.175 3.292 3.592 4.367 4.288
Lowest U.S. dollar rate 2.962 2.939 2.080 2.242 3.548 4.013
</TABLE>
The following table sets forth for the periods indicated information
with respect to the rate of inflation in Israel, as measured by the consumer
price index, the devaluation of the New Israeli Shekel in
55
<PAGE>
relation to the dollar and the comparison rate of yearly average inflation in
the United States. Annual inflation is the percentage change in the consumer
price index between December of the year indicated and December of the preceding
year. U.S. devaluation is the percentage increase in the value of the dollar in
relation to the NIS during the calendar year. Annual inflation adjusted for
devaluation is obtained by dividing the December consumer price index for the
year in question by the closing exchange rate, thus first obtaining
dollar-adjusted consumer price index and then calculating the yearly percentage
changes in this adjusted index. The U.S. inflation rate is published by the
Bureau of Labor Statistics of the United States Department of Labor and is from
consumer price index for all urban consumers.
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Annual inflation 14.5% 8.1% 10.6% 7.0% 8.6% 1.3%
U.S. devaluation 1.1 3.9 3.7 8.8 17.6 (0.17)
Annual inflation adjusted for
devaluation 13.2 4.1 6.6 (1.6) (7.7) 1.5
U.S. inflation rate 2.6 2.5 3.3 1.7 1.6 2.7
</TABLE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Positions with:
---------------------------------------------------
Name Age Medis Technologies Medis El
------ ----- -------------------- ---------
<S> <C> <C> <C>
Robert K. Lifton 72 Chairman of the Board, Chief Chairman of the Board
Executive Officer and Secretary
Howard Weingrow 76 President, Treasurer and Director Director
Zvi Rehavi 64 Executive Vice President(1) Executive Vice President
Amos Eiran 63 Director Director
Jacob S. Weiss 47 Director Director
Zeev Nahmoni 58 Director Director
Shmuel Peretz 60 Director Director
Key employee:
- -------------
Israel Fisher 51 Vice President-Finance(1) Vice President-Finance and
Secretary
</TABLE>
- ------------------
(1) Messrs. Rehavi and Fisher are appointed to their respective positions in
Medis Technologies pending and subject to the successful completion of this
exchange offer.
ROBERT K. LIFTON has been our chairman of the board, chief executive
officer and secretary since our inception and chairman of the board of Medis El
since October 1993. Prior to that, Mr. Lifton was a director of Medis El since
its inception in July 1992. He is principally engaged in managing his own
investments through the Stanoff Corporation, of which he is a major shareholder
and a principal, and other investment vehicles. Mr. Lifton has recently been
named chairman of the advisory board of ActFit.com Inc., a developer of
interactive Internet programming, is a director of Bank Leumi USA, the
co-chairman of the U.S.-Middle East Project of the Council on Foreign Relations,
chair of the Public Health Research Institute and serves on the boards of
numerous philanthropic organizations. He also is an officer and director of a
number of privately held companies. From 1988 to 1994, he was president of
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<PAGE>
the American Jewish Congress and is the founding chairman and chairman emeritus
of the Israel Policy Forum. In 1983, he was a founder of Preferred Health Care
Ltd. and served as its president. In 1961, he co-founded with Mr. Weingrow the
Transcontinental Investing Corporation, serving as its president until 1968,
when it was listed on the New York Stock Exchange, and then chairman of the
board until its merger in 1972. Mr. Lifton was an associate attorney with the
law firm of Kaye, Scholer, Fierman, Hays and Handler in 1955 and 1956, after
receiving a law degree from Yale Law School and being admitted to the New York
Bar, and has taught at Yale and Columbia law schools. Mr. Lifton has written
extensively on business and political matters.
HOWARD WEINGROW has been our president, treasurer and one of our
directors since our inception and a director of Medis El since its inception.
Mr. Weingrow is principally engaged in managing his own investments through the
Stanoff Corporation, of which he is a major shareholder and a principal, and
other investment vehicle. Mr. Weingrow has recently joined the advisory boards
of Creditcards.com, a registered independent service organization and ActFit.com
Inc., a developer of Interactive Internet programming. He is a trustee of the
Children's Medical Fund and the North Shore-Long Island Jewish Health System. He
is also a trustee of the James S. Brady Presidential Foundation and the Nassau
County Museum of Art. Mr. Weingrow is the founder of the Weingrow Family
Children's Research Laboratory of Long Island Jewish Hospital and the Weingrow
Collection of Avant Garde Art and Literature at Hofstra University He was
chairman and a director of Mercury Paging & Communications, Inc. from 1995 until
its sale in 1997. In 1961, he co-founded with Mr. Lifton the Transcontinental
Investing Corporation, serving as its executive vice president until 1968 and
then president until its merger in 1972. Mr. Weingrow served as treasurer of the
Democratic National Committee in 1971 and 1972.
ZVI REHAVI has been the executive vice president and General Manager of
Medis El since its inception. Mr. Rehavi is also general manager of More Energy
Ltd., a subsidiary of Medis El. From 1989 to 1991, he was manager of development
and production of Patriot Missile Sensors, a joint venture of Israel Aircraft
and Martin Marietta. From 1984 to 1989, he was Israel Aircraft's director of
sensors and electro mechanical components. From 1966 to 1974, he was manager,
inertial components laboratory at Israel Aircraft. From 1958 to 1966, he served
with the Technical Office of the Ministry of Defense of Israel. He has a Master
of Engineering Science from the University of Pennsylvania. He was a Ph.D.
candidate in Applied Physics at Hebrew University, Jerusalem, and an MBA
candidate at the Wharton School.
AMOS EIRAN has been one of our directors since December 1997 and one of
Medis El's directors since its inception. Mr. Eiran serves as chairman of the
Industrial Cooperation Authority, the agency in charge of the buy back and
offset program of the State of Israel. Mr. Eiran also serves as director for
Clal Insurance Group, an Israeli insurance company. Previously, Mr. Eiran was
director general of the Prime Minister's office during Yitzhak Rabin's first
term as Prime Minister and Director General and chairman of Mivtahim, the
largest pension fund in Israel.
JACOB S. WEISS has been one of our directors since December 1997 and
one of Medis El's directors since October 1993. Mr. Weiss serves as the
corporate vice president and general counsel to Israel Aircraft since 1996.
Prior to that, he was deputy general counsel-international division of Israel
Aircraft. Mr. Weiss is a director of Fibersense, Inc., a designer, developer and
manufacturer of fiberoptic gyroscopes, a director of Ellipso Inc., which was
granted an FCC license to establish and operate a low earth orbit mobile
communications network and a director of West Indian Space, a venture
established to market and sell services from high resolution earth observation
satellites.
ZEEV NAHMONI has been of our directors since December 1997 and one of
Medis El's directors from August 1994 to March 1996 and from October 1996 to
present. Mr. Nahmoni is the vice president
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<PAGE>
and general manager of the Electronics Group of Israel Aircraft since 1997 and
the Deputy General Manager of the Electronics Group of Israel Aircraft from 1995
to 1997. Prior to that, he was the general manager of the Tamam Division of the
Electronics Group of Israel Aircraft from 1992 to 1995. Mr. Nahmoni is also a
director of West Indian Space.
SHMUEL PERETZ has been one of our directors since December 1997 and one
of Medis El's directors since its inception. Mr. Peretz is currently the
president of Israel Aircraft Europe and has served in such capacity since 1997.
From 1988 to 1996, he was the corporate vice president-finance of Israel
Aircraft.
ISRAEL FISHER has been the vice president-finance and secretary of
Medis El since its inception. Mr. Fisher is also vice president-finance of More
Energy Ltd., a subsidiary of Medis El. From 1980 to 1992, he served as the
deputy manager of Israel Aircraft for financial planning and credit management.
From 1987 to 1990, he served as the deputy finance manager of the Tamam Plant of
the Electronics Division of Israel Aircraft. He has a MBA from the University of
Tel Aviv and two BA degrees from Bar-Ilan University: one in accounting and the
other in Economics and Business Administration.
In addition, Messrs. Lifton, Weingrow, Eiran, Weiss and Nahmoni are
directors of Medis Inc. and, with Mr. Peretz, directors of CDS Distributor,
Inc., our wholly owned subsidiaries.
As members of the board of Medis El, each director is elected for a one
year term at the annual meeting of shareholders. Upon the successful completion
of this exchange offer and the registration of our common stock pursuant to
section 12 of the Securities Exchange Act of 1934, members of the board of Medis
Technologies will be elected for a one year term at the annual meeting of
stockholders.
Our board of directors intends to create a compensation committee and
an audit committee, which is a requirement for listing on the Nasdaq SmallCap
Market, upon the completion of this exchange offer. Each committee will consist
of two or more independent directors, which directors have not yet been
appointed. The compensation committee will review our compensation policies and
administer our stock option plan. The audit committee will review the scope of
our audit, the engagement of our independent auditors and their audit reports.
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to compensation
earned by Robert K. Lifton, our chief executive officer, and Zvi Rehavi, our
only other executive officer who earns in excess of $100,000. Mr. Lifton's
annual compensation was paid by Medis Inc., our wholly owned subsidiary, with
funds paid to Medis Inc. in quarterly installments by Medis El for services
rendered. As of January 1, 1999, Medis El began paying such funds directly to
us. Mr. Rehavi's annual compensation is for services rendered to Medis El and is
paid by Medis El.
<TABLE>
<CAPTION>
Long-term compensation
Annual compensation awards
---------------------------------- ----------------------------
Securities
Other annual Restricted underlying
Name And Principal Position Year Salary Bonus compensation stock award(s) options/SARs
----------------------------- ---- ------ ----- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert K. Lifton 1999 $100,000 -- -- -- --
Chief Executive Officer
Zvi Rehavi 1999 $136,000 $64,000 $62,600(1) -- 27,500
Executive Vice President
</TABLE>
58
<PAGE>
- -------------
(1) Includes a monthly apartment allowance aggregating $24,000 per annum, a
$18,750 payment per annum for an educational fund and a contribution of
$15,600 per annum by Medis El to a key person life insurance policy whereby
upon termination of employment, Mr. Rehavi shall receive a lump sum
distribution based upon the number of years of premium payout. Medis El is
the death beneficiary of such policy.
EMPLOYMENT AGREEMENTS
Medis El entered into a one year employment agreement beginning October
1, 1999 with Zvi Rehavi, Medis El's executive vice president, which provides
for:
- - an annual base salary of $180,000;
- - a mandatary bonus of $62,000;
- - a payment of $30,000 per annum for an educational fund; and
- - a payment of $38,400 per annum for rent participation.
The employment agreement further provides for the payment of severance equal to
one-half of Mr. Rehavi's annual salary in the event of resignation or dismissal.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options/SAR
grants issued by Medis El to purchase Medis El's ordinary shares in the fiscal
year ended December 31, 1999. It does not include option/SARs issued by Medis El
that will not vest within 60 days from the date of this prospectus. We do not
have any options outstanding that vest within 60 days from the date of this
prospectus.
<TABLE>
<CAPTION>
Number of securities Percent of total options/
underlying SARs granted to
option/SARs employees Exercise of base
Name granted (#) in fiscal year price ($/Sh) Expiration date
------ ------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Zvi Rehavi 27,500 63.1% $7.42 2/14/00
</TABLE>
1999 STOCK OPTION PLAN
We adopted our 1999 stock option plan on July 13, 1999. We have
reserved 1,000,000 shares of common stock with respect to which options and
stock appreciation rights may be granted under the plan. The purpose of the plan
is to promote our interests and the interests of our stockholders by
strengthening our ability to attract and retain competent employees, to make
service on our board more attractive to present and prospective non-employee
directors and to provide a means to encourage stock ownership and proprietary
interest in Medis Technologies by officers, non-employee directors and valued
employees and other individuals upon whose judgment, initiative and efforts our
financial growth largely depends.
The plan may be administered by either the entire board or a committee
consisting of two or more members of our board, each of whom is a non-employee
director. The plan is currently administered by our board.
Incentive stock options may be granted only to our and our
subsidiaries' officers and key employees. Nonqualified stock options and stock
appreciation rights may be granted to our officers, employees, directors, agents
and consultants. In determining the eligibility of an individual for grants
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<PAGE>
under the plan, as well as in determining the number of shares to be optioned to
any individual, the stock option committee takes into account the position and
responsibilities of the individual being considered, the nature and value to us
of his or her service or accomplishments, his or her present or potential
contribution to our success or the success of our subsidiaries, the number and
terms of options and stock appreciation rights already held by an individual and
such other factors as the stock option committee may deem relevant.
The plan provides for the granting of incentive stock options to
purchase our common stock at not less than the fair market value on the date of
the option grant and the granting of nonqualified options and stock appreciation
rights with any exercise price. Stock appreciation rights granted in tandem with
an option have the same exercise price as the related option. The plan contains
certain limitations applicable only to ISOs granted thereunder. To the extent
that the aggregate fair market value, as of the date of grant, of the shares to
which incentive stock options become exercisable for the first time by an
optionee during the calendar year exceeds $100,000, the option will be treated
as a nonqualified option. In addition, if an optionee owns more than 10% of the
total voting power of all of our capital stock at the time the individual is
granted an incentive stock options the option price per share cannot be less
than 110% of the fair market value per share and the term of the incentive stock
options cannot exceed five years. No option or stock appreciation rights may be
granted under the plan after June 30, 2009, and no option or stock appreciation
rights may be outstanding for more than ten years after its grant.
Upon the exercise of an option, the holder must make payment of the
full exercise price. Such payment may be made in cash, check or, under certain
circumstances, in shares of our common stock, or any combination thereof. Stock
appreciation rights, which give the holder the privilege of surrendering such
rights for the appreciation in the common stock between the time of the grant
and the surrender, may be settled, in the discretion of our board or committee,
as the case may be, in cash, common stock, or in any combination thereof. The
exercise of an stock appreciation rights granted in tandem with an option
cancels the option to which it relates with respect to the same number of shares
as to which the stock appreciation rights was exercised. The exercise of an
option cancels any related stock appreciation rights with respect to the same
number of shares as to which the option was exercised. Generally, options and
stock appreciation rights may be exercised while the recipient is performing
services for us and within three months after termination of such services.
The plan may be terminated at any time by our board, which may also
amend the plan, except that without stockholder approval, it may not increase
the number of shares subject to the plan or change the class of persons eligible
to receive options under the plan.
To date, we have granted 603,000 options under the plan, 490,000 of
which were granted to our directors or designees of our directors and officer
nominees as follows:
<TABLE>
<S> <C> <C>
- - Zvi Rehavi 200,000
- - Robert K. Lifton 100,000
- - Jacob S. Weiss 100,000
- - Howard Weingrow 75,000
- - Israel Fisher 15,000
</TABLE>
We have committed ourselves to grant to each of the current holders of
options under Medis El's stock option plan an option to purchase a number of our
shares based upon the same exchange rate as this exchange offer. Each of the
grants is conditioned upon the closing of this exchange offer and such option
holder's agreement to forfeit his or her existing Medis El options.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding ownership
of our common stock as of March 15, 2000 by:
- - each beneficial owner of five percent or more of our common stock;
- - each of our directors and executive officers and our director and executive
officer nominees; and
- - all of our directors and executive officers and our director and executive
officer nominees as a group.
The table assumes all Medis ordinary shares not beneficially owned by
us are tendered in the exchange. Unless otherwise indicated, we believe that all
persons named in the table have sole voting and investment power with respect to
all shares of common stock beneficially owned by them. A person is deemed to be
the beneficial owner of securities which may be acquired by such person within
60 days from the date on which beneficial ownership is to be determined, upon
the exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that options, warrants
and convertible securities that are held by such person, but not those held by
any other person, and which are exercisable within such 60 day period, have been
exercised. Unless otherwise noted, the address of each holder of five percent or
more of our common stock is our corporate address.
<TABLE>
<CAPTION>
Amount
Beneficially Ownership Amount Ownership
Owned Prior Percentage Beneficially Owned Percentage After
Name and Address to the Prior to the After the
of Beneficial Owner Exchange Exchange the Exchange Exchange
------------------- -------- -------- ------------ --------
<S> <C> <C> <C> <C>
Israel Aircraft Industries Ltd. (1).... 3,791,457 35.5 5,503,957 34.5
Robert K. Lifton (2)................... 1,704,201 15.6 1,903,384 (3) 11.7
Howard Weingrow (4).................... 1,587,533 14.5 1,725,614 (5) 10.6
CVF, LLC (6)........................... 1,194,168 10.9 1,194,168 7.4
Amos Eiran............................. -- -- 13,700 (7) *
Jacob S. Weiss (8)..................... -- -- 3,425 *
Zeev Nahmoni (9)....................... -- -- 1,370 *
Zvi Rehavi............................. -- -- -- --
Shmuel Peretz (10)..................... -- -- -- --
All directors and executive officers
a group as - (7 persons) (11).......... 2,721,898 24.5 3,077,657 18.7
</TABLE>
- -------------
* Less than 1%
(1) Includes 50,000 shares of our common stock underlying warrants held by
Israel Aircraft. Voting control of Israel Aircraft is held by the State
of Israel. Israel Aircraft's address is Ben Gurion International
Airport, Tel Aviv 70100, Israel. Israel Aircraft, immediately prior to
this exchange offer, was the beneficial owner of 1,250,000 ordinary
shares of Medis El, approximating 12% of Medis El's outstanding shares.
(2) Includes 182,865 shares of our common stock underlying warrants held by
Mr. Lifton and an aggregate of 569,836 shares of our common stock and
common stock underlying warrants held by the Stanoff Corporation, which
is beneficially owned by Messrs. Lifton and Weingrow. Does not include
an aggregate of 338,000 shares of our common stock held in trust for
relatives of Mr. Weingrow of which Mr. Lifton is a trustee. Mr. Lifton,
immediately prior to this exchange offer, was the beneficial owner of
130,389 ordinary shares of Medis El, approximating 1.2% of Medis El's
outstanding shares.
(3) Includes options to acquire 15,000 of Medis El's ordinary shares, which
will be exchanged for options to acquire our common stock at an
exchange ratio of 1.37:1.0 subsequent to the completion of this
offering.
(4) Includes 153,698 shares of our common stock underlying warrants held by
Mr. Weingrow and an aggregate of 569,836 shares of our common stock and
common stock underlying warrants held by the Stanoff Corporation, which
is
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beneficially owned by Messrs. Lifton and Weingrow. Mr. Weingrow,
immediately prior to this exchange offer, was the beneficial owner of
85,789 ordinary shares of Medis El, approximating less than 1% of Medis
El's outstanding shares.
(5) Includes options to acquire 15,000 of Medis El's ordinary shares, which
will be exchanged for options to acquire our common stock at an
exchange ratio of 1.37:1.0 subsequent to the completion of this
offering.
(6) Includes 304,167 shares of our common stock underlying warrants held by
CVF, LLC. CVF is controlled by Lester Crown and Charles Goodman, as
well as other members of the Crown family who have interests in, or
individually are officers or directors of, numerous publicly and
privately held companies, including energy concerns. CVF's address is
222 North LaSalle Street, Chicago, IL 60601.
(7) Represents options to acquire 10,000 of Medis El's ordinary shares,
which will be exchanged for options to acquire our common stock at an
exchange ratio of 1.37:1.0 subsequent to the completion of this
offering.
(8) Does not include shares held by Israel Aircraft Industries, of which
Mr. Weiss is corporate vice president and general counsel.
(9) Does not include shares held by Israel Aircraft Industries, of which
Mr. Nahmoni is a vice president.
(10) Does not include shares held by Israel Aircraft Industries, of which
Mr. Peretz is the president of one of its subsidiaries.
(11) Includes our directors and our executive officer nominee and an
aggregate of 569,836 shares of our common stock and common stock
underlying warrants held by the Stanoff Corporation, which is
beneficially owned by Messrs. Lifton and Weingrow.
CERTAIN TRANSACTIONS
On December 15, 1997, we acquired from Israel Aircraft all of its
capital shares of Medis Inc., representing a 40% equity interest in such
company, in exchange for 3,600,457 of our shares of common stock. Medis Inc. is
now our wholly-owned subsidiary and the holder of all of Medis El's shares
beneficially owned by us. In connection with the acquisition, certain of our
stockholders entered into a shareholders agreement with Israel Aircraft
providing for certain management and control matters. The shareholders agreement
will terminate in accordance with its terms upon consummation of the exchange
offer.
We used $2,000,000 of proceeds from a private placement on June 30,
1998 to repay Medis El pursuant to a promissory note entered into between us and
Medis Inc. in December 1993, which had been assigned by Medis Inc. to Medis El
through a capital contribution.
In December 1998, we made the final $300,000 interest payment under the
promissory note to Medis El which had been repaid in June 1998. Such payment was
made with funds invested by the Stanoff Corporation, which is controlled by
Robert K. Lifton, our chairman and chief executive officer, and Howard L.
Weingrow, our president. The Stanoff Corporation received 25,000 units, each
unit consisting of three shares of our common stock and a warrant to purchase
one share of our common stock at $5.00 per share, or an aggregate of 75,000
shares and 25,000 warrants, for such investment. Also in December 1998, we
purchased from Medis El in a private placement 400,000 of it's ordinary shares
for an aggregate of $2,000,000.
On May 19, 1999, we purchased from Medis El in a private placement
318,181 of its ordinary shares for an aggregate of $1,750,000.
In May 1999, Israel Aircraft purchased from us in a private placement
25,000 units, each unit consisting of three shares of our common stock and a
warrant to purchase one share of our common stock at $5.00 per share, or an
aggregate of 75,000 shares and 25,000 warrants, for an aggregate of $300,000.
On June 28, 1999 we transferred 718,181 shares of Medis El owned by us
to Medis Inc., our wholly-owned subsidiary.
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Robert K. Lifton, receives an annual salary of $100,000 from Medis
Inc., our wholly-owned subsidiary, which amount is paid by Medis El for services
rendered.
In November 1999, our board of directors approved a resolution to hire
a U.S. consulting company whose key employee is Jacob Weiss, a member of our
board and of Medis El's board and the general counsel of Israel Aircraft, as a
consultant to us and Medis El, to provide consulting services to us and Medis
El on matters and in areas deemed appropriate by management. We anticipate
Mr. Weiss providing 300-400 hours of services annually at an hourly rate of
$125. In addition, we have granted to such consulting company options to
purchase 100,000 shares of our common stock at an exercise price per share
of $2.93
In December 1999 and January 2000, Medis El purchased an additional
16.5% of the outstanding shares of More Energy Ltd., giving Medis El an 86.5%
interest in such company, for an aggregate purchase price of $165,000.
