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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-83945
PROSPECTUS
MEDIS TECHNOLOGIES LTD.
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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.
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TERMS OF THIS EXCHANGE OFFER:
o 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.
o 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tendered and not withdrawn.
o This exchange offer will expire 5:00 p.m., New York City time, on May 22,
2000, unless extended.
o 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.
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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 10.
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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.
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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.
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April 24, 2000
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary............................................................1
Risk Factors.................................................................10
Determination of Exchange Ratio..............................................19
The Exchange Offer...........................................................22
Dividend Policy..............................................................29
Price Range of Our Common Stock..............................................29
Price Range of Medis El's Ordinary Shares....................................29
Capitalization...............................................................31
Selected Consolidated Financial Data.........................................32
Selected Consolidated Financial Data of Medis El.............................33
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................34
Business.....................................................................41
Management...................................................................60
Principal Stockholders.......................................................65
Certain Transactions.........................................................66
Description of Our Securities................................................68
Description of Medis El's Securities.........................................69
Comparison of Rights of Stockholders of Medis Technologies
and Shareholders of Medis El...............................................69
United States Federal Income Tax Consequences................................78
Legal Matters................................................................79
Experts......................................................................79
Where You Can Find More Information..........................................79
Index to Financial Statements.............................................. F-1
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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:
o 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.
o 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.
O 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.
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o 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.
o WATER TECHNOLOGIES
o 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.
o 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.
O 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.
o 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.
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.
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OWNERSHIP STRUCTURE
The following charts illustrate our ownership structure prior to and
subsequent to the proposed 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)
--------------------
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THE EXCHANGE OFFER
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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 May 22,
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.
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Expiration date; extension;
amendments.............................. The exchange offer and withdrawal
rights will expire at 5:00 P.M., New
York City time, on May 22, 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 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:
o contact such registered holder
promptly and instruct such
registered holder to tender
on your behalf; or
o 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
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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
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.
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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:
o you fail to tender your
ordinary shares for exchange;
and
o we successfully complete this
exchange offer and delist Medis
El's ordinary shares from the
Nasdaq SmallCap Market.
</TABLE>
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
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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)
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<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>
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(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.
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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.
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ACTUAL PRO FORMA (2) PRO FORMA (3)
------ ------------- -------------
MEDIS TECHNOLOGIES LTD
<S> <C> <C> <C>
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)
============ ============ ============
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EQUIVALENT
ACTUAL (1) PRO FORMA (4)
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<S> <C> <C>
MEDIS EL LTD
Book value per share(1) $ 0.16 $ 0.12
============ ============
Cash dividends per share $ -- $ --
============ ============
Net loss per share $ (0.45) $ (0.33)
============ ============
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(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.
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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:
o Medis El successfully develops one or more of its technologies; and
o 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
10
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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 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
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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 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
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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 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,
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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.
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.
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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, which enforce similar Israeli judgments, provided that:
o due service of process has been effected and the defendant was given
a reasonable opportunity to defend;
o 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;
o 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
o 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
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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 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.
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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.
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
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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.
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:
o Robert K. Lifton, our chairman and chief executive officer, who is
also Medis El's chairman;
o Howard Weingrow, our president, treasurer and a director, who is
also a director of Medis El; and
o 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:
o 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
o 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
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$7,200,000. Using 10% as a starting point, which represents our agency fees upon
the sale of a finished product pursuant to our exclusive agency agreement with
Medis El, we arbitrarily valued the agency rights, net of anticipated costs such
as:
o developing and implementing marketing campaigns;
o locating potential licensees and coordinating the preparation and
negotiation of licensing arrangements; and
o 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:
o the fact that Medis El's cash position at March 31, 1999 exceeded
our cash position by approximately $1,745,000; and
o 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:
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o the exchange offer to be the most feasible alternative based on cost
factors, timing and Israeli law issues; and
o 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."
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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:
o 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
o our common stock being registered pursuant to Section 12 of the
Securities Exchange Act of 1934.
22
<PAGE>
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, 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:
o 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;
o 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
o 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:
o receiving our common stock from us; and
o 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
23
<PAGE>
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.
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:
o contact such registered holder promptly and instruct such registered
holder to tender on your behalf; or
o 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:
o by a registered shareholder who has not completed the box entitled
"Special Delivery Instructions" on the letter of transmittal; or
o 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
24
<PAGE>
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 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 May
22, 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:
o to delay accepting any Medis El shares;
o to extend the exchange offer; or
o 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
25
<PAGE>
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.
RETURN OF MEDIS EL SHARES
If:
o less than 1,735,842 of Medis El's ordinary shares are tendered in
this exchange;
o we do not accept tendered Medis El ordinary shares for any valid
reason pursuant to the terms and conditions of this exchange offer;
or
o 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:
o 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;
o prior to the expiration date, the exchange agent receives from any
of the above such institutions a
26
<PAGE>
properly completed and duly executed notice of guaranteed delivery
substantially in the form provided by us setting forth:
o the name and address of the shareholder;
o the certificate number(s) of such shares; and
o 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 tendering; and
o 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.
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<PAGE>
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
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.
28
<PAGE>
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.
In order for our common stock to qualify for initial quotation on
the Nasdaq SmallCap Market, we, among other things, must have:
o 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
o $5,000,000 in market value of our public float; and
o 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:
o 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
o $1,000,000 in market value of our public float; and
o 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:
29
<PAGE>
<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
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 closing sale price of Medis El's ordinary shares on April
21, 2000, the last full trading day before we announced this exchange offer, was
$20.00 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.
30
<PAGE>
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)
Total stockholders' equity 8,561,000 50,701,000 102,472,000
------------- ------------- -------------
Total capitalization $ 9,199,000 $ 51,056,000 $ 102,483,000
============= ============= =============
</TABLE>
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<PAGE>
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) (7,662,000)
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>
32
<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>
33
<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
34
<PAGE>
under a December 1998 technology development agreement with The Coca-Cola
Company in which it:
o 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
o 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
35
<PAGE>
slightly to $1,399,000, compared to $1,303,000 for the year ended December 31,
1997.
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:
o 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;
o to purchase shares of Medis El; and
o 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:
o to fund the further research and development of our products; and
o 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
36
<PAGE>
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 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:
o the progress of research and development programs;
o the status of Medis El's technologies;
o the results of pre-clinical testing and clinical trials;
o the timing and costs involved in obtaining regulatory approvals;
and
o 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:
o the expected exercise of options representing an additional 50% of
the outstanding shares of New Devices Engineering for an aggregate
of $60,000;
o the expected reimbursement of funds aggregating $35,000 for patent
filing costs incurred by a shareholder of New Devices Engineering;
and
o 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.
37
<PAGE>
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.
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.
38
<PAGE>
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 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:
<TABLE>
<S> <C>
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)%
</TABLE>
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.
39
<PAGE>
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.
40
<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
41
<PAGE>
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 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.
42
<PAGE>
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 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.
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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:
o 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.
o 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.
o 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.
o 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:
o 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.
o 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
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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."
o 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 from
time to time provides Bar-Ilan with upgrades to its CellScan at no
charge.
o 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.
o 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.
o 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.
o 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.
o 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.
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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.
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