In February 2000, we purchased from Medis El in a private placement
107,759 of its ordinary shares for an aggregate of $2,500,000.
DISTRIBUTION AND AGENCY AGREEMENTS
Pursuant to an agreement between us and Medis El dated August 1992, we
became the sole distributor of the CellScan in the United States, its
territories and possessions. In July 1998, we became the exclusive agent to
Medis El in coordinating all licensing arrangements in North America with
respect to Medis El's stirling cycle technology and, in December 1999, the
remainder of Medis El's technologies except the CellScan, for which our original
1992 distribution agreement with Medis El still applies.
Other responsibilities under the 1998 agency agreement include:
- - finding potential licensees and cooperating with Medis El to
demonstrate its stirling cycle linear technologies;
- - preparing licensing agreements between Medis El and third parties;
- - overseeing legal proceedings between Medis El and third parties arising
out of or in connection with such licensing arrangements; and
- - managing the collection of royalties payable by such third parties to
Medis El.
In exchange for these and other services, we are entitled to receive a
fee equal to 10% of all royalties payable to Medis El under each license
agreement for the first ten years of each such agreement and 5% of the royalties
under each such agreement thereafter.
Except for affiliates of which we are 100% owners, all ongoing and
future transactions between us and our affiliates, including Medis El, will be
on terms no less favorable than can be obtained from unaffiliated parties and
will be approved by a majority of our independent and disinterested directors.
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DESCRIPTION OF OUR SECURITIES
GENERAL
Our authorized capitalization consists of 25,000,000 shares of common
stock, par value $.01 per share, and 10,000 shares of preferred stock, par value
$.01 per share. As of the date of this prospectus:
- - 10,625,619 shares of our common stock were issued and outstanding, held
of record by 70 persons; and
- - warrants to purchase 1,445,598 shares of our common stock were issued
and outstanding, held in record by 43 persons.
In addition, we have outstanding options to purchase 603,000 shares of
our common stock and will have outstanding options to purchase an additional
258,930 shares of our common stock subsequent to the completion of this exchange
offer, upon the exchange of all outstanding Medis El options for options granted
under our 1999 stock option plan. No shares of preferred stock are currently
outstanding.
COMMON STOCK
Each stockholder of record is entitled to one vote for each share of
our common stock owned by that stockholder on all matters properly submitted to
the stockholders for their vote. Our certificate of incorporation does not
provide for cumulative voting for the election of our directors, with the result
that stockholders owning or controlling more than 50% of the shares voted for
the election of directors can elect all of the directors. Subject to the
dividend rights of holders of preferred stock, if any, holders of common stock
are entitled to receive dividends when, as and if declared by our board out of
funds legally available for this purpose. In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to receive
on a pro rata basis any assets remaining available for distribution after
payment of our liabilities and after provision has been made for payment of
liquidation preferences to all holders of preferred stock. Holders of common
stock have no conversion or redemption provisions or preemptive or other
subscription rights. The outstanding shares of common stock are, and when issued
as set forth in this prospectus, will be, fully paid and nonassessable.
PREFERRED STOCK
Our certificate of incorporation authorizes us to issue 10,000 shares
of so-called "blank check" preferred stock having rights senior to our common
stock. Our board of directors is authorized, without further stockholder
approval, to issue preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights,
conversion rights, voting rights, redemption terms and liquidation preferences,
and to fix the number of shares constituting any series and the designations of
these series.
The issuance of preferred stock may have the effect of delaying or
preventing a change of control of Medis Technologies. The issuance of preferred
stock could decrease the amount of earnings and assets available for
distribution to the holders of common stock or could adversely affect the voting
power or other rights of the holders of common stock. We currently have no plans
to issue any shares of preferred stock.
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<PAGE>
WARRANTS
Each warrant entitles the holder of record to purchase one share of our
common stock at prices from $5.00 to $5.75 per share, subject to adjustment,
among other events, upon the occurrence of:
- - the issue or sale of common stock for consideration per share less than
the warrant price;
- - the issue, sale, grant or assumption of any options for consideration
per share less than the warrant price;
- - the declaration or payment of dividends payable in common stock; and
- - the combination, consolidation or reclassification of our common stock
into a lesser number of shares,
at any time until the warrants expire at 5:00 p.m., New York City time, on June
30, 2002.
Other provisions of the warrants include:
- - our right to extend the expiration date of the warrants; and
- - our obligation to issue additional shares of common stock to the
warrant holders upon consolidation, merger or transfer of all or
substantially all of our assets.
We refer you to the form of warrant agreement, which has been filed as
an exhibit to the Registration Statement of which this prospectus is a part, for
a complete description of the terms and conditions of the warrants.
DESCRIPTION OF MEDIS EL'S SECURITIES
Medis El's authorized capital consists of 30,000,000 ordinary shares,
of which 10,662,840 ordinary shares are currently outstanding.
All of Medis El's issued and outstanding shares are validly issued,
fully paid and non-assessable. The shares do not have preemptive rights. Neither
Medis El's Articles of Association nor the laws of the State of Israel restrict
in any way the ownership or voting of shares by non-residents of Israel.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF MEDIS TECHNOLOGIES AND
SHAREHOLDERS OF MEDIS EL
The following is a summary of the rights of our stockholders and Medis
El's shareholders. The rights of Medis El's shareholders are governed by the
Companies Law of the State of Israel, Medis El's Articles of Association and its
Memorandum of Association. Upon the successful completion of this exchange
offer, Medis El's shareholders who properly tendered their ordinary shares will
become our stockholders, and their rights will be governed principally by the
General Corporation Law of the State of Delaware and our charter and by-laws.
Although we have attempted to identify all material shareholders' rights
differences, this summary does not purport to identify all of the differences
between our common stock and Medis El's ordinary shares and is subject to the
detailed provisions of the relevant laws and governing instruments.
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DIVIDENDS
AS A MEDIS EL SHAREHOLDER:
Under Medis El's articles, all of Medis El's shares have the right to
take a uniform rate of the divisible profits of Medis El. Medis El has the right
to issue shares with different dividend rights, but has no current intention to
do so.
AS OUR STOCKHOLDER:
Under the Delaware code, a corporation may pay dividends out of
surplus, defined as the excess of net assets over capital. If no such surplus
exists, dividends may be paid out of its net profits for the fiscal year,
provided that dividends may not be paid out of net profits if the capital of
such corporation is less than the aggregate amount of capital represented by the
outstanding stock of all classes having a preference upon distribution of
assets. Our charter allows for the payment of such dividends as may be declared
by our board of directors. Our By-Laws are silent as to the payment of
dividends.
Neither we nor Medis El currently pay dividends to our respective
shareholders.
VOTING RIGHTS
AS OUR STOCKHOLDER AND AS A MEDIS EL SHAREHOLDER:
Each of our shares of common stock and Medis El's ordinary shares is
entitled to one vote on matters submitted to a vote of shareholders. Neither our
nor Medis El's shareholders have cumulative voting rights in the election of
directors.
DIRECTORS-NUMBER OF DIRECTORS; VACANCIES
AS A MEDIS EL SHAREHOLDER:
Medis El's articles specify that its board size shall be determined by
ordinary resolution of its shareholders. The current number of directors is six.
If a place on the board of directors is not filled or becomes vacant, the
remaining members of the board of directors are entitled to act for all
purposes, so long as their number does not fall below a quorum. If the number of
members falls below a quorum, the board of directors will not be entitled to act
except in emergency matters and for the purpose of appointing additional
directors. The Companies Law requires a public company to have at least two
outside directors. The vacancies of an outside director may not be filled by the
board of directors.
AS OUR STOCKHOLDER:
Our charter and By-Laws provide that our board size shall be determined
by our board. The current size of our board of directors is six. Vacant director
positions may be filled by a majority of our directors then in office, even
though less than a quorum.
In addition, at the time of filling any vacant director position, if
our directors then in office constitute less than a majority of the board, the
Delaware Court of Chancery may, upon application of shareholders holding at
least ten percent of shares outstanding, summarily order an election to be held
to fill any such vacant director positions, or to replace the directors chosen
by the directors then in office.
When one or more directors resign from our board, a majority of
directors then in office, including those who have so resigned, may vote to fill
the vacancy.
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DIRECTORS-CLASSIFICATION
AS A MEDIS EL SHAREHOLDER:
Medis El has no staggered terms of office. Each of Medis El's directors
is elected to serve until the annual meeting proceeding the general meeting at
which such director was elected, or until his or her earlier removal.
AS OUR STOCKHOLDER:
We have no staggered terms of office. Each of our directors is elected
to serve until the annual meeting proceeding the annual meeting at which such
director was elected, or until his or her earlier removal.
DIRECTORS-REMOVAL
AS A MEDIS EL SHAREHOLDER:
Medis El's articles provide that a director or the entire Medis El
board may be removed with or without cause by the holders of a majority of Medis
El's ordinary shares represented at a general meeting in person or by proxy.
AS OUR STOCKHOLDER:
Our By-Laws provide that any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares entitled to vote in an election of directors.
DIRECTORS-NOMINATIONS
As a Medis El Shareholder:
Medis El's articles and memorandum are silent on the nomination
procedure.
AS OUR STOCKHOLDER:
Our By-Laws provide that nominations for directors may be made only by
or at the direction of the our board of directors or by a shareholder entitled
to vote for the election of directors at a shareholders' meeting. Written notice
of such shareholder's intent to make a director nomination must be received by
our secretary in a manner and within the time period specified in our By-Laws.
LIMITATION ON DIRECTORS LIABILITY; INDEMNIFICATION
OF OFFICERS AND DIRECTORS
AS A MEDIS EL SHAREHOLDER:
The Companies Law provides that, if a company's articles include an
appropriate provision to that end:
- - a company may obtain an insurance policy for an executive officer or
similar position without regard to the corporate title with respect to
liabilities incurred by such person in consequence of an act which he
performed by virtue of his being an officer in breach of his duty of
care or in breach of his fiduciary duty to the company to the extent
that he acted in good faith and
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reasonably believed that the act would not prejudice the company, as
well as for monetary liabilities charged against him; and
- - a company may indemnify its officers for:
- monetary liability incurred pursuant to a judgment from an
action brought against him by a third party; or
- for reasonable legal expenses incurred in a proceeding brought
against the officer by the company, in its name or by another
person, in a criminal prosecution in which he was found
innocent or in a criminal prosecution in which he was
convicted of an offense that does not require proof of
criminal intent; with which he has charged in consequence of
an act which he performed by virtue of holding office in the
company.
According to the Companies Law, a company may exempt, in advance, an office
holder, from partial or all liability, in respect of any damages or losses
caused by a breach of his duty of care to it, provided that the company's
articles of association permit said exemption from liability.
Medis El's articles provide for insurance and indemnification similar
to those described above, and carries such insurance. Additionally, Israel
Aircraft has agreed to indemnify Mr. Rehavi, Medis El's executive vice
president, and Mr. Israel Fisher, Medis El's vice president-finance, for any
claims arising out of Medis El's initial public offering in 1993.
AS OUR STOCKHOLDER:
Section 102 of the Delaware code allows a corporation to include in its
certificate of incorporation a provision that limits or eliminates the personal
liability of directors to a corporation and its stockholders for monetary
damages for a breach of fiduciary duty as a director. However, a corporation may
not limit or eliminate the personal liability of a director for:
- - any breach of the director's duty of loyalty to the corporation or its
stockholders;
- - acts or omissions in bad faith or which involve intentional misconduct or a
knowing violation of law;
- - intentional or negligent payments of unlawful dividends or unlawful stock
purchases or redemption; or
- - any transaction from which the director derives an improper personal
benefit.
Section 145 of the Delaware code permits a corporation to indemnify any
person who was or is a party or is threatened to be made a party to:
- - any action, suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the corporation,
against expenses, including attorneys' fees, judgments, fines and
reasonable settlement amounts if such person acted in good faith and
reasonably believed that his or her actions were in or not opposed to the
best interests of such corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his or her conduct
was unlawful; and
- - any derivative action or suit on behalf of such corporation against
expenses, including attorneys' fees, actually and reasonably incurred in
connection with the defense or settlement of such action or suit, if such
person acted in good faith and reasonably believed that his or her actions
were in or not opposed to the best interest of such corporation.
In the event that a person is adjudged to be liable to the corporation
in a derivative suit, the Delaware code prohibits indemnification unless either
the Delaware Court of Chancery or the court in which such derivative suit was
brought determines that such person is entitled to indemnification for
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those expenses which such court deems proper. To the extent that a
representative of a corporation has been successful on the merits or otherwise
in the defense of a third party or derivative action, indemnification for actual
and reasonable expenses incurred is mandatory.
Our charter provides that we shall indemnify our directors to the
maximum extent permitted by the Delaware code. Our charter provides that we may,
at the discretion of our board of directors, indemnify our officers and
employees.
CALL OF SPECIAL MEETINGS
AS A MEDIS EL STOCKHOLDER:
Under Section 63(b) of the Companies Law, an extraordinary meeting of
shareholders must be called by the board of directors upon a demand of:
- - two directors or one quarter of the serving directors; or
- - one or more shareholders holding at least 5% of the issued share capital of
the company and at least 1% of the voting rights in the company or one or
more shareholders who have at least 5% of the voting rights in the company.
Under Medis El's articles, an extraordinary general meeting of the shareholders
may be called by its board of directors upon a valid vote of the board of
directors.
Under Section 64 of the Companies Law, in the event that directors or
shareholders have demanded that the board of directors of a company call a
shareholders meeting according to the provisions of Section 63 and the board of
directors does not do so within 35 days from the date of such demand, whomever
made the demand may call the meeting.
AS OUR STOCKHOLDER:
Under Section 211 of the Delaware code, special meetings of
stockholders may be called by the board of directors or by such other person or
persons authorized to do so by the corporation's certificate of incorporation or
By-Laws. Under our By-Laws, a special meeting of shareholders may be called only
by our chairman of the board or our president or by our president or secretary
at the request in writing of our board of directors.
ACTION OF SHAREHOLDERS WITHOUT A MEETING
AS A MEDIS EL SHAREHOLDER:
Neither the Companies Law nor Medis El's articles or memorandum address
the issue of shareholders action without a meeting in a public company.
AS OUR STOCKHOLDER:
The Delaware code permits the stockholders of a corporation to consent
in writing to any action without a meeting, unless the certificate of
incorporation of such corporation provides otherwise, which ours does not so
provide.
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SHAREHOLDER PROPOSALS
AS A MEDIS EL SHAREHOLDER:
Section 88(b) of the Companies Law provides that if a general meeting
was called and on its agenda is any of the below listed matters, then a
shareholder may request that the company send a position paper on his behalf to
the other shareholders in the company. Such matter are:
- - the appointment and discharge of directors;
- - approval of acts and of transactions that require approval by the general
meeting regarding interested parties transactions and transactions of an
officer of the company which may involve a conflict of interest;
- - approval of a merger; and
- - any other subject in respect of which it is prescribed in the articles or
under them that decisions of the general meeting also be adopted by voting
by ballot.
AS OUR STOCKHOLDER:
Our By-Laws provide that, to be timely, our secretary must receive
written notice at our principal executive offices not later than the close of
business on the 60th day nor earlier than the close of business on the 90th day
prior to the first anniversary of our annual meeting of stockholders of any
proposal by the shareholders to be included on the agenda of the upcoming
shareholders meeting. Such notice must set forth:
- - in the case of nominations for election or re-election as a director, such
information relating to such person that is required to be disclosed
pursuant to the Exchange Act;
- - in the case of any other business the stockholder proposes to bring before
the meeting, a brief description of such business, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose
behalf the nomination or proposal is made; and
- - the name and address of the stockholder and any such beneficial owner, if
any, and the class and number of shares of our stock owned beneficially and
of record by such stockholder and such beneficial owner.
AMENDMENT TO CHARTER; BY-LAWS
AS A MEDIS EL SHAREHOLDER:
Under the Companies Law, an Israeli company incorporated before the
Companies Law went into effect on February 1, 2000, may amend the provisions
prescribed in its memorandum in the manner and under the conditions prescribed
in the Companies Ordinance, its predecessor statute. According to the Companies
Ordinance, a company may not amend its memorandum of association, except to the
extent allowed under the explicit instructions in the Companies Ordinance, or
under other limited circumstances in accordance with Israeli law.
Under the Companies Law, an Israeli company incorporated before the
Companies Law went into effect may amend the provisions prescribed in its
articles by a resolution adopted by a general meeting by a majority of 75% of
those present or by such other majority as so provided in the company's
memorandum or articles. In addition, under the Companies Law, the company may
prescribed in the articles a provision for the majority required to amend
provisions of the articles, which may be effected by a resolution adopted in
a general meeting by a majority of 75% of those present or by a greater
majority if such a majority is prescribed in the company's memorandum or
articles.
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AS OUR STOCKHOLDER:
Under the Delaware code, the charter of a corporation may be amended by
resolution of the board of directors and the affirmative vote of the holders of
a majority of the outstanding shares of voting stock then entitled to vote. The
Delaware code also permits a corporation to make provision in its certificate of
incorporation requiring a greater proportion of the voting power to approve a
specified amendment. Any amendment to the charter of a corporation that
adversely affects a particular class or series of stock requires the separate
approval of the holders of the affected class or series of stock.
Under our charter, our board of directors is expressly authorized to
make, alter, amend, change, add or repeal our By-Laws. If such action is to be
taken by shareholders, the affirmative vote of not less than 66 2/3% of the
total votes eligible to be cast by shareholders is required.
CONFLICTS OF INTEREST
AS A MEDIS EL SHAREHOLDER:
Medis El's articles provide that no director or officer shall be
disqualified by virtue of his office from holding any office or place of profit
in Medis El or in any company which Medis El holds shares of or contracts with.
Any such arrangement or contract requires Medis El's approval, which may be
approved, provided that the director or officer involved acts in good faith and
the arrangement or contract does not prejudice Medis El's interests. No director
or officer shall be liable to account to Medis El for any profit arising from
any such office or place of profit or realized by any such contract or
arrangement solely due to such interest. The nature of the interest, as well as
any material fact or document, must be disclosed by him at the meeting of the
board of directors at which the contract or arrangement is first considered, if
his interest then exists, or, no later than the first meeting of the board of
directors after the acquisition of his interest.
Under the Companies Law, if an officer or a controlling member in a
public company knows that he has a personal interest in an existing or proposed
transaction of the company, then, without delay and not later than the board of
directors meeting at which the transaction is first discussed, he shall disclose
to the company the nature of his personal interest, including every substantive
fact or document. In addition, under the Companies Law, certain interested party
transactions of a company must be approved either by the company's board of
directors or by the company's audit committee and then by the shareholders,
according to the nature of the transaction. Under section 278(a) of the
Companies Law, if a director has a personal interest in the approval of a
transaction brought for approval to the audit committee or the board of
directors, then he shall not be present at the discussion and shall not
participate in such vote.
AS OUR STOCKHOLDER:
Our By-Laws provide that no contract entered into between us and one or
more of our directors or officers or between us and any other organization in
which one or more of its directors or officers, are directors or officers, or
have a financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present or participates in a meeting
of the board or committee which authorizes the contract or transaction, or
solely because his or her votes are counted for such purpose, if:
- - the director or officer's relationship or interest in the contract or
transaction is disclosed or known to our board of directors, and the
disinterested directors authorize the contract or transaction in good
faith;
- - the material facts as to the director or officer's relationship or interest
in the contract or transaction are disclosed or known to our shareholders
then entitled to vote, and the contract is
71
<PAGE>
approved in good faith by the vote of our shareholders; or
- - the contract or transaction is fair to the corporation as of the time it is
authorized, approved or ratified by our board of directors or by our
shareholders.
BUSINESS COMBINATIONS; ANTITAKEOVER EFFECTS
AS A MEDIS EL SHAREHOLDER:
The Companies Law provides that business combinations, such as mergers,
with interested stockholders require special approval. With regard to a
statutory merger, if any of one company's shares are held by the other
prospective merging company, then the merger would not be approved if objected
to by the majority of the shareholders present at the shareholders meeting in
which the merger is being brought for approval, and who are not:
- - affiliated with the other merging company;
- - acting on the merging company's behalf; or
- - controlled by the merging company.
In addition a merger is subject to the approval of the Board of Directors of
each company.
Other business combinations with a controlling shareholder require
approval by the following:
- - the board's audit committee;
- - the board; and
- - stockholders at the company's general meeting, on the condition that
one of the following applies:
- the majority of votes at the general meeting includes at least
one third of all votes of shareholders who do not have a
personal interest in the approval of the transaction and who
are present at the meeting; and
- the total number of opposing votes from among the shareholders
said in the above subparagraph does not exceed 1% of all the
voting rights of the company.
A company may cancel a transaction with another person that requires
approval as mentioned above and it may demand compensation from him for damage
caused to it even without cancellation of the transaction, if that person knew
of the personal interest of the controlling shareholder in the approval and if
he knew or should have known that the transaction had not been approved as
required by the Companies Law.
AS OUR STOCKHOLDER:
Section 203 of the Delaware code generally prohibits a publicly held
corporation from engaging in a "business combination" with an "interested
stockholder" for three years after the date the person becomes an interested
shareholder. Neither our charter nor bylaws contains any provisions which modify
Section 203 of the Delaware code.
Our charter and By-Laws contain a number of provisions which may be
deemed to have potential anti-takeover effects.
72
<PAGE>
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material U.S. income tax consequences of
the exchange offer. This summary may not apply to certain classes of persons,
including, without limitation, foreign persons, insurance companies, tax-exempt
organizations, financial institutions, dealers in securities, persons who
acquired shares pursuant to the exercise of employee stock options or rights or
otherwise as compensation and persons who hold shares as part of a straddle or
conversion transaction. This summary is based upon laws, regulations rulings and
decisions, all of which are subject to change, possibly with retroactive effect,
and no ruling has been or will be requested from the Internal Revenue Service on
the tax consequences of the exchange offer.
Our counsel, Cooperman Levitt Winikoff Lester & Newman, P.C., have
advised us that, in their opinion, an exchange of Medis El shares for our common
stock pursuant to the exchange offer will be treated for federal income tax
purposes as an exchange pursuant to Section 368(a)(1)(B) of the Internal Revenue
Code only if Medis Inc., our wholly-owned subsidiary, owns 80% or more of Medis
El's stock after the transaction and:
- - no gain or loss will be recognized by a holder of Medis El shares upon
the exchange in the exchange offer of such Medis El shares solely for
our common stock;
- - the aggregate adjusted tax basis of shares of our common stock received
in the exchange offer by a holder of Medis El shares will be the same
as the aggregate adjusted tax basis of the Medis El shares exchanged
therefor;
- - the holding period of shares of our common stock received in the
exchange offer by a holder of Medis El shares will include the holding
period of the Medis El shares exchanged therefor, provided such shares
were held as capital assets;
- - no gain or loss will be recognized by us or Medis El as a result of the
exchange offer.
The positions stated above are those of our tax advisors. Unlike a
ruling from the IRS, the opinion of the our tax advisors is not binding on the
IRS, and there can be no assurance that the IRS will not take a position
contrary to one or more positions reflected herein or that the positions
reflected herein will be upheld if challenged by the IRS.
This summary does not address state, local or foreign tax consequences
of the exchange offer. Consequently, each holder should consult such holder's
own tax advisor as to the specific tax consequences of the exchange offer to
such holder. We are not including any discussion of Israeli tax effects in this
prospectus. To the extent you are a Medis El shareholder and an Israeli citizen
or an Israeli company, please consult your tax advisor or counsel for the tax
effects of this exchange applicable to you.
73
<PAGE>
LEGAL MATTERS
The validity of our securities will be passed upon on our behalf by
Cooperman Levitt Winikoff Lester & Newman, P.C., New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1999
and for each of the three years in the period ended December 31, 1999 included
in this prospectus and the registration statement of which this prospectus is a
part have been audited by Grant Thornton LLP, independent certified public
accountants, as indicated in their reports, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Medis El Ltd. as of December
31, 1998 and 1999 and for each of the three years in the period ended December
31, 1999 have been audited by Fahn, Kanne & Co., independent auditors, as
indicated in their reports and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a Registration Statement on Form S-1 which
includes exhibits, schedules and amendments, pursuant to the Securities Act of
1933 with respect to this offering of our securities. This Prospectus is part of
the Form S-1 but does not contain all the information in the Form S- 1. We refer
you to the Form S-1 for further information about us, our securities and this
exchange offer. Statements in this prospectus about documents filed as exhibits
to the Form S-1 are summaries of these documents, and each of these statements
is qualified in its entirety by reference to the copy of the applicable document
filed with the SEC. The Form S-1 can be inspected and copied at the SEC's Public
Reference Room at:
Room 1024, Judiciary Plaza,
450 Fifth Street, N.W.,
Washington, D.C. 20549-1004,
and at the SEC regional offices located at:
7 World Trade Center,
Suite 1300,
New York, New York 10048,
and
Northwest Atrium Center,
500 West Madison Street, 14th Floor,
Chicago, Illinois 60661.
The public may obtain information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a web site at http://www.sec.gov which contains the Form S-1 and other
reports, proxy and information statements and information regarding issuers that
file electronically with the SEC.
74
<PAGE>
Medis El files annual and other reports pursuant to the Securities
Exchange Act of 1934. Such reports and other information filed by Medis El can
be inspected and copied at the above-listed addresses at prescribed rates.
We will file, no later than the date of commencement of the exchange
offer, a statement on Schedule TO pursuant to Rule 14d-3 under the Exchange Act
which contains certain information about the exchange offer. The Schedule and
any amendments to the Schedule can be inspected and copied as set forth above.
We intend to furnish to each of our stockholders annual reports
containing audited financial statements. We will also furnish to each of our
stockholders such other reports, including proxy statements, as may be required
by law.
75
<PAGE>
<TABLE>
<CAPTION>
I N D E X
PAGE
----
MEDIS TECHNOLOGIES LTD. FINANCIAL STATEMENTS
- --------------------------------------------
<S> <C>
Report of Independent Certified Public Accountants F-3
Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-39
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction F-40
PRO FORMA FINANCIAL STATEMENTS ASSUMING 100% OF MEDIS EL SHARES ARE TENDERED:
Unaudited Pro Forma Consolidated Balance Sheet - December 31, 1999 F-41
Note to Unaudited Pro Forma Consolidated Balance Sheet F-42
Unaudited Pro Forma Consolidated Statement of Operations - December 31, 1999 F-43
Note to Unaudited Pro Forma Consolidated Statement of Operations F-44
PRO FORMA FINANCIAL STATEMENTS ASSUMING 80% OF MEDIS EL SHARES ARE TENDERED:
Unaudited Pro Forma Consolidated Balance Sheet - December 31, 1999 F-45
Note to Unaudited Pro Forma Consolidated Balance Sheet F-46
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
I N D E X
PAGE
<S> <C>
Unaudited Pro Forma Consolidated Statement of Operations - December 31, 1999 F-47
Note to Unaudited Pro Forma Consolidated Statement of Operations F-48
MEDIS EL LTD. FINANCIAL STATEMENTS
Independent Auditors' Report to the Shareholders of Medis El Ltd. F-49
Financial Statements
Consolidated Balance Sheets F-50
Consolidated Statements of Operations F-51
Consolidated Statements of Changes in Shareholders' Equity F-52
Consolidated Statements of Cash Flows F-53
Notes to Consolidated Financial Statements F-54 - F-68
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
MEDIS TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of Medis
Technologies Ltd. and Subsidiaries (a Delaware corporation) as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Medis Technologies Ltd. and Subsidiaries as of December 31, 1998 and 1999, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
GRANT THORNTON LLP
New York, New York
March 9, 2000
F-3
<PAGE>
Medis Technologies Ltd. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
ASSETS 1998 1999
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,155,000 $ 1,842,000
Short-term deposits 500,000 -
Accounts receivable - other 66,000 58,000
Inventory 405,000 -
Prepaid expenses 89,000 101,000
------------ ------------
Total current assets 4,215,000 2,001,000
Property and equipment, net 860,000 983,000
Intangible assets, net 9,680,000 7,242,000
------------ ------------
$ 14,755,000 $ 10,226,000
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 204,000 $ 86,000
Accounts payable 113,000 102,000
Accrued expenses 362,000 730,000
------------ ------------
Total current liabilities 679,000 918,000
Long-term debt, excluding current maturities 96,000 11,000
Other long-term liabilities 61,000 109,000
------------ ------------
836,000 1,038,000
Minority interest in subsidiary 1,513,000 627,000
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 10,000 shares
authorized; none issued
Common stock, $.01 par value; 25,000,000 shares authorized; 9,407,615 and
9,988,619 shares issued and outstanding, at December 31, 1998
and 1999, respectively 94,000 100,000
Additional paid-in capital 29,962,000 32,450,000
Accumulated deficit (17,650,000) (23,615,000)
Deferred compensation costs (374,000)
------------ ------------
12,406,000 8,561,000
------------ ------------
$ 14,755,000 $ 10,226,000
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-4
<PAGE>
Medis Technologies Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Sales $ -- $ 8,000 $ --
Cost of sales -- 3,000 --
----------- ------------- -----------
Gross profit -- 5,000 --
Operating expenses
Research and development costs, net 1,406,000 1,646,000 2,749,000
Selling, general and administrative expenses 1,303,000 1,399,000 2,467,000
Amortization of intangible assets 102,000 2,445,000 2,574,000
----------- ------------- -----------
Total operating expenses 2,811,000 5,490,000 7,790,000
----------- ------------- -----------
Loss from operations (2,811,000) (5,485,000) (7,790,000)
Other income (expenses)
Interest and other income 64,000 63,000 150,000
Interest expense (381,000) (101,000) (22,000)
----------- ------------- -----------
(317,000) (38,000) 128,000
----------- ------------- -----------
Loss before minority interest (3,128,000) (5,523,000) (7,662,000)
Minority interest in loss of subsidiary 1,584,000 1,105,000 1,697,000
----------- ------------- -----------
NET LOSS $(1,544,000) $ (4,418,000) $(5,965,000)
=========== ============= ===========
Basic and diluted net loss per share $ (.33) $ (.52) $ (.61)
=========== ============= ===========
Weighted-average shares outstanding 4,645,232 8,581,774 9,807,101
=========== ============= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
Medis Technologies Ltd. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Deferred Total
------------------- paid-in Accumulated compen- Stockholders'
Shares Dollars capital deficit sation costs Equity
------ ------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,952,210 $ 40,000 $ 10,003,000 $(11,688,000) $ -- $ (1,645,000)
Net loss -- -- -- (1,544,000) -- (1,544,000)
Issuance of common stock in lieu of
interest on subordinated notes 66,373 1,000 32,000 -- -- 33,000
Issuance of common stock due to
exercise of warrants 638,573 6,000 2,548,000 -- -- 2,554,000
Minority share of capital contribution -- -- (1,145,000) -- -- (1,145,000)
Acquisition of minority interest in
Medis Inc. 3,600,457 36,000 13,089,000 -- -- 13,125,000
--------- -------- ------------ ------------ ------------ ------------
Balance at December 31, 1997 8,257,613 83,000 24,527,000 (13,232,000) -- 11,378,000
Net loss (4,418,000) (4,418,000)
Issuance of common stock 1,150,002 11,000 4,589,000 4,600,000
Compensation expense -- -- 9,000 -- -- 9,000
Increase attributable to changes in
Medis El shares outstanding -- -- 1,549,000 -- -- 1,549,000
Minority share of MTL's
investment in Medis El -- -- (712,000) -- -- (712,000)
--------- -------- ------------ ------------ ------------ ------------
Balance at December 31, 1998 9,407,615 94,000 29,962,000 (17,650,000) -- 12,406,000
Net loss -- -- -- (5,965,000) -- (5,965,000)
Issuance of common stock 581,004 6,000 2,318,000 -- -- 2,324,000
Deferred compensation costs 435,000 $ (374,000) 61,000
Increase attributable to changes in
Medis El shares outstanding -- -- 344,000 -- -- 344,000
Minority share of MTL's investment
in Medis El -- -- (609,000) -- -- (609,000)
--------- -------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 9,988,619 $100,000 $ 32,450,000 $(23,615,000) $ (374,000) $ 8,561,000
========= ======== ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-6
<PAGE>
Medis Technologies Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,544,000) $(4,418,000) $(5,965,000)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 117,000 132,000 388,000
Amortization of intangible assets 102,000 2,445,000 2,574,000
Changes in accrued severance payable 33,000 48,000
Losses of minority interest (1,584,000) (1,105,000) (1,697,000)
Loss on sale of available-for-sale securities 22,000 -- --
Compensation expense -- 61,000 187,000
Non-cash settlement costs -- -- 437,000
Loss from sale of property and equipment -- 10,000 5,000
Charge of inventory to research and
development expense -- -- 255,000
Write-off of acquired in-process research and
development -- -- 117,000
Changes in operating assets and liabilities
Accounts receivable 29,000 21,000 8,000
Inventory (78,000) 113,000 (47,000)
Prepaid expenses 9,000 (43,000) (12,000)
Accounts payable 93,000 (42,000) (11,000)
Accrued interest and other expenses 222,000 134,000 351,000
----------- ----------- -----------
Net cash used in operating activities (2,612,000) (2,659,000) (3,362,000)
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (124,000) (134,000) (330,000)
Sale of securities and short-term deposits 479,000 -- 500,000
Proceeds from sale of property, plant and equipment 1,000 17,000 11,000
Purchases of short-term deposits (500,000)
Acquisition by Medis El of shares of More Energy, Ltd. (115,000)
Acquisition of shares of Medis El -- -- (138,000)
----------- ----------- -----------
Net cash provided by (used in)
investing activities 356,000 (617,000) (72,000)
----------- ----------- -----------
Cash flows from financing activities
Repayment of subordinated notes payable (130,000) -- --
Repayment of long-term debt (196,000) (342,000) (195,000)
Proceeds from long-term debt 240,000 45,000 --
Proceeds from issuance of common stock - Medis El -- 1,350,000 --
Proceeds from issuance of common stock 33,000 4,600,000 2,324,000
Proceeds from (repayments of) short-term credit 60,000 6,000 (8,000)
----------- ----------- -----------
Net cash provided by financing activities 7,000 5,659,000 2,121,000
----------- ----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (2,249,000) 2,383,000 (1,313,000)
Cash and cash equivalents at beginning of year 3,021,000 772,000 3,155,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 772,000 $ 3,155,000 $ 1,842,000
=========== =========== ===========
</TABLE>
F-7
<PAGE>
Medis Technologies Ltd. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 220,000 $ 305,000 $ 12,000
Income taxes 1,000 4,000 7,000
Noncash investing and financing activities:
Decrease in long-term debt through the issuance
of common stock $ 2,314,000 $ 650,000 $ --
Acquisition of minority interest in
Medis Inc. (see Note C) $13,125,000 $ -- $ --
Decrease in inventory through increase in
fixed assets $ $ 429,000 $ 197,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1999
NOTE A - NATURE OF BUSINESS
Medis Technologies Ltd. ("MTL") is a holding company, which through
its majority-owned indirect subsidiary, Medis El, engages in
research and development activities. Medis El Ltd. ("Medis El"), an
Israeli corporation, was formed to engage in the development, clinical
testing and marketing of the CellScan, a machine that was originally
designed to develop diagnostic tests for cancers and other diseases. By
1997, Medis El evolved into a multi-product company as it sought out and
assisted in the development of advanced technologies in a number of
unrelated fields. Medis El currently owns, in whole or in part, a number of
different technologies in various stages of development. Its strategy is to
become a greenhouse for the development of technology products to license,
sell, or enter into joint ventures with large corporations. In addition to
the CellScan, Medis El's technologies include the Stirling Cycle Linear
System, Fuel Cells, the Toroidal Internal Combustion Engine and Compressor,
Reciprocating Electric Machine, Direct Current Regulating Device and Water
Technologies.
CDS Distributor, Inc. ("CDS"), a Delaware corporation and a wholly-owned
subsidiary of MTL, has the exclusive right to distribute the CellScan in
the United States for a period expiring twelve years after FDA approval of
the product. CDS also has agency rights for certain other technologies
developed by Medis El. See Note J-1 and J-2 for further discussion of these
distribution and agency rights.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of MTL and its
wholly-owned and majority-owned subsidiaries from their dates of
acquisition (Reference is made to Note C) (collectively, the "Company").
All intercompany transactions and balances have been eliminated. Minority
interest represents the minority shareholders' proportionate share in the
equity or income of Medis El. The minority shareholders of Medis El include
Israel Aircraft Industries Ltd. ("IAI"), which is also a shareholder of
MTL, certain other shareholders of MTL, and owners of shares that are
traded on the NASDAQ Small Cap Market.
F-9
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, certificates of deposit, money
market funds and highly liquid investments with a maturity of three months
or less when purchased. As of December 31, 1998 and 1999, cash and cash
equivalents included $105,000 and $ 211,000, respectively, of balances
denominated in Israeli currency (NIS).
3. SHORT-TERM DEPOSITS
Short-term deposits represent deposits with financial institutions that
have maturities of greater than three months (but less than a year) when
purchased.
4. INVENTORY
Inventory, consisting primarily of finished goods, is valued at the lower
of cost or market. Cost is determined on a first-in, first-out basis.
5. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Grants received by Medis El from the State of Israel related to CellScan
and Neuritor research and development were offset against research and
development costs.
6. REVENUE RECOGNITION
Revenue from sales is recognized upon delivery of product to the customer.
7. WARRANTY COSTS
The Company grants a one-year warranty on products sold and provides for
estimated warranty costs.
8. USE OF ESTIMATES
In preparing the Company's financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported
F-10
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Company for bank loans
with similar terms and maturities, the fair value of the Company's
long-term debt at December 31, 1998 and 1999, approximates the carrying
value. Furthermore, the carrying value of all other financial instruments
potentially subject to valuation risk (principally consisting of cash and
cash equivalents) also approximates fair value.
10. TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the Company and its subsidaries have been
prepared in U.S. dollars, as the dollar is the Company's functional
currency.
Non-dollar transactions and balances were remeasured into dollars in
accordance with Statement of Financial Accounting Standards No. 52 ("SFAS
No. 52"), "Foreign Currency Translation."
11. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost (net of investment grants).
Depreciation is provided on the straight-line basis over the estimated
useful lives of such assets. Leasehold improvements are amortized over the
lives of the respective leases or useful lives of the improvements,
whichever is shorter.
The annual depreciation rates are as follows:
<TABLE>
<CAPTION>
ANNUAL RATES
<S> <C>
Machinery and equipment 10% - 33%
Computers 20 - 33
Furniture and office equipment 7 - 15
Vehicles 15%
</TABLE>
F-11
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
12. STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). As
permitted under SFAS No. 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees", and related interpretations in accounting for its
employee stock options. Under APB No. 25, when the exercise price of
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recorded. However,
with respect to options to granted to non-employees, the Company records
expense equal to the fair value of the option on the date of grant. To the
extent that compensation expense is recognized with respect to stock
options, such expense is amortized over the vesting period of such options.
13. INTANGIBLE ASSETS, LONG-LIVED ASSETS AND IMPAIRMENT OF LONG-LIVED
ASSETS
Intangible assets, consisting of acquired technology assets and goodwill,
are being amortized on a straight-line basis over a five year period. The
Company's policy is to review all long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable,
the Company will estimate the future cash flows expected to result from the
use of the asset and its eventual disposition. Future cash flows are the
future cash inflows expected to be generated by an asset less the future
cash outflows expected to be necessary to obtain those inflows. If the sum
of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company would
recognize an impairment loss. With respect to goodwill, the Company follows
the enterprise level approach, whereby the value of goodwill is compared to
the value of Company as a whole. Therefore, the Company would judge a
significant decline in the market value of the Company's or Medis El's
common stock as an event or change in circumstances, and recognize an
impairment loss on such goodwill.
F-12
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
14. NET LOSS PER SHARE
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share." Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss for the period by the weighted-average
number of common shares outstanding during the period. Diluted net loss per
share is computed by dividing the net loss for the period by the
weighted-average number of common and common equivalent shares outstanding
during the period. However, as the Company generated net losses in all
periods presented, common equivalent shares, composed of incremental common
shares issuable upon the exercise of warrants and stock options, are not
reflected in diluted net loss per share because such shares are
antidilutive.
15. OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements. Other
comprehensive income, as defined, includes all changes in equity during a
period from non-owner sources. To date, the Company has not had any
material transactions that are required to be reported as other
comprehensive income.
16. SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments
of an Enterprise and Related Information," which establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The
Company has determined that it does not have any separately reportable
business segments, but does operate in two geographic areas, the United
States and Israel.
F-13
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE B (CONTINUED)
17. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments
and Hedging Activities," which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting
when certain conditions are met. SFAS No. 133 as amended by SFAS 137 is
effective for fiscal years beginning after June 15, 2000. The Company does
not believe that the adoption of this statement will have a material impact
on the Company's financial position or results of operations.
18. YEAR 2000 ISSUE
The Company has addressed year 2000 compliance in its systems, accounting
software, computer hardware and existing products, which include the
CellScan and prototypes of its stirling cycle linear compressor and fuel
cell technology, and has communicated with its significant third party
vendors with respect to their respective states of readiness. In order to
assess year 2000 compliance of its products and systems, the Company
identified those systems which are critical to its operations and the
operations of its technologies and, based upon tests to such products and
systems, believed that all of its systems and technologies, to the extent
developed, were materially compliant.
The Company did not experience any material failures or disruptions either
on or after January 1, 2000, whether internally or by reason of significant
third party vendors; however, due to the uncertainties that are inherent in
year 2000 remediation, it can give no assurances that its efforts will
prevent future disruptions.
Although the Company believes that it has adequately addressed the year
2000 issue, it is possible that future failures or disruptions stemming
from year 2000 issues may yet result in material failures or disruptions to
its systems, products or prototypes.
F-14
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE C - MINORITY INTEREST AND ACQUISITION OF MINORITY INTEREST
Through December 15, 1997, MTL owned 60% of Medis Inc. while IAI owned 40%
of Medis Inc. Through a shareholders' agreement in effect during that time,
control of Medis Inc. was shared as the board of directors of Medis Inc.
and Medis El each consisted of six directors, of which three were
designated by MTL and three were designated by IAI. As neither party had
control of Medis Inc., MTL had accounted for its investment in Medis Inc.
(and therefore Medis El) under the equity method of accounting.
As of December 15, 1997, MTL acquired IAI's 40% interest in Medis Inc., for
aggregate consideration of 3,600,457 shares of MTL stock. As this was an
acquisition of a minority interest, the Company accounted for this
transaction using purchase accounting. The purchase price was valued based
on the value of Medis Inc.'s investment in Medis El, using the quoted
market price of Medis El shares as of December 15, 1997. The aggregate
purchase price was valued at $13,125,000. Acquired intangible technology
assets, consisting primarily of patents, know-how and other
technology-related assets, aggregated $2,975,000, of which $2,814,000
related to the CellScan technology. Goodwill, which represented the excess
of the purchase price over the value of the acquired tangible and
intangible technology assets, aggregated $9,252,000. Intangible assets,
including goodwill, are being amortized over a five-year period. The
operations of Medis Inc. and Medis El are included in results of operations
of the Company from the date of acquisition.
At December 31, 1998 and 1999, the Company reported minority interest in
the balance sheet of $1,513,000 and $627,000, respectively. For financial
reporting purposes, the assets, liabilities, and earnings of Medis El are
consolidated in MTL's financial statements, and the minority investors'
interest in Medis El has been recorded as "Minority interest" in the
balance sheet.
At December 31, 1998, MTL owned 100% of the common stock of Medis Inc.,
which in turn owned 5,925,000 shares, or 58.87%, of Medis El. Additionally,
MTL owned 400,000 shares of Medis El, or an additional 3.97%. The minority
shareholders (including public shareholders) owned 37.16% of Medis El's
common stock.
F-15
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE C (CONTINUED)
At December 31, 1999, MTL owned 100% of the common stock of Medis Inc.,
which in turn owned 5,925,000 shares, or 56.49%, of Medis El. Additionally,
MTL owned 742,681 shares of Medis El, or an additional 7.08%. The minority
shareholders (including public shareholders) owned 36.43% of Medis El's
common stock.
The following unaudited pro forma consolidated results of operations for
the year ended December 31, 1997 assumes that the acquisition of the
minority interest of Medis Inc. had occurred on January 1, 1997. The pro
forma data is for informational purposes only and may not necessarily
reflect results of operations as if the acquisition had occurred on January
1, 1997.
<TABLE>
<S> <C>
Revenues $ --
============
Net loss $(4,598,000)
============
Basic and diluted
loss per share $(.57)
======
Shares used in calculation of basic
and diluted loss per share 8,077,997
==========
</TABLE>
NOTE D - INVENTORIES
Inventories at December 31, 1998 include three CellScan machines that
management designated as held for sale because the Company made certain
improvements to such machines and believed that it would be able to sell
such machines. The remaining five machines were included in property and
equipment as they were intended to be used as a marketing and research and
development tool to demonstrate and promote the CellScan technology and to
develop new research applications.
F-16
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE D (CONTINUED)
During 1999, the Company reclassified the remaining three CellScans with a
total cost of $197,000 from inventory to property and equipment. This
treatment, which resulted in all of the Company's CellScans being
classified as property and equipment, is consistent with the Company's use
of all its CellScans as a marketing and research and development tool to
demonstrate and promote the CellScan technology, and to develop new
research applications.
On June 30, 1999, the Company charged its inventory of cell carriers and
antigens, and Neuritors, a technology that the Company is no longer
developing or selling, aggregating $255,000 to research and development
expense.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1999
------------ ----------
<S> <C> <C>
Machinery and equipment $ 776,000 $1,106,000
Computers 174,000 187,000
Furniture and office equipment 84,000 94,000
Vehicles 154,000 154,000
Leasehold improvements 156,000 300,000
----------- ----------
1,344,000 1,841,000
Less accumulated depreciation 484,000 858,000
----------- ----------
Property and equipment - net $ 860,000 $ 983,000
=========== ==========
</TABLE>
Machinery and equipment at December 31, 1998 includes five CellScan machines and
at December 31, 1999 includes eight CellScan machines. (Reference is made to
Note D.)
F-17
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE F - INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets consist of the following at December 31:
1998 1999
------------- ------------
<S> <C> <C>
CellScan technology assets $ 2,814,000 $ 2,851,000
Neuritor technology assets 161,000 -
Goodwill 9,252,000 9,351,000
------------- ------------
12,227,000 12,202,000
Accumulated amortization 2,547,000 4,960,000
------------- ------------
$ 9,680,000 $ 7,242,000
============= ============
</TABLE>
During the year ended December 31, 1999, the Company purchased an aggregate
of 24,500 shares (or approximately 0.24%) of Medis El on the open market
(i.e., from the minority shareholders). These purchases were treated as an
acquisition of minority interest of the Company. The excess of purchase
price over net assets acquired was approximately $139,000 which was
allocated to CellScan technology assets ($37,000), in-process R&D for the
Fuel Cell and Stirling Cycle Projects ($3,000), and goodwill ($99,000).
In connection with management's decision as of June 30, 1999 to no longer
develop or sell the Neuritor technology, management determined that an
event or change in circumstances had occurred that indicated that the
acquired technology assets relating to the Neuritor were impaired.
Therefore, the Company charged the remaining unamortized balance relating
to such technology (or an additional $128,000) to amortization of
intangible assets. Such amount represents the write-off of such impaired
technology assets.
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Bank debt - Israel $ 300,000 $ 97,000
Less current portion (204,000) (86,000)
-------- -------
$ 96,000 $ 11,000
========= =======
</TABLE>
F-18
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE G (CONTINUED)
BANK DEBT - ISRAEL
Bank Debt - Israel represents Medis El's borrowings of bank loans that are
linked to the dollar, which bear interest at the LIBOR plus 2.4% to 2.6%
per annum and are guaranteed by the State of Israel. Such loans are
collateralized by a floating lien on all of the assets of Medis El.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31,
2000 $86,000
2001 8,000
2002 3,000
-------
$97,000
=======
</TABLE>
NOTE H - STOCKHOLDERS' EQUITY
1. MEDIS TECHNOLOGIES LTD. COMMON STOCK
Each stockholder is entitled to one vote for each share of common
stock owned by that stockholder on all matters properly submitted to
the stockholders for their vote. Stockholders owning or controlling
more than 50% of the shares can elect all of the directors. Subject to
the dividend rights of holders of preferred stock, if any, holders of
common stock are entitled to receive dividends when, as and if
declared by the board of directors out of funds legally available for
this purpose. In the event of liquidation, dissolution or winding up,
the holders of common stock are entitled to receive on a pro rata
basis any assets remaining available for distribution after payment of
liabilities and after provision has been made for payment of
liquidation preferences to all holders of preferred stock. Holders of
common stock have no conversion or redemption provisions or preemptive
or other subscription rights.
F-19
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
In 1997, the Company recorded a reduction in additional paid-in capital
due to the recognition of the minority share of a capital contribution
to Medis El. The capital contribution arose from a note payable to
Medis Inc. that MTL signed at inception. The note had a face value of
$2,500,000, of which $500,000 was repaid prior to January 1, 1996. In a
year prior to 1996, the note receivable was assigned by Medis Inc. to
Medis El as a capital contribution. Medis El disclosed this transaction
in the notes to its financial statements and for financial statement
purposes presented the capital contribution and note receivable netted
against each other in stockholders' equity. As of December 31, 1997,
MTL was required to consolidate Medis El for the first time, after the
acquisition by MTL of the minority interest held by IAI. Since MTL had
a note payable to Medis El that would need to be eliminated in
consolidation, Medis El had to reclassify the note out of equity in
order to eliminate it in consolidation as of December 31, 1997.
Therefore, even though the capital contribution had occurred before
December 31, 1997, it was reflected in the December 31, 1997 financial
statements to facilitate the consolidation process. Since MTL owned 67%
of Medis El at the time, the minority share of the capital contribution
was recorded as a reduction of equity and an increase in the minority
interest.
In March 1998, the Company offered its existing shareholders the
opportunity to acquire 216,667 units at a price of $12 per unit, each
unit consisting of three shares of MTL common stock and one warrant to
purchase one share of MTL common stock at an exercise price of $5.00
per share. In September 1998, 181,426 units were issued to existing
shareholders for approximately $2,177,000. The proceeds were used to
repay the $2,000,000 subordinated note due to Medis El discussed
above, and the outstanding subordinated notes and bank loan.
F-20
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
In November 1998, the Company offered an additional 176,908 units with the
same terms and conditions as the units mentioned above. The proceeds of
this offering were approximately $2,123,000. These proceeds were used to
purchase an additional 400,000 shares of Medis El for $2,000,000 and to pay
interest of $300,000 due on the note which had already been paid. In
December 1998, the Company sold an additional 25,000 units with the same
terms and conditions as mentioned above. The aggregate proceeds were
$300,000.
During the year ended December 31, 1999, the Company issued an aggregate of
193,668 units (of which 25,000 were to IAI) with the same terms as those
issued in 1998. Proceeds from such issuances aggregated approximately
$2,324,000. The purpose of the issuance of such units was to generate
additional cash to purchase shares of Medis El in order to fund the
research and development activities of Medis El and for the Company's
working capital.
On May 19, 1999, the Company purchased an additional 318,181 shares of
Medis El for $1,750,000.
2. MEDIS TECHNOLOGIES LTD. WARRANTS
MTL warrants outstanding are summarized below:
<TABLE>
<CAPTION>
Weighted-
average exercise
Shares price
----------- ----------------
<S> <C> <C>
Balance at January 1, 1997 1,143,098 $3.00-$5.00
Exercised (638,573) $4.00
Cancelled (15,000) $3.00-$5.00
-----------
Balance at December 31, 1997 489,525 $5.00
Granted 533,334 $5.00
Exercised -
Cancelled (11,762) $5.00
-----------
Balance at December 31, 1998 1,011,097
Granted 193,668 $5.00
----------
BALANCE AT DECEMBER 31, 1999 1,204,765 $5.00
=========
</TABLE>
F-21
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
In March 1998, as consideration for providing guarantees on Company debt,
the Company granted a total of 100,000 warrants to purchase 100,000 shares
of the Company's common stock exercisable at $5.00 per share to two
officers. Additionally, during 1998, 50,000 warrants were issued to a
nonemployee consultant. The Company recorded approximately $9,000 of
compensation expense relating to the above grants, which represented
management's estimate of the fair value of such warrants. The fair value of
such warrants was estimated using a Black-Scholes methodology and a 5%
risk-free interest rate and 0% volatility (since the Company is not a
public company).
On June 8, 1999, the Company extended the expiration date of its
outstanding warrants which were scheduled to expire on January 1, 2000,
June 30, 2000 and December 31, 2000 through June 30, 2002. In connection
with such modification, the Company recorded an additional $41,000 of
compensation expense during the year ended December 31, 1999, relating to
the above warrants that were issued to employees in exchange for guarantees
and to the consultant. The fair value of such warrants was estimated using
a Black-Scholes methodology and a 5% risk-free interest rate and 0%
volatility (since the Company is not a public company).
3. MEDIS TECHNOLOGIES LTD. STOCK OPTIONS
On July 13, 1999, the Company's Board of Directors approved the 1999 Stock
Option Plan, and reserved 1,000,000 shares of common stock for issuance as
stock options or stock appreciation rights pursuant to the plan. The plan
provides for the issuance of both incentive and nonqualified stock options.
On November 2, 1999, the Company granted to employees of the Company and
its subsidiaries, and consultants options to purchase 450,000 shares of
common stock at $2.93 per share which is the Company's good faith
determination of 80% of the fair market value on the date of grant. Such
options have a four-year life, and vest after two years.
F-22
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
Information regarding these options for 1999 is as follows:
<TABLE>
<CAPTION>
Nonqualified options
-------------------------
Weighted-
average
exercise
Shares price
------ -----
<S> <C> <C>
Options outstanding at beginning of year
Exercised - -
Granted 450,000 $2.93
Cancelled or forfeited - -
------- -----
Options outstanding at end of year 450,000 $2.93
======= ====
Exercisable - -
======= ===
</TABLE>
The following tables summarize information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------- ------------------------------
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
as of remaining average as of average
Ranges of December 31, contractual exercise December 31, exercise
exercise prices 1999 life price 1999 price
--------------- ------------ ------------ ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
$2.93 450,000 3.84 years $2.93 - -
</TABLE>
Summary of weighted-average fair value of stock options granted during the
year ended December 31, 1999:
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
exercise price fair value
-------------- ----------
<S> <C> <C>
Exercise price is less than market price on grant date $2.93 $1.31
As of December 31, 1999, 550,000 options were available for grant pursuant
to the plan.
</TABLE>
F-23
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
Compensation costs charged to operations which the Company recorded for
options granted to employees and directors at exercise prices below the
fair market value at the date of grant and for options granted to
consultants aggregated $20,000 in 1999. Deferred compensation for employee
and director stock options was determined by calculating the difference
between the exercise price and the fair market value of such options on the
date of grant. Deferred compensation for options granted to the consultant
was estimated using a Black-Scholes Option Valuation model and the
assumptions disclosed in Note H-6. The deferred compensation is charged to
operations ratably over the vesting period of such options.
See Note H-6 for discussion of pro forma effects of applying SFAS No. 123
to these employee stock options.
4. MEDIS EL
In January 1998, Medis El sold 300,000 shares at $ 4.50 per share, in a
private placement, to an existing shareholder for aggregate net cash
proceeds of $1,334,000. The Company owned 67% of Medis El before the
private placement and 65% of Medis El after the private placement. The
Company recorded a gain on the issuance of these shares of approximately
$796,000, which is reflected as additional paid-in capital.
The Company calculated the recorded gain by subtracting the book value of
the new shares after issuance from the net proceeds of such shares. The
Company recorded its share of the gain by multiplying its ownership
percentage by the total gain.
F-24
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
The following table reconciles the gains recognized by the Company through
transactions in Medis El stock:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1998 1999
---- ----
<S> <C> <C>
Gain on Medis El private placement - January, 1998 $ 796,000 $ --
Gain on Medis El's issuance of shares to CellScan
Argentina for settlement of litigation (Note I.6 ) -- 268,000
Gain on exchange of shares of Medis El owned
by Medis Inc. for the Company's outstanding
debt (Note G) 540,000 --
Gain on exercises of Medis El stock options 37,000 76,000
Contribution of interest payment to Medis El 176,000 --
---------- ----------
Amount reflected in statement of
stockholders' equity $1,549,000 $ 344,000
========== ==========
</TABLE>
The Company calculated the gain on the exchange of shares for debt by
subtracting the book value of the shares previously owned by Medis Inc.
from the value of the debt.
5. MEDIS EL SHARE OPTION PLAN
In October 1993, the Board of Directors of Medis El adopted a share option
plan (the "Share Option Plan") pursuant to which 500,000 shares were
reserved for issuance upon the exercise of options to be granted to key
employees and consultants of Medis El. The Share Option Plan is
administered by the Board of Directors, which designates the quantities,
dates and prices of the options granted. Unless otherwise determined by the
Board of Directors, the exercise price of options will be the market price
of the Ordinary Shares on the date of grant.
F-25
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
Options granted under the Share Option Plan will expire after a four-year
period, but will be exercisable only after the second anniversary of the
grant date and then only if the option holder is still an employee or
consultant of Medis El. The options are exercisable in full, two years
after the date of grant.
On May 3, 1998, the Board of Directors of Medis El granted options to
purchase Medis El's shares under the Share Option Plan adopted in October
1993 (see details of issuance below). Pursuant to the grant, certain
employees, a director, and a consultant of Medis El received 119,000
options (of which 50,000 were granted to a director) which are convertible
into shares on a one-to-one ratio at $7.20, which was 80% of the market
price on the date of the grant ($9.00).
On November 4, 1998, the Board of Directors of Medis El granted options to
purchase Medis El's shares under the Share Option Plan adopted in October
1993 (see details of issuance below). Pursuant to the grant, the executive
vice-president of Medis El received 30,000 options, which are convertible
into shares on a one-to-one ratio at $6.00. The market price on the date of
the grant was $7.188.
During 1999, the Board of Directors of Medis El extended the expiration
date of the options issued on February 14, 1994 for an additional one-year
period until February 14, 2000. The extension pertains only to options held
by persons who were in the employ of Medis El on the date the extension was
adopted.
During the year ended December 31, 1999, Medis El issued additional 56,150
shares upon exercise of stock options by employees.
F-26
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
The following table summarizes Medis El's option plan activity for the
three years ended December 31, 1999:
<TABLE>
<CAPTION>
Weighted-
Number average
of exercise
options price
------- -----
<S> <C> <C>
Balance at January 1, 1997 244,750 3.03
Cancelled (9,000) 0.56
---------
Balance at December 31, 1997 235,750 3.12
Granted 196,400 7.07
Exercised (29,650) 0.66
Cancelled (87,950) 7.42
--------
Balance at December 31, 1998 314,550 4.61
Granted 43,600 7.42
Exercised (56,150) 0.56
Cancelled (46,900) 7.42
--------
BALANCE AT DECEMBER 31, 1999 255,100 5.47
=======
</TABLE>
F-27
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
Outstanding Share Option Plan activity is summarized as follows:
<TABLE>
<CAPTION>
Number of options
------------------------------
Exercise
Issue date price Issued Exercised Cancelled Outstanding Expires
---------- ----- ------ --------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
February 14, 1994 $7.42 143,150 (143,150) February 14, 1998
August 30, 1996 0.5625 89,700 (57,300) (14,900) 17,500 (1) August 30, 2000
November 28, 1996 0.5625 11,100 (9,700) (1,400) - November 28, 2000
December 2, 1996 0.5625 63,300 (18,300) 45,000 (2) December 2, 2000
February 14, 1998 7.42 47,400 (500) (46,900) - February 14, 1999
July 1, 1998 7.20 105,000 105,000 (3) July 1, 2002
November 5, 1998 7.20 14,000 14,000 November 5, 2002
November 4, 1998 6.00 30,000 30,000 (4) November 4, 2002
February 14, 1999 7.42 43,600 43,600 (5) February 14, 2000
</TABLE>
(1) Including to the executive vice president of Medis El - 27,500 options
(2) Including to directors of Medis El - 60,000 options
(3) Including to officers and directors of Medis El - 100,000 options
(4) All issued to the executive vice president of Medis El
(5) Including to the executive vice president of Medis El - 27,500 options
Compensation costs charged to operations which Medis El recorded for
options granted below the fair market value at the date of grant were
$23,000 and $126,000 in 1998 and 1999, respectively. Compensation expense
was determined by calculating the difference between the exercise price and
the fair market value of such options on the date of grant. The expense is
charged to operations over the vesting period of such options.
F-28
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
6. EFFECT OF SFAS NO. 123 ON MEDIS EL SHARE OPTIONS AND ON THE COMPANY'S
OPTIONS
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock-Based Compensation," and
has been determined as if the Company had accounted for Medis El's stock
options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes
Option Valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Medis El Medis EL MTL
options options options
1998 1999 1999
------------- ------------- --------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Risk-free interest rate 5.00% 6.00% 5.40%
Volatility factor 0.10 0.40 0.00
Expected life in years
after vesting period 1 - 2 1 - 2 2
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of the traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's and Medis El's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimates, in management's opinion,
existing models do not necessarily provide a reliable single measure of the
fair value of its stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized as an expense over the vesting period of the options.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 1998 1999
------------- ------------- ---------
<S> <C> <C> <C>
Loss for the year as reported $(1,544,000) $(4,418,000) $ (5,965,000)
Pro forma loss (1,785,000) (4,592,000) (6,002,000)
Loss per share as reported (.33) (.52) (.61)
Pro forma loss per share (.38) (.54) (.61)
</TABLE>
F-29
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE H (CONTINUED)
The weighted average fair value of Medis El options granted during the
years ended December 31, 1998 and 1999 was $1.89 and $0.96, respectively.
The total compensation expense for employees included in the pro forma
information for 1997, 1998 and 1999 is $144,000, $174,000 and $138,000,
respectively.
NOTE I - COMMITMENTS AND CONTINGENCIES
1. CELLSCAN LICENSE - Medis El acquired the rights to the CellScan in August
1992 by assignment from IAI of a license from Bar Ilan University to
IAI. Medis El paid IAI $1,000,000 in consideration of the assignment of the
license and for certain tooling and equipment. The license is a perpetual
worldwide license to develop, manufacture and sell the CellScan, and to
sublicense the right to manufacture and sell the device. The license
includes all rights to the University's CellScan patents, know-how and
inventions including any subsequently acquired, and all improvements
thereto. Medis El is obligated to pay the University a royalty for a
twenty-year period beginning in 1995. For the first ten years, the royalty
is at the rate of 6.5% of proceeds of sales (after deducting sales
commissions and other customary charges) and 4.5% on any fees received from
granting territorial rights. The royalty for the second ten-year period is
3.5% on all revenues whether from sales or fees. In addition to such
royalty payments, the Company is required to grant $100,000 to the
University during the first year that the Company's after-tax profits
exceed $300,000. No royalties were required to be paid during the three
years ended December 31, 1999.
2. NEURITOR LICENSE - In consideration of grants by the State of Israel,
Medis El is obligated to pay royalties for a license from Imexco General
Ltd. ("Imexco"), for which assignment Medis El paid $500,000. An
additional sum of $125,000 was paid in December 1995. In 1996, Medis El
relinquished its exclusive right to market the Neuritor in consideration
of relief of its obligation to pay minimum royalties. Medis El has to
pay Imexco royalties at rates ranging from 2% to 7% of the revenue
generated by the sale of the Neuritor.
3. OTHER ROYALTIES - In consideration of grants by the State of Israel,
Medis El is obligated to pay royalties of 3% of sales of products developed
with funds provided by the State of Israel until the dollar-linked amount
equal to the grant payments received by Medis El is repaid in full. All
grants received from the State of Israel related to the CellScan and
Neuritor technologies. Total grants received, net of royalties paid as of
December 31, 1999, aggregate $2,576,000, which includes those received by
IAI relating to such technologies of $805,000. No royalties were required
to be paid during the three years ended December 31, 1999.
F-30
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE I (CONTINUED)
4. LEASE COMMITMENTS - MTL's office space is provided to MTL for an annual
rental fee of approximately $24,000, by a company, which is controlled by
the Chairman of the Board and the President of MTL.
Medis El is committed under two leases for office space, laboratory and
manufacturing facilities. Its Corporate headquarters and technology center
facility lease, which has a term until November 2000 and a one-year option
extending to November 2001 on most of the facility, provides for an annual
aggregate rental of approximately $91,000. Its manufacturing facility lease
has an initial term until December 31, 2001, a two-year option extending to
December 31, 2003, and provides for an annual aggregate rental of
approximately $26,000.
5. AGREEMENT WITH PERUVIAN COMPANY - In June 1999, Medis El reached an
agreement with the Peruvian company ("Peru") which owns a CellScan machine,
whereby, in consideration of Medis El upgrading the CellScan system at its
cost, Peru relinquished any future claims against Medis El, except for an
option to require Medis El to repurchase the CellScan system for $100,000.
Such option expired on January 14, 2000. In February 2000, Medis El
granted Peru a new option to require Medis El to repurchase the CellScan
machine for $110,000 which was exercised by Peru, via a letter dated
February 23, 2000. The Company has charged expense in the fourth quarter
of 1999 for its anticipated loss on the transaction.
6. SETTLEMENT OF LITIGATION - In November 1999, Medis El entered into a
settlement agreement with an Argentinian company ("Argentina") to dismiss
with prejudice an action pending in the Supreme Court of the State of New
York, County of New York, entitled CELLSCAN ARGENTINA, S.A. V. MEDIS EL
LTD., ET AL. This action arose from a 1993 distribution agreement and a
related purchase of a CellScan machine. Argentina sought an aggregate of
$10,000,000 in compensatory and punitive damages. The settlement requires
Medis El to purchase back from Argentina its CellScan for $100,000, issue
60,000 of Medis El's ordinary shares to Argentina and issue warrants to
purchase 30,000 of Medis El's ordinary shares for $5.00 per share, expiring
two years from the date of the warrant. Medis El recorded a charge to
expense in the fourth quarter of 1999 of $437,000, which represents the
fair market value of the Medis El shares and warrants on the date of grant.
The fair value of the warrants was estimated using a Black-Scholes
valuation model and assumptions consistent with those used in Note H-6.
F-31
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE I (CONTINUED)
The settlement agreement also includes irrevocable options that MTL and
Argentina grant to each other. If the Exchange Offer was not consummated by
January 3, 2000, Argentina may require MTL to purchase its shares at $6.00
per share provided that it may not sell more than an aggregate of 3,000
shares within five trading days and not more than aggregate of 12,000
shares in a period of 20 trading days. Additionally, MTL may require
Argentina to sell its shares to MTL for a price of $6.00 subject to the
above trading restrictions. In January and February 2000, MTL repurchased
an aggregate of 24,000 shares from Argentina for an aggregate cash
consideration of $145,500.
7. OTHER AGREEMENTS - During the first quarter of 1999, a U.S.-based
multinational corporation paid to Medis El, $100,000 for a right of first
refusal to obtain exclusive rights to use the stirling cycle and other
technologies in its field of business and an additional $100,000 to assist
in the development of the stirling cycle for use in its field of business,
which Medis El and the Company recorded as a credit to research and
development expense. This payment was made pursuant to a technology
development agreement that Medis El entered into with the corporation in
December 1998 to, among other things, jointly develop the stirling cycle
system for application in such corporation's line of business.
NOTE J - RELATED PARTY TRANSACTIONS
1. CELLSCAN DISTRIBUTION AGREEMENT - Medis El and CDS have entered into an
agreement, whereby CDS has the sole distribution rights to the CellScan in
the United States continuing for a period of twelve years after FDA
approval of the product, but is subject to termination in the event that
certain annual performance criteria are not met. CDS is obligated to pay
the first $1,500,000 of costs to obtain FDA approval, Medis El is obligated
to pay the next $500,000 and is obligated to loan CDS the next $500,000
which will be repaid only if CellScan receives FDA approval. In the event
that the distribution agreement is transferred by CDS to a third party for
consideration, Medis El will be entitled to receive a pro rata portion of
such consideration (based on the share it bore of all FDA costs) to the
extent required to repay the loan it granted to the distributor, referred
to above.
F-32
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE J (CONTINUED)
2. EXCLUSIVE AGENCY AGREEMENTS - In July 1998, Medis El entered into an
Exclusive Agency Agreement with CDS. Under such agreement, CDS would
coordinate all licensing arrangements between the Company and third parties
within North America in respect of the Company's linear technologies. In
exchange, CDS would be entitled to receive a fee equal to 10% of all
royalties payable to the Company under the specific license agreements for
the first ten years of such agreement and 5% of the royalties thereafter.
Additionally, on October 26, 1998, the Board of Directors authorized Medis
El to enter into an Exclusive Agency Agreement with CDS with respect to
Medis El's other technologies. The agreement would be on terms similar to
the agreement for linear technologies described above. Both agreements have
been approved at general meetings of the shareholders of Medis El. In
January 1999, Medis El paid CDS $20,000, which represented the royalty due
to CDS for negotiating the agreement with the large multinational
corporation mentioned in Note I-7.
3. OTHER RELATED PARTY TRANSACTIONS - Medis El is required to utilize IAI
as its initial outside manufacturing source for products to be manufactured
by Medis El which IAI is capable of producing at competitive prices and, if
IAI is unable to satisfy Medis El's requirement at such prices, Medis El is
required to seek other Israeli sources. Only after exhausting these two
options, may Medis El then have recourse to non-Israeli sources.
4. INSURANCE - Medis El is presently included as an additional insured
party on IAI's product and third party liability insurance policy.
5. EMPLOYMENT AGREEMENT - Medis El had a one-year employment agreement with
its executive vice president, which terminated on September 30, 1999. Under
the agreement, he received an annual base salary of approximately $136,000.
Effective October 1, 1999, the Company and the executive vice president
signed a one-year employment agreement, which provides the executive vice
president an annual base salary of $180,000.
6. BOARD MEMBERS - Medis Inc. has a Board of Directors consisting of six
members, three of which are designated by MTL and three by IAI. Medis El
has a Board currently composed of six Directors, three of which are
designated by MTL and three by IAI. One of the founding stockholders of MTL
is the Chairman of the Board of Medis El, the Chairman of the Board, Chief
Executive Officer, and Secretary of MTL and President and Chief Executive
Officer of Medis Inc. He receives an annual salary of $100,000 paid by
Medis El. The other founding shareholder of MTL is a Director of Medis El,
Vice President of Medis Inc. and President, Treasurer and a Director of
MTL.
F-33
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE J (CONTINUED)
7. ACQUISITION BY MEDIS EL OF MINORITY SHARE OF MORE ENERGY LTD.- In
December 1999, Medis El purchased shares representing an additional 11.5%
interest in its majority owned subsidiary, More Energy Ltd., for an
aggregate cash purchase price of $115,000. Medis El accounted for this
acquisition of a minority interest using purchase accounting. The excess of
purchase price over the book value of the net assets acquired aggregated
$115,000. This excess purchase price was allocated to in process research
and development and therefore was charged to research and development costs
as of the date of the acquisition. The project acquired was an additional
interest in the fuel cell technology that More Energy Ltd. is developing.
Medis El believes that it will be able to seek to enter into licensing or
joint venture arrangements with third parties relating to the fuel cells by
the third quarter of 2000. Medis El anticipates that it will incur
substantial costs to complete the fuel cell project. If Medis El's expected
development timetable is not adhered to, the result may be that Medis El
may continue to incur additional research and development costs relating to
the fuel cell technology. Additionally, if Medis El is unable to locate a
licensing or joint venture partner, this may delay the completion of the
project or cause Medis El to incur additional costs.
NOTE K - INCOME TAXES
The following represents the components of the Company's pre-tax losses for
each of the three years in the period ended December 31, 1999.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1997 1998 1999
------------- ---------- -----------
<S> <C> <C> <C>
Domestic $ (481,000) $(2,556,000) $(3,001,000)
Foreign (1,063,000) (1,862,000) (2,964,000)
---------- ---------- ----------
$(1,544,000) $(4,418,000) $(5,965,000)
========== ========== ==========
</TABLE>
F-34
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE K (CONTINUED)
The Company files a consolidated Federal income tax return, which includes
MTL, Medis Inc., and CDS. At December 31, 1999, the Company has a net
operating loss ("NOL") carryforward for United States Federal income tax
purposes of approximately $4,686,000, expiring as follows:
<TABLE>
<S> <C> <C>
2007 $ 210,000
2008 897,000
2009 684,000
2010 657,000
2011 1,115,000
2012 444,000
2013 252,000
2014 427,000
----------
$4,686,000
==========
</TABLE>
Pursuant to United States Federal income tax regulations, the Company's
ability to utilize this NOL may be limited due to changes in ownership, as
defined in the Internal Revenue Code.
The Company, through Medis El, has net operating losses, for Israeli tax
purposes, aggregating approximately $23,500,000, which, pursuant to Israeli
tax law, do not expire.
Deferred income tax assets arising from NOL carryforwards have been reduced
to zero through a valuation allowance. The Company continually reviews the
adequacy of the valuation allowance and will recognize deferred tax assets
only if a reassessment indicates that it is more likely than not that the
benefits will be realized.
Medis El is an Israeli corporation and is subject to income taxes under the
relevant Israeli tax law. Medis El has been issued a certificate of
approval as an "Approved Enterprise," which allows Medis El to have lower
tax rates under Israeli tax law. Such rates include a corporate tax on
income at a rate of 20% and a tax rate on distributed dividends of 15%.
These benefits may be in force through at least 2006.
No tax expense has been recorded in the financial statements of the
Company, as the Company has a loss in the current year, in each tax-paying
jurisdiction.
F-35
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE K (CONTINUED)
Temporary differences that give rise to deferred tax assets are as follows
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
---- ----
<S> <C> <C>
Net operating loss carryforwards - United States $ 1,785,000 $ 1,964,000
Net operating loss carryforwards - Israel 6,839,000 8,496,000
Other (544,000) (82,000)
----------- -------------
8,080,000 10,378,000
Valuation allowance (8,080,000) (10,378,000)
---------- -------------
Deferred tax assets, net of valuation
Allowance $ - $ -
=========== =============
</TABLE>
F-36
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE K (CONTINUED)
A reconciliation of the income tax benefit computed at the United States
Federal statutory rate to the amounts provided in the financial statements
is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income tax benefit computed at
Federal statutory rate $(525,000) $(1,502,000) $(2,028,000)
Effect of foreign income taxes 149,000 261,000 415,000
Effect of permanent differences 35,000 831,000 875,000
Change in valuation allowance 341,000 410,000 738,000
-------- ----------- -----------
$ - $ - $ -
========= =========== ===========
</TABLE>
NOTE L - LIQUIDITY
Since inception, the Company has incurred operating losses and has used
cash in its operations. Accordingly, the Company has relied on financing
activities, principally the sale of its stock, to fund its research and
development activities. The Company believes this dependence will continue
unless it is able to successfully develop and market its technologies.
However, there can be no assurance that the Company will be able to
continue to obtain financing or successfully develop and market its
technologies.
NOTE M - INFORMATION ABOUT GEOGRAPHIC AREAS
The following lists the long-lived assets held in the Company's country of
domicile and in all foreign countries:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
---- ----
<S> <C> <C>
United States $ - $ -
Israel 10,540,000 8,225,000
---------- -----------
$10,540,000 $ 8,225,000
========== ===========
</TABLE>
F-37
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE M (CONTINUED)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
---- ----
<S> <C> <C>
Long-lived assets consist of the following:
Property and equipment, net $ 860,000 $ 983,000
Intangible assets, net 9,680,000 7,242,000
----------- -----------
$10,540,000 $ 8,225,000
========== ===========
</TABLE>
NOTE N - SUBSEQUENT EVENTS
1. ISSUANCE OF COMMON STOCK - In January and February, 2000, the Company
completed private placements of units of its common stock. An aggregate of
637,000 shares and 240,833 warrants were issued for aggregate cash proceeds
of $2,895,400. The warrants have an exercise price of $5.75 per share.
2. EXERCISES OF MEDIS EL STOCK OPTIONS - During January and February 2000,
employees, including certain officers and a director of Medis El, exercised
an aggregate of 66,100 stock options.
3. REGISTRATION STATEMENT - The Company intends to file Amendment No. 3 to
a Registration Statement with the Securities and Exchange Commission to
register additional shares (to a maximum of 5,299,722) to be issued in
exchange for outstanding shares of Medis El that are tendered (the
"Exchange Offer"). Such transaction is subject to the terms discussed in
the Registration Statement. The Company intends to issue 1.37 of its shares
for each share of Medis El that is tendered. The Exchange Offer will not be
consummated unless a minimum of 1,735,842 shares (or 80% of the outstanding
shares of Medis El) are tendered. Additionally, the Company intends to file
an additional registration statement to register approximately 9.2 million
of its outstanding shares for the owners thereof.
4. ACQUISITION BY MEDIS EL OF MINORITY INTEREST IN MORE ENERGY LTD. - In
January 2000, Medis El purchased an additional 5% of its majority-owned
subsidiary, More Energy, Ltd., for an aggregate cash purchase price of
$50,000.
5. INVESTMENT IN MEDIS EL - On February 23, 2000, the Company acquired an
additional 107,759 shares of Medis El for $2,500,000.
F-38
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998 and 1999
NOTE N (CONTINUED)
6. OPTION GRANTS - On February 21, 2000, the Board of Directors granted an
aggregate of 153,000 options under the 1999 Stock Option Plan to
employees of the Company and Medis El and to Medis El directors and
consultants. The options had an exercise price of $5.00 per share. The
options vest after two years and expire after four years.
NOTE O - SUBSEQUENT EVENTS (UNAUDITED)
1. AGREEMENT WITH PERUVIAN COMPANY - In April 2000, the Company transferred
$55,000 to the Peruvian company and intends to transfer the remaining
$55,000 when proof of shipment is received.
2. NEW TECHNOLOGY AGREEMENT - On March 26, 2000, the Company entered into
an agreement with an unaffiliated third party giving it the option to
analyze an advanced composite pipe technology developed and owned by
such party and subsequently enter into a joint venture to develop the
technology. If the Company decides to exercise the option, they will be
required to, among other things, finance the operations of the joint
venture for two years at $600,000 per year. The Company paid $7,500 for
the option, which expires on June 24, 2000.
3. ADDITIONAL OPTIONS ON TECHNOLOGY: Medis El has an option to purchase an
additional 50% interest for aggregate consideration of $60,000, in a
company assisting in the development of one of its technologies. Medis El
currently owns 25% of such company. The option which was scheduled to
expire on March 31, 2000 was extended through June 30, 2000.
* * * * *
F-39
<PAGE>
Medis Technologies Ltd. and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
The following unaudited pro forma consolidated balance sheet as of December
31, 1999 gives effect to the exchange offer proposed by this Registration
Statement (1) as if 100% of the outstanding shares of Medis El had been
tendered and (2) as if 80% of the outstanding shares of Medis El had been
tendered, in both cases, as if they had occurred on December 31, 1999. The
following unaudited pro forma consolidated statements of operations for the
years ended December 31, 1999 and 1998, give effect to the exchange offer
proposed by this Registration Statement (1) as if 100% of the outstanding
shares of Medis El had been tendered and (2) as if 80% of the outstanding
shares of Medis El had been tendered, in both cases, as if they had
occurred at the beginning of each year presented. The exchange offer
proposed by this registration statement represents the Company's
acquisition of the shares held by minority shareholders of Medis El.
The pro forma adjustments are based on available information and certain
assumptions that management believes are reasonable. The unaudited pro
forma consolidated financial statements and the notes thereto should be
read in conjunction with the consolidated financial statements and the
notes thereto. The unaudited pro forma financial information does not
purport to represent the financial condition or results of operations of
the Company after such transaction nor does it purport to project the
financial condition or results of operations of the Company as of any
future date or for any future period.
F-40
<PAGE>
Medis Technologies Ltd. and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ASSUMING 100% OF MEDIS EL SHARES ARE TENDERED
December 31, 1999
<TABLE>
<CAPTION>
Pro forma
Actual Adjustments Pro forma
-------------- ------------ --------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,842,000 $ 1,842,000
Accounts receivable-Other 58,000 58,000
Prepaid expenses 101,000 101,000
-------------- --------------
Total current assets 2,001,000 2,001,000
PROPERTY AND EQUIPMENT, net 983,000 983,000
INTANGIBLE ASSETS, net 7,242,000 $93,284,000 (a) 100,526,000
------------- ---------- -----------
$ 10,226,000 $93,284,000 $103,510,000
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 86,000 $ 86,000
Accounts payable 102,000 102,000
Accrued expenses and other current liabilities 730,000 730,000
------------- -----------
Total current liabilities 918,000 918,000
LONG-TERM DEBT 11,000 11,000
OTHER LONG-TERM LIABILITIES 109,000 109,000
----------- -----------
Total liabilities 1,038,000 1,038,000
MINORITY INTEREST IN SUBSIDIARY 627,000 $ (627,000) (a) -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 100,000 53,000 (a) 153,000
Additional paid-in capital 32,450,000 94,239,000 (a) 126,689,000
Accumulated deficit (23,615,000) (381,000)(a) (23,996,000)
Deferred compensation costs (374,000) (374,000)
------------ ---------- -----------
Total stockholders' equity 8,561,000 93,911,000 102,472,000
------------ ---------- -----------
$ 10,226,000 $93,284,000 $103,510,000
============ =========== ===========
</TABLE>
F-41
<PAGE>
Medis Technologies Ltd. And Subsidiaries
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ASSUMING 100% OF MEDIS EL SHARES ARE TENDERED
December 31, 1999
(a) Adjustment to reflect the excess of purchase price over assets acquired
upon completion of this exchange offer assuming that 100% of the shares of
Medis El or 3,868,410 shares are tendered in the exchange offer. The
assumed market price for such shares is $24.375, which was the quoted
market price of Medis El shares on February 29, 2000. The Company used the
market price on February 29, 2000 since Medis El's stock price increased
significantly during the months of January and February 2000. The Company
has allocated the excess of purchase price over net assets acquired to
in-process research and development to be written off on the date of
acquisition ($381,000), acquired technology assets ($5,696,000), and
goodwill ($87,588,000). The Company intends to amortize the acquired
technology assets over their remaining useful lives of three years and the
goodwill over a five-year period. The adjustment also eliminates the
minority interest of Medis El, as it is assumed to be settled upon
completion of this transaction.
F-42
<PAGE>
Medis Technologies Ltd. and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ASSUMING 100% OF MEDIS EL SHARES ARE TENDERED
Year ended December 31, 1999
<TABLE>
<CAPTION>
Pro forma
Actual Adjustments Pro forma
------ ----------- ---------
<S> <C> <C>
Operating expenses
Research and development costs, net $ 2,749,000 $ 2,749,000
Selling general and administrative
Expenses 2,467,000 2,467,000
Amortization of intangible assets 2,574,000 $ 19,416,000 (a) 21,990,000
------------ ------------ ------------
Total operating expenses 7,790,000 19,416,000 27,206,000
------------ ------------ ------------
Loss from operations (7,790,000) (19,416,000) (27,206,000)
Other income (expenses)
Interest and other income 150,000 150,000
Interest expense (22,000) (22,000)
------------ ------------ ------------
128,000 128,000
------------ ------------ ------------
Loss before minority interest (7,662,000) (19,416,000) (27,078,000)
Minority interest in losses of subsidiaries 1,697,000 (1,697,000)(a) --
------------ ------------ ------------
NET LOSS $ (5,965,000) $(21,113,000) $(27,078,000)
============ ============ ============
Basic and diluted net loss per share $ (.61) $ (1.79)
============ ============
Weighted average shares outstanding 9,807,101 15,106,822
============ ============
</TABLE>
F-43
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS ASSUMING
100% OF MEDIS EL SHARES ARE TENDERED
Year ended December 31, 1999
(a) Adjustment to reflect the amortization of the excess of purchase price
over assets acquired upon completion of this exchange offer assuming that
100% of the shares of Medis El are tendered. The Company has allocated the
excess of purchase price over net assets acquired to in-process research
and development to be written off on the date of acquisition ($381,000),
acquired technology assets ($5,696,000), and goodwill ($87,588,000). Such
amortization was calculated based on an aggregate of $93,284,000 of
acquired technology assets and goodwill, assuming that 3,869,410 shares of
Medis El are tendered at an assumed market price at February 29, 2000 of
$24.375. The amortization for the year ended December 31, 1999, was
calculated assuming that the amortization period for the acquired
technology assets is three years and for goodwill is five years.
Additionally, the minority shareholders' share of the net loss of Medis El
is eliminated since, as of the beginning of the year, there are no minority
shareholders.
F-44
<PAGE>
Medis Technologies Ltd. and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ASSUMING 80% OF MEDIS EL SHARES ARE TENDERED
December 31, 1999
<TABLE>
<CAPTION>
Pro forma
Actual Adjustments Pro forma
------ ----------- ---------
ASSETS
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $ 1,842,000 $ 1,842,000
Accounts receivable 58,000 58,000
Prepaid expenses 101,000 101,000
-------------- ------------
Total current assets 2,001,000 2,001,000
PROPERTY AND EQUIPMENT, net 983,000 983,000
INTANGIBLE ASSETS, net 7,242,000 $41,857,000 (a) 49,099,000
------------- ---------- -----------
$ 10,226,000 $41,857,000 $ 52,083,000
============ ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Current portion of long-term debt $ 86,000 $ 86,000
Accounts payable 102,000 102,000
Accrued expenses and other current liabilities 730,000 730,000
------------- ------------
Total current liabilities 918,000 918,000
LONG-TERM DEBT 11,000 11,000
OTHER LONG-TERM LIABILITIES 109,000 109,000
-------------- -------------
Total liabilities 1,038,000 1,038,000
MINORITY INTEREST IN SUBSIDIARY 627,000 $ (283,000) (a) 344,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 100,000 24,000 (a) 124,000
Additional paid-in capital 32,450,000 42,287,000 (a) 74,737,000
Accumulated deficit (23,615,000) (171,000)(a) (23,786,000)
Deferred compensation costs (374,000) (374,000)
------------ ------------ -------------
Total stockholders' equity 8,561,000 42,140,000 50,701,000
------------ ---------- -----------
$ 10,226,000 $41,857,000 $ 52,083,000
============ ========== ===========
</TABLE>
F-45
<PAGE>
Medis Technologies Ltd. And Subsidiaries
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
ASSUMING 80% OF MEDIS EL SHARES ARE TENDERED
December 31, 1999
(a) Adjustment to reflect the excess of purchase price over assets acquired
upon completion of this exchange offer assuming that 80% of the shares of
Medis El or 1,735,841 shares are tendered in the exchange offer. The
assumed market price for such shares is $24.375, which was the quoted
market price of Medis El shares on February 29, 2000. The Company has
allocated the excess of purchase price over net assets acquired to
in-process research and development to be written off on the date of
acquisition ($171,000), acquired technology assets ($2,556,000), and
goodwill ($39,301,000). The Company intends to amortize the acquired
technology assets over three years and the goodwill over a five-year
period. The adjustment also reduces the minority interest to reflect the
20% share held by the minority shareholders upon completion of this
transaction.
F-46
<PAGE>
Medis Technologies Ltd. and Subsidiaries
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ASSUMING 80% OF MEDIS EL SHARES ARE TENDERED
Year ended December 31, 1999
<TABLE>
<CAPTION>
Pro forma
Actual Adjustments Pro forma
---------- ----------- -------------
<S> <C> <C> <C>
Operating expenses
Research and development costs, net $ 2,749,000 $ 2,749,000
Selling, general and administrative
Expenses 2,467,000 2,467,000
Amortization of intangible assets 2,574,000 $ 8,712,000 11,286,000
---------- ---------- -----------
Total operating expenses 7,790,000 8,712,000 16,502,000
---------- ---------- -----------
Loss from operations (7,790,000) (8,712,000) (16,502,000)
Other income (expenses)
Interest and other income 150,000 150,000
Interest expense (22,000) (22,000)
------------- ----------- -------------
128,000 128,000
------------- ----------- ------------
Loss before minority interest (7,662,000) (8,712,000) (16,374,000)
Minority interest in losses of subsidiaries 1,697,000 (765,000) 932,000
------------- ----------- ------------
NET LOSS $(5,965,000) $(9,477,000) $(15,442,000)
========== ========== ===========
Basic and diluted net loss per share $(.61) $(1.27)
==== =====
Weighted average shares outstanding 9,807,101 12,185,201
========== ===========
</TABLE>
F-47
<PAGE>
Medis Technologies Ltd. and Subsidiaries
NOTE TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
ASSUMING 80% OF MEDIS EL SHARES ARE TENDERED
Year ended December 31, 1999
(a) Adjustment to reflect the amortization of the excess of purchase price
over assets acquired upon completion of this exchange offer assuming that
80% of the shares of Medis El are tendered. The Company has allocated the
excess of purchase price over net assets acquired to in-process research
and development to be written off on the date of acquisition ($171,000),
acquired technology assets ($2,556,000), and goodwill ($39,301,000). Such
amortization was calculated based on an aggregate of $41,857,000 of
acquired technology assets and goodwill, assuming that 1,735,841 shares of
Medis El are tendered at an assumed market price at February 29, 2000 of
$24.375. The amortization for the year ended December 31, 1999 was
calculated assuming that the amortization period for the acquired
technology assets is three years and for goodwill is five years.
Additionally, the minority shareholders' share of the net loss of Medis El
is adjusted to reflect a 20% minority interest.
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS
OF
MEDIS EL LTD.
We have audited the consolidated balance sheets of "Medis El Ltd." and its
subsidiary (together - the "Company") as of December 31, 1999 and 1998 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,
1999. 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 generally accepted auditing
standards, including those prescribed by the Israeli Auditors' Regulations (Mode
of Performance), 1973, which auditing standards are substantially identical to
generally accepted auditing standards in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance that
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 aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999 and 1998, and the results of its operations, changes in
shareholders' equity and its cash flows for each of the three years in the
period ended December 31, 1999, in accordance with generally accepted accounting
principles in Israel and in the United States (as applicable to these financial
statements, such accounting principles are, in all material respects,
substantially identical).
Fahn, Kanne & Co.
Certified Public Accountants (Isr.)
Tel-Aviv, Israel
March 8, 2000
F-49
<PAGE>
MEDIS EL LTD.
CONSOLIDATED BALANCE SHEETS
( IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
A S S E T S
-----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 3) $ 2,960 $ 1,464
Short-term deposits 500 -
Accounts receivable - Other (Note 4) 66 58
Inventory 405 -
Prepaid expenses 89 101
------ ------
Total current assets 4,020 1,623
------ ------
PROPERTY AND EQUIPMENT (Note 5):
Cost 1,344 1,841
Less - accumulated depreciation (484) (858)
------ ------
860 983
------ ------
------ ------
$ 4,880 $ 2,606
====== ======
L I A B I L I T I E S A N D S H A R E H O L D E R S ' E Q U I T Y
--------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term credit $ 204 $ 86
Trade payables 113 102
Accrued expenses and other liabilities (Note 6) 327 577
------ ------
Total current liabilities 644 765
------ ------
LONG-TERM LIABILITIES:
Long-term debt (Note 7) 96 11
Accrued severance pay (Note 8) 61 109
------ ------
157 120
------ ------
CONTINGENT LIABILITIES AND COMMITMENTS (Note 9)
SHAREHOLDERS' EQUITY:
Share capital (Note 10):
Authorized - 30,000,000 ordinary shares of NIS 0.1 par value Issued and
outstanding - 10,054,650 at December 31, 1998 and
10,488,981 shares at December 31, 1999 352 363
Additional paid-in capital 21,462 23,778
Accumulated loss (17,564) (22,225)
Cumulative translation adjustments 27 27
Deferred compensation under employee stock option plan and other (198) (222)
------ ------
Total shareholders' equity 4,079 1,721
------ ------
------ ------
$ 4,880 $ 2,606
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINACIAL STATEMENTS.
F-50
<PAGE>
MEDIS EL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET LOSS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Sales $ - $ 8 $ -
Cost of sales - 3 -
----- ----- -----
Gross profit - 5 -
Research and development costs, net (Note 11) 1,406 1,646 2,747
----- ----- -----
(1,406) (1,641) (2,747)
Selling, general and administrative expenses (Note 12) 1,269 1,350 2,011
----- ----- -----
Operating loss (2,675) (2,991) (4,758)
Financial income, net 28 34 102
----- ----- -----
(2,647) (2,957) (4,656)
Other expenses - (10) (5)
----- ----- -----
Net Loss $(2,647) $(2,967) $(4,661)
===== ===== =====
Net loss per share - basic and diluted $ (0.28) $ (0.31) $ (0.45)
===== ===== =====
Weighted average number of shares outstanding 9,325 9,624 10,293
===== ===== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINACIAL STATEMENTS.
F-51
<PAGE>
MEDIS EL LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Deferred
Additional Cummulative Compensation Total
Share Paid-in Accumulated Translation ESOP and Shareholders'
Capital Capital Loss Adjustments Other Equity
------- ---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $334 $15,458 $(11,950) $ 27 - $3,869
CHANGES DURING THE YEAR ENDED
DECEMBER 31, 1997
Additional paid-in capital - 122 - - - 122
Net loss - - (2,647) - - (2,647)
---- ------- -------- ------ -------- ------
Balance at December 31, 1997 334 15,580 (14,597) 27 - 1,344
CHANGES DURING THE YEAR ENDED
DECEMBER 31, 1998
Issuance of shares (*) 18 3,332 - - - 3,350
Additional paid-in capital - 2,300 - - - 2,300
Net loss - - (2,967) - - (2,967)
Grant of stock options - 250 - - (250) -
Amortization of deferred compensation - - - - 52 52
---- ------- -------- ------ -------- ------
Balance at December 31, 1998 352 21,462 (17,564) 27 (198) 4,079
CHANGES DURING THE YEAR ENDED
DECEMBER 31, 1999
Issuance of shares (*) 11 2,111 - - - 2,122
Net loss - - (4,661) - (4,661)
Issuance of stock purchase warrants - 55 - - - 55
Grant of MTL stock options to Medis El employee 150 (150) -
Amortization of deferred compensation - - - - 126 126
---- ------- -------- ----- -------- ------
Balance at December 31, 1999 $363 $23,778 $(22,225) $ 27 $ (222) $1,721
==== ======= ======== ===== ======== ======
</TABLE>
(*) Net of share issue expenses of $21,000 and $20,000 in 1999 and1998,
respectively
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINACIAL STATEMENTS.
F-52
<PAGE>
MEDIS EL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,647) $ (2,967) $ (4,661)
Adjustments to reconcile loss to net cash used in
operating activities:
Depreciation and amortization 101 184 514
Changes in accrued severance pay 13 33 48
Issuance of stock and stock purchase warrants - - 437
Erosion of securities and short-term deposits 22 - -
Loss from sale of property and equipment - 10 5
Charge of inventory to research and development expense - - 255
Write-off of in-process research and development expense - 115
Changes in assets and liabilities:
Decrease in trade accounts receivable 8 - -
Decrease (increase) in other accounts receivable and
prepaid expenses 30 (22) (4)
Decrease (increase) in inventory (78) 113 (47)
Increase (decrease) in accounts payable and
accrued expenses and other liabilities 83 (20) 239
----- ----- -----
Net cash used in operating activities (2,468) (2,669) (3,099)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (124) (134) (330)
Proceeds from sales of property and equipment 1 17 11
Investment in securities and short-term deposits - (500) -
Proceeds from realization of securities and short-term
investments 479 - 500
Acquisition of minority interest in a subsidiary - - (115)
----- ----- -----
Net cash provided by (used in) investing activities 356 (617) 66
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term credit 1 6 (8)
Proceeds from issuance of shares - 3,350 1,740
Additional paid-in capital 122 2,300 -
Repayment of long-term debt (192) (197) (195)
----- ----- -----
Net cash provided by (used in) financing activities (69) 5,459 1,537
----- ----- -----
Net increase (decrease) in cash and cash equivalents (2,181) 2,173 (1,496)
Cash and cash equivalents at beginning of year 2,968 787 2,960
----- ----- -----
Cash and cash equivalents at end of year $ 787 $ 2,960 $ 1,464
===== ===== =====
NON-CASH TRANSACTIONS:
Grant of stock options $ - $ 250 $ 150
Reclassification of inventory $ - $ 429 $ 197
Cash paid during the year for Interest $ 34 $ 21 $ 12
====== ===== =====
</TABLE>
The accompanying notes are an integral part of the finacial statements.
F-53
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 1 - GENERAL
Medis El Ltd. ("the Company"), an Israeli corporation, was formed to engage
in the development, clinical testing and marketing of the CellScan, a
machine that was originally designed to develop diagnostic tests for
cancers and other diseases. By 1997, the Company evolved into a
multi-product company as it sought out and assisted in the development of
advanced technologies in a number of unrelated fields. The Company
currently owns, in whole or in part, a number of different technologies in
various stages of development. Its strategy is to become a greenhouse for
the development of technology products to license, sell, or enter into
joint ventures with large corporations. In addition to the CellScan, the
Company's technologies include the Stirling Cycle Linear System, Fuel
Cells, the Toroidal Internal Combustion Engine and Compressor,
Reciprocating Electric Machine, Direct Current Regulating Device and Water
Technologies.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. ACCOUNTING PRINCIPLES
The financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP") in Israel. Such Israeli accounting
principles, as applicable to these financial statements, are, in all
material respects, the same as accounting principles generally accepted in
the United States.
B. USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions in determining the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Medis El
Ltd. and its subsidiary, More Energy Ltd., of which Medis El owns 81.5%
(after acquiring an 11.5% interest in December 1999). Consolidation was
made based on the financial statements of the subsidiary, after
elimination of intercompany balances.
D. FINANCIAL STATEMENTS IN U.S. DOLLARS
1. These financial statements have been prepared in U.S. Dollars ("the
dollar") because the functional currency of the Company is the dollar.
The dollar is the currency of the primary economic environment in
which the operations of the Company are conducted. Most of the
Company's sales and promotional efforts are focused outside of Israel,
and the currency is the dollars. Also the Company's sales and
promotional efforts in Israel are linked to the dollar. In addition,
the Company manages its operations in dollars.
2. Transactions and balances denominated in dollars are presented at
their dollar amounts. Non-dollar transactions and balances are
remeasured into dollars in accordance with the principles set forth in
the Statement of Financial Accounting Standards ("FAS") No. 52,
"Foreign Currency Translation", of the Financial Accounting Standards
Board of the United States.
Accordingly, items have been remeasured as follows:
- Monetary items - at the current exchange rate at each balance sheet
date;
- Nonmonetary items - at historical exchange rates;
- Income and expense items - at exchange rates current as of the date
of recognition of those items (excluding depreciation and other items
deriving from nonmonetary items).
F-54
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
- Exchange gains and loses from the aforementioned remeasurements
(which are immaterial for each year) are reflected in the statements
of income.
E. TRANSLATION OF FOREIGN CURRENCIES
Balances denominated in foreign currencies are translated at exchange rates
prevailing at the balance sheet date. Exchange rates between the NIS and
the U.S. dollar at December 31, 1999 and 1998 were NIS 4.153 = $ 1.00 and
NIS 4.16 = $ 1.00, respectively.
F. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, money-market funds and
certificates of deposit with a maturity of three months or less.
G. INVENTORY
Inventory is presented at the lower of cost or market value. Cost is
determined on the "first-in, first-out" basis.
H. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of investment grants
received in respect thereof. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives on the straight-line basis. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter. The annual
depreciation rates are as follows:
<TABLE>
<CAPTION>
ANNUAL RATES (%)
----------------
<S> <C> <C>
Machinery and equipment 10 - 33
Computers 20 - 33
Furniture and office equipment 7 - 15
Vehicles 15
</TABLE>
I. REVENUE RECOGNITION
Revenue from sales is recognized upon delivery of the product to the
customer.
J. WARRANTY COSTS
The Company grants a one-year warranty on products sold and provides for
estimated warranty costs.
F-55
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
K. RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Grants received from the State of Israel for research and development are
offset against the Company's research and development costs.
L. NET LOSS PER SHARE
Net loss per share is computed based on the weighted average number of
shares outstanding during each period. Stock options have been excluded
from the calculation of diluted loss per share as their effect would have
been anti-dilutive.
M. STOCK-BASED COMPENSATION
The Company has elected to follow the Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB-25"), in
accounting for its employee stock option plans. Under APB-25, when the
exercise price of the Company's stock options equals or exceeds the market
price of the underlying stock on the date of grant, no compensation expense
is recognized.
N. LONG-LIVED ASSETS AND IMPAIRMENT OF LONG-LIVED ASSETS
The Company's policy is to review all long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable, the Company will estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash
flows are the future cash inflows expected to be generated by an asset,
less the future cash outflows expected to be necessary to obtain those
inflows. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset,
the Company would recognize an impairment loss.
O. SHORT-TERM DEPOSITS
Short-term deposits represent deposits with financial institutions that
have maturities of greater than three months (but less than a year) when
purchased.
NOTE 3 - CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
<S> <C> <C>
In Israeli currency (NIS) $ 105 $ 211
In U.S. dollars 2,855 1,253
----- -----
$ 2,960 $ 1,464
===== =====
</TABLE>
F-56
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 4 - ACCOUNTS RECEIVABLE - OTHER
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
<S> <C> <C>
Government institutions $ 15 $ 36
Sundry 51 22
----- -----
$ 66 $ 58
===== =====
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
<S> <C> <C>
COST (*)
Machinery and equipment $ 776 $ 1,106
Computers 174 187
Furniture and office equipment 84 94
Vehicles 154 154
Leasehold improvements 156 300
----- -----
$ 1,344 $ 1,841
===== =====
(*) Net of investment grants $ 89 $ 89
===== =====
ACCUMULATED DEPRECIATION
Machinery and equipment $ 168 $ 420
Computers 135 159
Furniture and office equipment 40 46
Vehicles 33 44
Leasehold improvements 108 189
---- ----
$ 484 $ 858
===== ====
</TABLE>
During the first quarter of 1999, the Company reclassified three CellScans with
a total cost of $197,000 from inventory to property and equipment. This
treatment, which results in all of the Company's CellScans being classified as
property and equipment, is consistent with the Company's use of its CellScans as
a research tool to develop new applications and a marketing tool to demonstrate
and promote the CellScan technology.
F-57
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 6 - ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
<S> <C> <C>
Employees and related liabilities $ 160 $ 255
Accrued expenses 167 322
---- ----
$ 327 $ 577
==== ====
Includes amounts in NIS $ 203 $ 259
===== ====
</TABLE>
NOTE 7 - LONG-TERM DEBT
A. The long-term debt is comprised of bank loans linked to the dollar,
bearing interest equal to the London Inter-Bank Offered Rate (LIBOR) plus
2.4% to 2.6% per annum and guaranteed by the State of Israel.
The aggregate maturities after the balance sheet date are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
<S> <C>
2000, current liability $ 86
-----
2001 8
2002 3
-----
11
-----
-----
$ 97
=====
</TABLE>
B. To collateralize the loans which the Company received from the bank, the
Company gave a floating lien on all its assets.
NOTE 8 - ACCRUED SEVERANCE PAY
The Company's liability for severance pay, pursuant to Israeli law, is fully
provided for through insurance policies and by an accrual which reflects the
unfunded portion. The amounts maintained with insurance companies are not under
the control of the Company and, therefore, are not included in the financial
statements.
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS
A. The Company acquired the rights to the CellScan in August 1992 by
assignment from Israel Aircraft Industries Ltd. ("IAI" - a related party,
see note 14A) to the Company of a license from Bar Ilan University (the
"University") to IAI. The Company paid IAI $1,000,000 in consideration of
the assignment of the license and for certain tooling and equipment. The
license is a perpetual worldwide license to develop, manufacture, market
and sell the CellScan, and to sub-license the right to manufacture and sell
the device. The license includes all rights to the University's
F-58
Page>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
CellScan patents, know-how and inventions, including any subsequently
acquired, and all improvements thereto. Beginning in 1995, the Company is
obliged to pay the University a royalty for a 20-year period. For the
first ten years, the royalty is at the rate of 6.5% on proceeds of sales
(after deducting sales commissions and other customary charges) and 4.5%
on any fees received on account of the grant of territorial rights. The
royalty in the ensuing ten years is 3.5% on all revenues, whether from
sales or fees. In addition to such royalty payments, the Company is to
make a further grant of $100,000 to the University for the first year in
which the Company's post-tax profits exceed $300,000. No royalties were
required to be paid during the three years ended December 31, 1999.
B. The Company acquired the rights to the Neuritor in August 1992 by
assignment from IAI to the Company of a license from Imexco General Ltd.
("Imexco"), for which assignment the Company paid $500,000. An additional
sum of $125,000 was paid in December 1995. In 1996, the Company
relinquished its exclusive right to market the Neuritor in consideration of
relief of its obligation to pay minimum royalties. The Company is required
to pay Imexco royalties at rates ranging from 2% to 7% of the revenue
generated by the sale of the Neuritor.
C. In consideration of grants by the State of Israel, the Company is
obligated to pay royalties of 3% of sales of products developed with funds
provided by the State of Israel until the dollar-linked amount equal to the
grant payments received by the Company is repaid in full. All grants
received from the State of Israel related to the CellScan and Neuritor
technologies. Total grants received, net of royalties paid as of December
31,1999, aggregate to $2,576,000 which includes an amount of $805,000 in
respect of those received by IAI relating to such technologies.
D. The Company is committed under two leases for office space, laboratory
and manufacturing facilities. Its Corporate headquarters and technology
center facility lease, which has a term until November 2000 and a one-year
option extending to November 2001 on most of the facility, provides for an
annual aggregate rental of approximately $91,000. Its manufacturing
facility lease has an initial term until December 31, 2001, a two-year
option extending to December 31, 2003 and provides for an annual aggregate
rental of approximately $26,000.
E. For commitments to related parties, see Note 14.
F. In November 1999, the Company entered into a settlement agreement with
an Argentinian company ("Argentina") to dismiss with prejudice an action
pending in the Supreme Court of the State of New York, County of New York,
entitled Cellscan Argentina, S.A. v. Medis El Ltd., et al. This action
arose from a 1993 distribution agreement and a related purchase of a
CellScan machine. Argentina sought an aggregate of $10,000,000 in
compensatory and punitive damages. The settlement required the Company to
purchase back from Argentina its CellScan for $100,000, issue 60,000 of
Medis El's ordinary shares to Argentina and issue warrants to purchase
30,000 of Medis El's ordinary shares for $5.00 per share, expiring two
years from the date of the warrant. The Company recorded a charge to
expense in the fourth quarter of 1999 of $437,000, which represents the
fair
F-59
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
market value of the shares and warrants on the date of grant. The fair
value of the warrants was estimated using a Black-Scholes valuation model
and assumptions consistent with those used in Note 10F.
The settlement agreement also includes irrevocable options that Medis
Technologies Ltd. ("MTL"), beneficial owner of approximately 64% of the
Company's outstanding ordinary shares, and Argentina grant to each other.
If the Exchange Offer was not consummated by January 3, 2000, Argentina may
require MTL to purchase its shares at $6.00 per share, which price
increases by $.50 on the first calendar day of every month thereafter
commencing March 1, 2000, provided that it may not sell more than an
aggregate of 3,000 shares within five trading days and not more than
aggregate of 12,000 shares in a period of 20 trading days. Additionally,
MTL may require Argentina to sell its shares to MTL upon the same terms and
conditions as above. From January through March 3, 2000, MTL repurchased an
aggregate of 24,000 shares from Argentina for an aggregate cash
consideration of $145,500.
G. During the first quarter of 1999, a U.S.-based multinational corporation
paid the Company $100,000 for a right of first refusal to obtain exclusive
rights to use the stirling cycle and other technologies in its field of
business and an additional $100,000 to assist in the development of the
stirling cycle for use in its field of business, which the Company recorded
as a credit to research and development expense. This payment was made
pursuant to a technology development agreement the Company entered into
with the corporation in December 1998 to, among other things, jointly
develop the stirling cycle system for application in such corporation's
line of business.
H. In June 1999, the Company reached an agreement with the Peruvian company
("Peru") which owns a CellScan machine, whereby, in consideration of the
Company upgrading the CellScan system at its cost, Peru relinquished any
future claims against the Company, except for an option to require the
Company to repurchase the CellScan machine for $100,000. Such option
expired on January 14, 2000. In February 2000, the Company granted Peru a
new option to require the Company to repurchase the CellScan machine for
$110,000 which was exercised by Peru, via a letter dated February 23,
2000. The Company has charged expense in the fourth quarter of 1999 for
its anticipated loss on the transaction.
I. MTL intends to file Amendment #3 to a registration statement with the
United States Securities and Exchange Commission ("SEC") relating to its
offer to exchange a maximum of 5,299,722 shares of its common stock for all
of the Company's ordinary shares not already owned by MTL (3,868,410) at an
exchange rate of 1.37 shares of MTL common stock for each Medis El ordinary
share tendered (the "Exchange Offer"). The Exchange Offer, which does not
take effect until the registration statement filed with the SEC becomes
F-60
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)
effective, is conditioned upon the tender of at least 1,735,842 of the
Company's ordinary shares, which is the number of the Company's ordinary
shares needed to give MTL beneficial ownership of 80 percent of the
Company's shares. If all shares are tendered, the Company will become a
wholly owned subsidiary of MTL. Upon consummation of the Exchange Offer,
MTL will apply for listing on the Nasdaq Small Cap Market and seek to
delist the Company from the same.
NOTE 10- SHARE CAPITAL
A. NUMBER OF SHARES
<TABLE>
<CAPTION>
Authorized Issued and Outstanding
----------------------------------- --------------------------------
December December December December
31, 1998 31, 1999 31, 1998 31, 1999
---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Ordinary Shares of NIS 0.1 each 30,000,000 30,000,000 10,054,650 10,488,981
================ =============== ============== ==============
</TABLE>
Subsequent to the balance sheet date, the Company issued additional shares
(see Note 16C).
B. SHARE OPTION PLAN
In October 1993, the Board of Directors of the Company adopted a share
option plan (the "Share Option Plan") pursuant to which 500,000 shares were
reserved for issuance upon the exercise of options to be granted to key
employees and consultants of the Company. The Share Option Plan is
administered by the Board of Directors, which designates the quantities,
dates and prices of the options granted. Unless otherwise determined by the
Company's Board of Directors, the exercise price of options will be the
market price of the Ordinary Shares on the date of grant.
Options under the Share Option Plan will be for a four year period, but
will be exercisable only after the second anniversary of the grant date and
then only if the option holder is still an employee or consultant of the
Company. The options are exercisable in full, two years after the date of
grant. The grantee is responsible for all personal tax consequences of the
grant and the exercise thereof. The Company believes that no tax
consequences will result to the Company in connection with such grant or
exercise
On March 19, 1996, the Board of Directors of the Company granted options to
purchase the Company's shares under the share option plan adopted in
October 1993 (see details of issuance in E. below). Pursuant to the grant,
employees, directors, and a consultant of the Company received 164,100
options (of which 60,000 were granted to directors and 3,300 were granted
to a consultant) that are convertible into shares on a one to one ratio at
the market price on the date of the grant ($0.5625).
On May 3, 1998, the Board of Directors of the Company granted options to
purchase the Company's shares under the share option plan adopted in
October 1993 (see details of issuance in E. below). Pursuant to the grant,
certain employees, a director, and a consultant of the Company received
119,000 options (of which 50,000 were granted to a director) that are
convertible into shares on a one to one ratio at $7.20, which was 80% of
the market price on the date of the grant ($9.00).
F-61
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 10- SHARE CAPITAL (CONT.)
On November 4, 1998, the Board of Directors of the Company granted options
to purchase the Company's shares under the share option plan adopted in
October 1993 (see details of issuance in E. below). Pursuant to the grant,
the executive vice-president of the Company received 30,000 options which
are convertible into shares on a one to one ratio at $6.00. The market
price on the date of the grant was $7.188.
During 1999, the Board of Directors extended the expiration date of the
options issued on February 14, 1994 for an additional one-year period until
February 14, 2000. The extension pertains only to options held by persons
who were in the employ of the company on the date the extension was
adopted.
On November 2, 1999, Medis Technologies Ltd., ("MTL") granted to the
Company's executive vice president options to purchase 200,000 shares of
MTL common stock at $2.93 per share, which represents MTL's good faith
determination of 80% of the fair market value on the date of grant. Such
options have a four-year life, and vest after two years.
C. For issuance of shares and warrants in connection with settlement
agreement, see Note 9F.
D. The following table summarizes option plan activity for the three years
ended December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------- --------------
<S> <C> <C>
Balance at January 1, 1997 244,750 3.03
CHANGES DURING THE YEAR ENDED
DECEMBER 31, 1997
Cancelled (9,000) 0.56
-------
Balance at December 31, 1997 235,750 3.12
CHANGES DURING THE YEAR ENDED
DECEMBER 31, 1998
Granted 196,400 7.07
Exercised (29,650) 0.66
Cancelled (87,950) 7.42
--------
Balance at December 31, 1998 314,550 4.61
CHANGES DURING THE YEAR ENDED
DECEMBER 31, 1999
Granted 43,600 7.42
Exercised (56,150) 0.56
Cancelled (46,900) 7.42
--------
Balance at December 31, 1999 255,100 5.47
=======
</TABLE>
F-62
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- SHARE CAPITAL (CONT.)
E. Outstanding Share Option Plan activity (see B. and D. above) is summarized as
follows:
<TABLE>
<CAPTION>
Number of options
---------------------------------
Issue Date Exercise Price Issued Exercised Cancelled Outstanding Expires
---------- -------------- ------ --------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
February 14, 1994 $7.42 143,150 - (143,150) - February 14, 1998
August 30, 1996 $0.5625 89,700 (57,300) (14,900) 17,500(1) August 30, 2000
November 28, 1996 $0.5625 11,100 (9,700) (1,400) - November 28, 2000
December 2, 1996 $0.5625 63,300 18,300 - 45,000(2) December 2, 2000
February 14, 1998 $7.42 47,400 (500) (46,900) - February 14, 1999
July 1, 1998 $7.20 105,000 - - 105,000(3) July 1, 2002
November 5, 1998 $7.20 14,000 - - 14,000 November 5, 2002
November 4, 1998 $6.00 30,000 - - 30,000(4) November 4, 2002
February 14, 1999 $7.42 43,600 - - 43,600(5) February 14, 2000
</TABLE>
(1) Balance outstanding is to the executive vice president of the
Company.
(2) Balance outstanding is to directors of the Company.
(3) Includes 50,000 options each to the executive vice president and a
director of the Company.
(4) All issued to the executive vice president of the Company
(5) Including to the executive vice president of the Company - 27,500
options.
Compensation costs charged to operations which the Company records for
options granted below the fair market value at the date of grant were
$23,000 and $126,000 in 1998 and 1999. Compensation expense was
determined by calculating the difference between the exercise price
and the fair market value of the option on the date of grant. Such
expense is charged to operations over the vesting period.
F. Pro-forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock-Based Compensation," and
has been determined as if the Company had accounted for its stock options
under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes Option
Valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Risk-free interest rate 5.00% 6.00%
Volatility factor 0.10 0.40
Expected life in years after vesting period 1-2 1-2
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of the traded options , which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimates, in management's opinion existing models do not
necessarily provide a reliable single measure of the fair value of its
stock options.
F-63
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 10- SHARE CAPITAL (CONT.)
For purposes of pro-forma disclosure, the estimated fair value of the
options is amortized as an expense over the options' vesting period. The
Company's pro-forma information is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1997 1998 1999
---- ---- ----
(In thousands, except per share amounts)
----------------------------------------
<S> <C> <C> <C>
Loss for the year as reported $ (2,647) $ (2,967) $ (4,661)
Pro-forma loss $ (3,006) $ (3,244) $ (4,719)
Loss per share as reported $ (0.28) $ (0.31) $ (0.45)
Pro-forma loss per share $ (0.32) $ (0.34) $ (0.46)
Weighted average fair value of options granted - $ 1.89 $ 0.96
during the year
</TABLE>
The total compensation expense for employees included in the pro-forma
information for 1997, 1998 and 1999 is $359,000, $277,000 and $140,000,
respectively.
NOTE 11- RESEARCH AND DEVELOPMENT COSTS, NET
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Salaries, materials, sub-contractors and other expenses $1,333 $1,545 $2,219
Charge of inventory to research and development - - 255
Write-off of acquired in-process research and development - - 115
Depreciation expense 73 101 358
------ ------ ------
1,406 1,646 2,947
Third party participation (Note 9G.) - - (200)
------ ------ ------
$1,406 $1,646 $2,747
====== ====== ======
DISTRIBUTION BY FIELD OF RESEARCH:
Medical $1,328 $1,173 $1,857
Fuel Cells - - 336
Stirling Cycle Technologies 78 354 304
Engines - - 236
Other - 119 14
------ ------ ------
$1,406 $ 1,646 $ 2,747
====== ======= =======
</TABLE>
On June 30, 1999, the Company charged its inventory of cell carriers, antigens
and Neuritors with an aggregate cost of $255,000, to research and development
EXPENSE.
F-64
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 12 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
General and administrative expenses $1,095 $1,174 $1,401
Claim settlement expense - - 437
Selling expenses 146 146 144
Depreciation expense 28 30 29
------ ------ ------
$1,269 $1,350 $2,011
====== ====== ======
</TABLE>
NOTE 13 - INCOME TAXES
A. Under the Income Tax Law (Adjustment for Inflation), 1985, income for
tax purposes is measured in terms of earnings in NIS, adjusted for the
increase in the Israeli CPI.
B. Tax benefits under the Law for the Encouragement of Capital Investments,
1959 (the "Law") are summarized as follows:
The Company has been issued a certificate of approval as an "Approved
Enterprise" under the Law.
In accordance with the above Law, the Company elected the "combined path",
pursuant to which the Company has the right to receive a government
guaranteed bank loan of 66% of the amount of the approved investment (see
Note 7). In addition, the Company has the right to receive a grant of 25%
of the approved investment, in which case the loan will be reduced by the
amount of the grant. As of the balance sheet date, the Company has received
grants in the amount of $97,000, of which $89,000 remains after the sale of
vehicles in respect of which investment grants were received.
The tax liability in respect of the Company's income deriving from its
Approved Enterprise activities is calculated as follows:
1. For a ten-year period, company tax at a rate of 20% of income.
2. Tax on dividends distributed at a rate of 15% (instead of 25%).
These tax benefits can be utilized at least through 2006.
C. A reconciliation of the theoretical tax expense, assuming all income was
taxed at the regular rate applicable to an Israeli corporation, and the
actual tax expense is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Theoretical tax benefit on losses (*) $952 $1,068 $1,678
Non-deductible expenses (6) (5) (5)
Tax adjustments in respect of inflation in
Israel and other items (58) (189) (22)
---- ------ ------
888 874 1,651
Valuation allowance (888) (874) (1,651)
---- ------ ------
Reported income tax expense $ - $ - $ -
==== ====== =======
(*) Applicable tax rate 36% 36% 36%
==== ====== =======
</TABLE>
F-65
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS)
NOTE 13 - INCOME TAXES (CONT.)
D. The Company has not been audited by the Israeli tax authorities since
its incorporation.
E. Temporary differences giving rise to deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
----------- -----------
<S> <C> <C>
Net operating loss carryforward $6,839 $8,496
Temporary differences, net (544) (82)
------ ------
Total 6,295 8,414
Valuation allowance (6,295) (8,414)
------ ------
Deferred tax assets, net of valuation allowance $ - $ -
======= =======
</TABLE>
NOTE 14 - TRANSACTIONS WITH RELATED PARTIES
A. The Company is controlled directly and indirectly (via Medis
Technologies Ltd. ("MTL"), (formerly known as Cell Diagnostics Inc.), and
its wholly owned subsidiary Medis Inc.), by a group of Investors, which
includes Company board members Robert K. Lifton and Howard Weingrow and
Israel Aircraft Industries Ltd. ("IAI"), a government corporation.
B. The following transactions with related parties are included in the
financial statements:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Expenses $ 32 $ 32 $ 73
Reimbursement to related parties $164 $161 $173
</TABLE>
C. The Company's CellScan distribution agreement for the United States with
a subsidiary of MTL is for a period expiring 12 years after FDA approval of
the product, but is subject to termination in the event that certain yearly
performance criteria are not met. The distributor is obligated to fund the
effort to obtain FDA approval in accordance with the following schedule:
1. First $1,500,000 - to be paid by the distributor.
2. Next $500,000 - to be paid by the Company.
3. Next $500,000 - to be loaned by the Company to the distributor but to be
repaid to the Company only if the CellScan receives FDA approval.
In the event that the distribution agreement is transferred by MTL to a
third party for consideration, the Company will be entitled to receive a
pro rata portion of such consideration (based on the share it bore of all
FDA costs) to the extent required to repay the loan it granted to the
distributor, referred to in item 3 above.
In July 1998, the Company entered into an Exclusive Agency Agreement with
CDS Distributors Inc. or its affiliate ("CDS"). CDS Distributors Inc. is a
subsidiary of MTL - a principal beneficial shareholder of the Company.
Under such agreement, CDS would coordinate all licensing arrangements
between the Company and third parties within
F-66
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - TRANSACTIONS WITH RELATED PARTIES (CONT.)
North America in respect of the Company's linear technologies. In exchange,
CDS would be entitled to receive a fee equal to 10% of all royalties
payable to the Company under the specific license agreements for the first
ten years of such agreement and 5% of the royalties thereafter.
Additionally, on October 26, 1998, the Board of Directors authorized the
company to enter into an Exclusive Agency Agreement with CDS Distributors
Inc. in respect of the Company's other technologies. The agreement would be
on terms similar to the agreement for linear technologies described above.
Both agreements have been approved at general meetings of the shareholders
of the Company.
D. The Company is required to utilize IAI as its initial outside
manufacturing source for products which IAI is capable of producing at
competitive prices and, if IAI is unable to satisfy the Company's
requirement at such prices, the Company is required to seek other Israeli
sources. Only after exhausting these two options, may the Company then have
recourse to non-Israeli sources.
E. The Company pays $150,000 per year to MTL for services rendered to the
Company, $100,000 of which is used to pay a salary to Robert K. Lifton
(Chairman of the Board of Directors of the Company) as President and Chief
Executive Officer of MTL. Amos Eiran, a Director of the Company, acts as a
consultant to the Company for which he receives approximately $1,400 per
month.
F. On May 19, 1999, the Company issued to MTL 318,181 of its ordinary
shares for an aggregate of $1,750,000.
G. In December 1999, the Company purchased shares representing an
additional 11.5% interest in its majority owned subsidiary, More Energy
Ltd., for an aggregate cash purchase price of $115,000. The Company
accounted for this acquisition of a minority interest using purchase
accounting. The excess of purchase price over the book value of the net
assets acquired aggregated $115,000. This excess purchase price was
allocated to in process research and development and therefore was charged
to research and development costs as of the date of the acquisition. The
project acquired was an additional interest in the fuel cell technology
that More Energy Ltd. is developing. The Company believes that it will be
able to seek to enter into licensing or joint venture arrangements with
third parties relating to the fuel cells by the third quarter of 2000. The
Company anticipates that it will incur substantial costs to complete the
fuel cell project. If the Company's expected development timetable is not
adhered to, the result may be that the Company may continue to incur
additional research and development costs relating to the fuel cell
technology. Additionally, if the Company is unable to locate a licensing or
joint venture partner, this may delay the completion of the project or
cause the Company to incur additional costs.
H. The Company is presently included as an additional insured party on
IAI's product and third party liability insurance policy.
I. The Company had a one-year employment agreement with its executive vice
president, which terminated on September 30, 1999. In 1999, he received
approximately $136,000 as a base salary for the year. Effective October 1
1999, the Company and its executive vice president entered into a one-year
employment agreement, which provides the executive vice president an annual
base salary of $180,000.
NOTE 15 - FINANCIAL INSTRUMENTS
Financial instruments, as part of general business, mainly include cash and cash
equivalents, accounts receivable, deposits, short-term credit, trade and other
accounts payable, other current liabilities and long-term liabilities. The fair
value of the above instruments is not materially different from the values at
which they are presented in the financial statements. The average interest rates
in respect of the Company's long-term liabilities are not materially different
from the interest rates offered, as of balance sheet date on similar Company
liabilities.
F-67
<PAGE>
MEDIS EL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS
A. In January 2000, the Company purchased shares representing an additional
5% interest in its majority-owned subsidiary, More Energy Ltd., for an
aggregate cash purchase price of $50,000.
B. During January and February 2000, employees, including certain officers
and directors of the Company, exercised an aggregate of 66,100 stock
options, which resulted in the issuance of the same number of the Company's
ordinary shares.
C. On February 23, 2000, Medis Technologies Ltd. ("MTL") acquired 107,759
of the Company's ordinary shares for an aggregate of $2,500,000.
D. In February 2000, MTL granted to certain employees, directors and
consultants of the Company options to purchase 153,000 shares of MTL common
stock at $5.00 per share. Such options have a four-year life and vest
after two years.
NOTE 17 - SUBSEQUENT EVENTS (UNAUDITED)
A. AGREEMENT WITH PERUVIAN COMPANY - In April 2000, the Company transferred
$55,000 to the Peruvian company and intends to transfer the remaining
$55,000 when proof of shipment is received.
B. ADDITIONAL OPTIONS ON TECHNOLOGY: The Company has an option to purchase
an additional 50% interest for aggregate consideration of $60,000, in a
company assisting in the development of one of its technologies. The
Company currently owns 25% of such company. The option which was scheduled
to expire on March 31, 2000 was extended through June 30, 2000.
**************************
F-68
<PAGE>
================================================================================
MEDIS TECHNOLOGIES LTD.
EXCHANGE OFFER
FOR
3,868,410 ORDINARY SHARES
OF
MEDIS EL LTD.
--------------------
PROSPECTUS
--------------------
, 2000
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and, if given or made, such information or representations must
not be relied on as having been authorized by us. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy the
securities offered hereby by anyone in any jurisdiction in which such offer
or solicitation is not authorized or is unlawful. The delivery of this
prospectus shall not, under any circumstances create any implication that the
information herein is correct as of any time subsequent to the date of the
prospectus.
- ------------------------------------------------------------------------------
Until , 2000, all dealers that effect transactions in these securities, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth various expenses which will be incurred
in connection with the exchange offer. Other than the SEC registration fee, all
amounts set forth below are estimates:
<TABLE>
<S> <C>
SEC registration fee.................. $ 8,097.08
Blue sky fees and expenses............ 10,000.00
Printing and engraving expenses....... 65,000.00
Legal fees and expenses............... 150,000.00
Accounting fees and expenses.......... 275,000.00
Transfer and Exchange Agent fees...... 8,000.00
NASDAQ listing fee.................... 10,000.00
Miscellaneous expenses................ 10,000.00
-----------
$536,097.08
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") makes
provision for the indemnification of officers and directors of corporations in
terms sufficiently broad to indemnify the officers and directors of the
registrant under certain circumstances for liabilities (including reimbursement
of expenses incurred) arising under the Securities Act of 1933, as amended (the
"Act").
The registrant's Bylaws (the "Bylaws") provide that the registrant may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the registrant), by reason of the fact that he is or was a
director, officer, employee or agent of the registrant or is or was serving at
the request of the registrant as a director, officer, employee or agent of
another corporation or enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information relating to all securities of
Registrant sold by it since January 1, 1997:
In 1997:
- - The Registrant issued 66,373 shares of common stock in lieu of interest
of $132,773 due on subordinated notes of the Registrant (the "Notes").
- - Existing warrantholders surrendered an aggregate of $2,314,290 of the
Notes held by such warrantholders as payment in full for the exercise
of an aggregate of 578,573 warrants into such number of shares of
common stock of the Registrant.
- - The Registrant issued 60,000 shares of common stock upon the exercise
of 60,000 warrants for
<PAGE>
an aggregate exercise price of $240,000.
- - On December 15, 1997, the Registrant issued 3,600,457 shares of its
common stock to Israel Aircraft Industries Ltd. ("IAI") in exchange for
IAI's 40% equity ownership of Medis Inc., making Medis Inc. the
Registrant's wholly-owned subsidiary.
In 1998:
- - In June 1998, the Registrant issued in a private placement 83,334 units
to the Stanoff Corporation, which is beneficially owned by Robert K.
Lifton and Howard Weingrow, the Registrants' chairman and chief
executive officer and president, respectively, and 98,092 units to
certain other existing stockholders, each unit consisting of three
shares of the Registrant's common stock and one warrant to purchase one
share of the Registrant's common stock at an exercise price of $5.00
per share, at a price of $12.00 per unit (the "Units"). The net
proceeds to the Registrant from this financing was $2,177,112.
- - In November 1998, the Registrant issued in a private placement 10,241
Units to certain existing stockholders and 166,667 Units to new
stockholders, all of which met the definition of "accredited investor,"
as such term is defined in the Securities Act of 1933, as amended
("accredited investor"). The net proceeds to the Registrant from this
financing was $2,122,896.
- - In December 1998, the Registrant issued in a private placement 25,000
Units to the Stanoff Corporation. The net proceeds to the Registrant
from this financing was $300,000.
In 1999:
- - In February 1999, the Registrant issued in a private placement 16,667
Units to an existing stockholder. The net proceeds to the Registrant
from this financing was $200,004.
- - In March 1999, the Registrant issued in a private placement 50,334
Units to new stockholders, all of which were accredited investors. The
net proceeds to the Registrant from this financing was $604,004.
- - In April and May 1999, the Registrant issued in a private placement
100,000 Units to existing stockholders. The net proceeds to the
Registrant from this financing was $1,200,000.
- - In June 1999, the Registrant issued in a private placement 9,000 Units
to a new stockholder who is an accredited investor. The net proceeds to
the Registrant from this financing was $108,000.
- - In August 1999, the Registrant issued in private placement 1,000 Units
to a new stockholder who is an accredited investor. The net proceeds to
the Registrant from this financing was $12,000.
- - In September 1999, the Registrant issued in a private placement 16,667
Units to a new stockholder, who is an accredited investor. The net
proceeds to the Registrant from this financing was $200,004.
In 2000:
- - In January and February 2000, the Registrant issued in a private
placement an aggregate of approximately 10 units to existing
stockholders and new stockholders who are accredited investors, each
unit consisting of 66,000 shares of the Registrant's common stock and
25,000
<PAGE>
warrants to purchase one share each of the Registrant's common stock at
an exercise price of $5.75 per share, at a price of $300,000 per unit.
The net proceeds to the Registrant from this financing was
approximately $2,895,400.
Exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act"), in connection with the foregoing transactions,
is claimed under Section 4(2) of the Securities Act as a transaction by the
issuer not involving a public offering. Each certificate evidencing such shares
of Common Stock bears an appropriate restrictive legend and "stop transfer"
orders are maintained on Registrant's stock transfer records there against. None
of these sales involved participation by an underwriter or a broker-dealer.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a list of Exhibits filed herewith as part of the
Registration Statement:
3.(i)* Form of Restated Certificate of Incorporation of Registrant
3.(ii) Form of Restated By-Laws of Registrant, as amended
4.1* Form of certificate evidencing shares of common stock
5.1* Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C.
5.2* Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C.
regarding tax matters
10.1* Registrant's 1999 Stock Option Plan
10.2* Distributorship Agreement dated as of August 13, 1992 by and
between Medis El Ltd. and CDS Distributor, Inc.
10.3* Exclusive Agency Agreement dated as of July 1, 1998 by and between
Medis El Ltd. and CDS Distributor, Inc.
10.4* Form of warrant agreement
10.5* Stock Purchase Agreement dated as of December 15, 1997 between Cell
Diagnostics Inc., Howard Weingrow and Robert K. Lifton and Israel
Aircraft Industries Ltd.
10.6* CDI Shareholders Agreement dated as of December 15, 1997 among
Israel Aircraft Industries Ltd., Howard Weingrow and Robert K.
Lifton, Cell Diagnostics Inc., Medis Inc., CDS Distributor, Inc.
and Medis El Ltd.
10.7* Letter Agreement dated as of December 15, 1997 among Cell
Diagnostics Inc., Medis Inc., Medis El Ltd., Robert K. Lifton,
Howard Weingrow and Israel Aircraft Industries Ltd.
10.8* Employment Agreement dated November 2, 1999 between Zvi Rehavi and
Medis El Ltd.
10.9* Technology Development Agreement dated as of December 14, 1998 by
and between Medis El Ltd. and The Coca-Cola Company.
21.1* Subsidiaries of the Registrant, as amended
23.1 Consent of Grant Thornton LLP
23.2 Consent of Fahn, Kanne & Co.
23.3* Consent of Cooperman Levitt Winikoff Lester & Newman, P.C.
(included in Exhibits 5.1 and 5.2)
24.1* Power of Attorney (included on the signature page of Part II of
this Registration Statement)
27.1 Financial Data Schedule
99.1* Transmittal Letter
99.2* Notice of Guaranteed Delivery
99.3* Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees
99.4* Letter to Clients
- ------------
* Previously filed.
<PAGE>
(b) Financial Statement Schedules.
No schedules are required to be filed.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement or amendment thereto
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York on April 13, 2000.
MEDIS TECHNOLOGIES LTD.
By: /s/ ROBERT K. LIFTON
-----------------------------
Robert K. Lifton
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE
--------- -----
/s/ ROBERT K. LIFTON Chairman of the Board, Chief April 13, 2000
- ---------------------------- Executive Officer and Secretary
Robert K. Lifton (principal executive officer)
/s/ HOWARD WEINGROW President, Treasurer and April 13, 2000
- ---------------------------- Director (principal accounting
Howard Weingrow and financial officer)
* Director April 13, 2000
- ----------------------------
Amos Eiran
* Director April 13, 2000
- ----------------------------
Jacob S. Weiss
* Director April 13, 2000
- ----------------------------
Zeev Nahmoni
* Director April 13, 2000
- ----------------------------
Shmuel Peretz
* Robert K. Lifton, pursuant to Powers of Attorney (executed by each of the
officers and directors listed above and indicated by signing above, and filed
with the Securities and Exchange Commission), by signing his name hereto does
hereby sign and execute this Amendment to the Registration Statement on behalf
of each of the persons referenced above.
April 13, 2000 /s/ ROBERT K. LIFTON
-----------------------
Robert K. Lifton
<PAGE>
Exhibit 3(ii)
RESTATED
BY-LAWS
OF
MEDIS TECHNOLOGIES LTD.
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TABLE OF CONTENTS
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ARTICLE I. OFFICES................................................................................................1
Section 1. REGISTERED OFFICES..........................................................................1
Section 2. OTHER OFFICES...............................................................................1
ARTICLE II. MEETINGS OF STOCKHOLDERS.............................................................................1
Section 1. PLACE OF MEETINGS...........................................................................1
Section 2. ANNUAL MEETING OF STOCKHOLDERS..............................................................1
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF...............................................1
Section 4. VOTING......................................................................................1
Section 5. PROXIES.....................................................................................2
Section 6. SPECIAL MEETINGS............................................................................2
Section 7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS..............................................2
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST..............................................3
ARTICLE III. DIRECTORS............................................................................................3
Section 1. THE NUMBER OF DIRECTORS.....................................................................3
Section 2. VACANCIES...................................................................................3
Section 3. REMOVAL.....................................................................................4
Section 4. POWERS......................................................................................4
Section 5. PLACE OF DIRECTORS' MEETINGS................................................................4
Section 6. REGULAR MEETINGS............................................................................4
Section 7. SPECIAL MEETINGS............................................................................4
Section 8. QUORUM......................................................................................4
Section 9. ACTION WITHOUT MEETING......................................................................4
Section 10. TELEPHONIC MEETINGS.........................................................................4
Section 11. COMMITTEES OF DIRECTORS.....................................................................5
Section 12. MINUTES OF COMMITTEE MEETINGS...............................................................5
Section 13. COMPENSATION OF DIRECTORS...................................................................5
Section 14. CONFLICT OF INTEREST........................................................................5
ARTICLE IV. OFFICERS.............................................................................................6
Section 1. OFFICERS....................................................................................6
Section 2. ELECTION OF OFFICERS........................................................................6
Section 3. SUBORDINATE OFFICERS........................................................................6
Section 4. COMPENSATION OF OFFICERS....................................................................6
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES.......................................................6
Section 6. CHAIRMAN OF THE BOARD.......................................................................7
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<S> <C> <C>
Section 7. PRESIDENT...................................................................................7
Section 8. VICE PRESIDENTS.............................................................................7
Section 9. SECRETARY...................................................................................7
Section 10. ASSISTANT SECRETARY.........................................................................7
Section 11. CHIEF FINANCIAL OFFICER OR TREASURER........................................................7
Section 12. ASSISTANT CHIEF FINANCIAL OFFICER OR TREASURER..............................................8
ARTICLE V. INDEMNIFICATION OF DIRECTORS AND OFFICERS..............................................................8
ARTICLE VI. INDEMNIFICATION OF EMPLOYEES AND AGENTS..............................................................10
ARTICLE VII. CERTIFICATES OF STOCK...............................................................................11
Section 1. CERTIFICATES...............................................................................11
Section 2. SIGNATURES ON CERTIFICATES.................................................................11
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES.........................................11
Section 4. LOST CERTIFICATES..........................................................................11
Section 5. TRANSFERS OF STOCK.........................................................................11
Section 6. FIXED RECORD DATE..........................................................................12
Section 7. REGISTERED STOCKHOLDERS....................................................................12
ARTICLE VIII. GENERAL PROVISIONS................................................................................12
Section 1. DIVIDENDS..................................................................................12
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES....................................................12
Section 3. CHECKS.....................................................................................12
Section 4. FISCAL YEAR................................................................................12
Section 5. CORPORATE SEAL.............................................................................12
Section 6. MANNER OF GIVING NOTICE....................................................................13
Section 7. WAIVER OF NOTICE...........................................................................13
ARTICLE IX. AMENDMENTS..........................................................................................13
Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS.....................................................13
</TABLE>
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ARTICLE I
OFFICES
Section 1. REGISTERED OFFICES. The registered office of the
corporation shall be in the City of Dover, County of Kent, State of Delaware.
Section 2. OTHER OFFICES. The corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of stockholders shall
be held at any place within or outside the State of Delaware designated by the
Board of Directors. In the absence of any such designation, stockholders'
meetings shall be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting
of stockholders shall be held each year on a date and a time designated by the
Board of Directors.
Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. A
majority of the voting power of the shares of capital stock of the corporation
issued and outstanding and entitled to vote at any meeting of stockholders, the
holders of which are present in person or represented by proxy, shall constitute
a quorum for the transaction of business except as otherwise provided by law, by
the Certificate of Incorporation, as amended, or by these By-Laws. A quorum,
once established, shall not be broken by the withdrawal of enough votes to leave
less than a quorum and the votes present may continue to transact business until
adjournment. If, however, such quorum shall not be present or represented at any
meeting of the stockholders, a majority of the voting power of the shares of
capital stock represented in person or by proxy at such meeting may adjourn the
meeting from time to time, without notice other than announcement at the meeting
of the time and place of the adjourned meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote thereat.
Section 4. VOTING. When a quorum is present at any meeting, in
all matters other than the election of directors, the vote of the holders of
stock representing a majority of the voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the Certificate of
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Incorporation, as amended, or these By-Laws, or any rule, regulation or
statutory provision applicable to the corporation, a different vote is required
in which case such express provision shall govern and control the decision of
such question. Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors.
Section 5. PROXIES. At each meeting of the stockholders, each
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him/her by proxy appointed by an instrument in
writing subscribed by such stockholder and bearing a date not more than three
years prior to said meeting, unless said instrument provides for a longer
period. All proxies must be filed with the Secretary of the corporation at the
beginning of each meeting in order to be counted in any vote at the meeting.
Section 6. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation, as amended, may be called by the
Chairman of the Board or the President and shall be called by the President or
the Secretary at the request in writing of the Board of Directors or
stockholders of record holding ten percent (10%) or more of the issued and
outstanding shares of the Corporation entitled to vote at such meeting. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
Section 7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(1) Nominations of persons for election to the Board of
Directors of the corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders (a) pursuant
to the corporation's notice of meeting, (b) by or at the direction of the Board
of Directors or (c) by any stockholder of the corporation who was a stockholder
of record at the time of giving of notice provided for in this By-Law, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this By-Law.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(1) of this By-Law, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is not within 30 days
before or after such anniversary date, notice by the stockholder to be timely
must be so delivered not earlier than the close of business on the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
earlier of (i) the day on which notice of the meeting was mailed or (ii) the
date public announcement of the date of such meeting is first made by the
corporation. In no event shall the public announcement of an adjournment of an
annual
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meeting commence a new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or re-election as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule
14A-11 thereunder (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected), (b) as to
any other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the nomination or proposal is made and (c) as to the stockholder giving
the notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such stockholder and of such
beneficial owner, as they appear on the corporation's books, and (ii) the class
and number of shares of the corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The
officer who has charge of the stock ledger of the corporation shall prepare and
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
Section 1. THE NUMBER OF DIRECTORS. The number of directors
which shall constitute the entire Board shall be determined from time to time
solely by resolution adopted by the affirmative vote of a majority of the
directors. The directors need not be stockholders of the corporation. The
directors shall be elected at the annual meeting of the stockholders, except as
provided in Section 2 of this Article, and each director elected shall hold
office until his/her successor is duly elected and qualified.
Section 2. VACANCIES. Vacancies on the Board of Directors by
reason of death, resignation, removal, or otherwise, and newly created
directorships resulting from any increase in the number of directors may be
filled (other than directors elected by one or more series of Preferred Stock)
solely by a majority of the directors then in office (although less than a
quorum) or by a sole
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remaining director. Each director so chosen shall hold office until such
director's successor shall have been duly elected and qualified or until such
director's earlier death, resignation, disqualification or removal. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority of the entire Board (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders having the right to vote for
such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. REMOVAL. No director may be removed from office by
the stockholders except for cause with the affirmative vote of the holders of
two-thirds (66 2/3%) of all outstanding securities of the corporation then
entitled to vote generally in the election of directors, voting together as a
single class.
Section 4. POWERS. The property and business of the
corporation shall be managed by or under the direction of its Board of
Directors. In addition to the powers and authorities by these By-Laws expressly
conferred upon them, the Board may exercise all such powers of the corporation
and do all such lawful acts and things as are not directed or required by
statute, by the Certificate of Incorporation, as amended, or by these By-Laws to
be exercised or done by the stockholders.
Section 5. PLACE OF DIRECTORS' MEETINGS. The directors may
hold their meetings and have one or more offices, and keep the books of the
corporation outside of the State of Delaware.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board of Directors.
Section 7. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President on
forty-eight hours' notice to each director, either personally or by mail,
telecopier, or other means of electronic transmission at the address of such
director on the books and records of the corporation; special meetings shall be
called by the President or the Secretary in like manner and on like notice on
the written request of two directors.
Section 8. QUORUM. At all meetings of the Board of Directors a
majority of the then authorized number of directors shall be necessary and
sufficient to constitute a quorum for the transaction of business, and the vote
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, by the Certificate of Incorporation, as
amended, or by these By-Laws. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
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Section 9. ACTION WITHOUT MEETING. Unless otherwise restricted
by the Certificate of Incorporation, as amended, or these By-Laws, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee designated by the Board of Directors may be taken without a
meeting, if all members of the Board of Directors or committee, as the case may
be, consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee.
Section 10. TELEPHONIC MEETINGS. Unless otherwise restricted
by the Certificate of Incorporation, as amended, or these By-Laws, members of
the Board of Directors, or any committee designated by the Board of Directors,
may participate in a meeting of the Board of Directors, or of any committee, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
Section 11. COMMITTEES OF DIRECTORS. The Board of Directors
may, by resolution passed by a majority of the entire Board of Directors,
designate one or more committees, each such committee to consist of one or more
of the directors of the corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he/she
or they constitute a quorum, may unanimously appoint another member of the Board
of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation, as
amended, adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
By-Laws of the corporation; and, unless the resolution or the Certificate of
Incorporation, as amended, expressly so provide, no such committee shall have
the power or authority to declare a dividend or to authorize the issuance of
stock.
Section 12. MINUTES OF COMMITTEE MEETINGS. Each committee
shall keep regular minutes of its meetings and report the same to the Board of
Directors when requested by the Board of Directors.
Section 13. COMPENSATION OF DIRECTORS. Unless otherwise
restricted by the Certificate of Incorporation, as amended, or these By-Laws,
the Board of Directors shall have the authority to fix the compensation of
directors. The directors may be paid their expenses, if any, of attendance at
each meeting of the Board of Directors and may be paid a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude
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any director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 14. CONFLICT OF INTEREST. No contract or transaction
between the corporation and one or more of its directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers, are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the board or committee which authorizes the
contract or transaction, or solely because his or their votes are counted for
such purpose, if:
(a) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the board of
directors or the committee, and the board or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum;
(b) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the shareholders; or
(c) The contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the board of
directors, a committee or the shareholders.
ARTICLE IV
OFFICERS
Section 1. OFFICERS. The officers of this corporation shall be
chosen by the Board of Directors and shall include a Chairman of the Board of
Directors or a President, or both, and a Secretary. The corporation may also
have at the discretion of the Board of Directors such other officers as are
desired, including a Vice-Chairman of the Board of Directors, a Chief Executive
Officer, a Chief Operating Officer, a Chief Financial Officer or Treasurer, one
or more Vice Presidents, one or more Assistant Secretaries and Assistant Chief
Financial Officers or Treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 3 hereof. In the event there are two
or more Vice Presidents, then one or more may be designated as an Executive Vice
President, Senior Vice President or other similar or dissimilar title. At the
time of the election of officers, the directors may by resolution determine the
order of their rank. Any number of offices may be held by the same person,
unless the Certificate of Incorporation, as amended, or these By-Laws otherwise
provide.
Section 2. ELECTION OF OFFICERS. The Board of Directors, at
its first meeting after each annual meeting of stockholders, shall choose the
executive officers of the corporation.
-6-
<PAGE>
Section 3. SUBORDINATE OFFICERS. The Board of Directors may
appoint, or grant to the executive officers the power to appoint, such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
Section 4. COMPENSATION OF OFFICERS. The salaries of all
executive officers of the corporation shall be fixed by the Board of Directors.
The salaries of all other officers and agents of the corporation shall be fixed
by the executive officers of the corporation.
Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES. The officers
of the corporation shall hold office until their successors are chosen and
qualify in their stead. Any officer elected or appointed by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the members of the Board of Directors. If the office of any officer or officers
becomes vacant for any reason, the vacancy shall be filled by the Board of
Directors.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board,
if such an officer be elected, shall be the Chief Executive Officer of the
corporation and, if present, preside at all meetings of the Board of Directors
and exercise and perform such other powers and duties as may be from time to
time assigned to him/her by the Board of Directors or prescribed by these
By-Laws. If there is no President, the Chairman of the Board shall have the
powers and duties prescribed in Section 7 of this Article IV.
Section 7. PRESIDENT. Subject to the control of the Board of
Directors, the President shall have general supervision, direction and control
of the business and officers of the corporation. He/she shall preside at all
meetings of the stockholders and, in the absence of the Chairman of the Board,
or if there be none, at all meetings of the Board of Directors. He/she shall be
an ex-officio member of all committees and shall have the general powers and
duties of management usually vested in the office of President of corporations,
and shall have such other powers and duties as may be prescribed by the Board of
Directors or these By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of
the President, the Vice Presidents in order of their rank as fixed by the Board
of Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other duties as from time to time
may be prescribed for them, respectively, by the Board of Directors.
Section 9. SECRETARY. The Secretary shall attend all sessions
of the Board of Directors and all meetings of the stockholders and record all
votes and the minutes of all proceedings in a book to be kept for that purpose;
and shall perform like duties for the standing committees when required by the
Board of Directors. He/she shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or these
By-Laws. He/she shall keep in safe custody the seal
-7-
<PAGE>
of the corporation, and when authorized by the Board, affix the same to any
instrument requiring it, and when so affixed it shall be attested by his/her
signature or by the signature of an Assistant Secretary. The Board of Directors
may give general authority to any other officer to affix the seal of the
corporation and to attest the affixing by his/her signature.
Section 10. ASSISTANT SECRETARY. The Assistant Secretary, or
if there be more than one, the Assistant Secretaries in the order determined by
the Board of Directors, or if there be no such determination, the Assistant
Secretary designated by the Board of Directors, shall, in the absence or
disability of the Secretary, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 11. CHIEF FINANCIAL OFFICER OR TREASURER. The Chief
Financial Officer or Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation, in
such depositories as may be designated by the Board of Directors. He/she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his/her transactions as Chief Financial Officer
or Treasurer and of the financial condition of the corporation. If required by
the Board of Directors, he/she shall give the corporation a bond, in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors, for the faithful performance of the duties of his/her office and for
the restoration to the corporation, in case of his/her death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his/her possession or under his/her control
belonging to the corporation.
Section 12. ASSISTANT CHIEF FINANCIAL OFFICER OR TREASURER.
The Assistant Chief Financial Officer or Treasurer, or if there shall be more
than one, the Assistant Chief Financial Officers or Treasurers in the order
determined by the Board of Directors, or if there be no such determination, the
Assistant Chief Financial Officer or Treasurer designated by the Board of
Directors, shall, in the absence or disability of the Chief Financial Officer or
Treasurer, perform the duties and exercise the powers of the Chief Financial
Officer or Treasurer and shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he/she is or was a director or officer of the
corporation, or is or was serving
-8-
<PAGE>
at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him/her in connection with such
action, suit or proceeding if he/she acted in good faith and in a manner he/she
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his/her conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he/she reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his/her conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he/she is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him/her in connection with the defense or
settlement of such action or suit if he/she acted in good faith and in a manner
he/she reasonably believed to be in or not opposed to the best interests of the
corporation except that no such indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director or officer of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b) of this Article
V, or in defense of any claim, issue or matter therein, he/she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him/her in connection therewith.
(d) Any indemnification under paragraphs (a) and (b) of this
Article V (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director or officer is proper in the circumstances because he/she has met the
applicable standard of conduct set forth in paragraphs (a) and (b) of this
Article V. Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorney's fees) incurred by an
officer or director in defending
-9-
<PAGE>
any civil, criminal, administrative or investigative action, suit or proceeding
shall be paid by the corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall ultimately be
determined that he/she is not entitled to be indemnified by the corporation as
authorized in this Article V. Such expenses (including attorney's fees) incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided
by, or granted pursuant to, the other paragraphs of this Article V shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any ByLaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his/her official capacity and as to action in another capacity while holding
such office.
(g) The Board of Directors may authorize, by a vote of a
majority of a quorum of the Board of Directors, the corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him/her and incurred by him/her in any such capacity, or
arising out of his/her status as such, whether or not the corporation would have
the power to indemnify him/her against such liability under the provisions of
this Article V.
(h) For the purposes of this Article V, references to "the
corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article V with
respect to the resulting or surviving corporation as he/she would have with
respect to such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he/she reasonably believed to be in the best interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.
-10-
<PAGE>
(j) The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article V shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ARTICLE VI
INDEMNIFICATION OF EMPLOYEES AND AGENTS
The corporation may, at its option, indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit, or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he/she is or was an
employee or agent of the corporation or, while an employee or agent of the
corporation, is or was serving at the request of the corporation as an employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him/her in
connection with such action, suit or proceeding, to the extent permitted by
Section 145 of the General Corporation Law of the State of Delaware.
ARTICLE VII
CERTIFICATES OF STOCK
Section 1. CERTIFICATES. Every holder of stock of the
corporation shall be entitled to have a certificate signed by, or in the name of
the corporation by, the Chairman or Vice Chairman of the Board of Directors, or
the President or a Vice President, and by the Secretary or an Assistant
Secretary, or the Chief Financial Officer or Treasurer or an Assistant Chief
Financial Officer or Treasurer of the corporation, certifying the number of
shares represented by the certificate owned by such stockholder in the
corporation.
Section 2. SIGNATURES ON CERTIFICATES. Any or all of the
signatures on the certificate may be a facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he/she were such officer, transfer agent, or
registrar at the date of issue.
Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES.
If the corporation shall be authorized to issue more than one class of stock or
more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the corporation shall issue to represent such
class or series of stock; provided that, except as otherwise provided in section
202 of the General Corporation Law of the State of
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<PAGE>
Delaware, in lieu of the foregoing requirements, there may be set forth on the
face or back of the certificate which the corporation shall issue to represent
such class or series of stock, a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
Section 4. LOST CERTIFICATES. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his/her legal representative, to advertise the
same in such manner as it shall require and/or to give the corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 5. TRANSFERS OF STOCK. Upon surrender to the
corporation, or the transfer agent of the corporation, of a certificate for
shares duly endorsed or accompanied by proper evidence of succession,
assignation or authority to transfer, it shall be the duty of the corporation to
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.
Section 6. FIXED RECORD DATE. In order that the corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of the stockholders, or any adjournment thereof, or entitled to receive payment
of any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date which shall not be more than 60 nor less than ten days before the
date of such meeting, nor more than 60 days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 7. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim or interest in such share on the part of any other person, whether
or not it shall have express or other notice thereof, save as expressly provided
by the laws of the State of Delaware.
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<PAGE>
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the Certificate of Incorporation, as
amended, if any, may be declared by the Board of Directors at any regular or
special meeting, pursuant to law. Dividends may be paid in cash, in property, or
in shares of the capital stock, subject to the provisions of the Certificate of
Incorporation, as amended.
Section 2. PAYMENT OF DIVIDENDS; DIRECTORS' DUTIES. Before
payment of any dividend there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors from time
to time, in their absolute discretion, think proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the directors shall
think conducive to the interests of the corporation, and the directors may
abolish any such reserve.
Section 3. CHECKS. All checks or demands for money and notes
of the corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the corporation
shall be fixed by resolution of the Board of Directors.
Section 5. CORPORATE SEAL. The corporate seal shall have
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 6. MANNER OF GIVING NOTICE. Whenever, under the
provisions of the Certificate of Incorporation, as amended, or of these By-Laws,
or any rule, regulation or statutory provision applicable to the corporation,
notice is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given (unless
otherwise provided) in writing, by mail, addressed to such director or
stockholder, at his/her address as it appears on the records of the corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by mail, telecopier, or other means of electronic
transmission at the address of such director on the books and records of the
corporation.
Section 7. WAIVER OF NOTICE. Whenever any notice is required
to be given under the provisions of the Certificate of Incorporation, as
amended, or of these By-Laws, or any rule, regulation or statutory provision
applicable to the corporation, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto.
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<PAGE>
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS. These
ByLaws may be altered, amended or repealed or new By-Laws may be adopted by the
Board of Directors, when such power is conferred upon the Board of Directors by
the Certificate of Incorporation, as amended, or by the affirmative vote of not
less than 66 2/3% of the total voting power of all outstanding securities of the
corporation then entitled to vote generally in the election of directors, voting
together as a single class, at any regular meeting of the Board of Directors or
of the stockholders or at any special meeting of the Board of Directors or of
the stockholders if notice of such alteration, amendment, repeal or adoption of
new By-Laws be contained in the notice of such special meeting.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 9, 2000, accompanying the consolidated
financial statements of Medis Technologies Ltd. and Subsidiaries contained in
the Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
New York, New York
April 13, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated March 8, 2000, accompanying the consolidated
financial statements of Medis El Ltd. and Subsidiary contained in the
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
Fahn Kanne & Co
Certified Public Accountants (Isr.).
Tel Aviv, Israel
April 13, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF MEDIS TECHNOLOGIES LTD. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,842,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,001,000
<PP&E> 1,841,000
<DEPRECIATION> (858,000)
<TOTAL-ASSETS> 10,226,000
<CURRENT-LIABILITIES> 918,000
<BONDS> 11,000
0
0
<COMMON> 100,000
<OTHER-SE> 8,461,000
<TOTAL-LIABILITY-AND-EQUITY> 10,226,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,790,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,000
<INCOME-PRETAX> (5,965,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,965,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,965,000)
<EPS-BASIC> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
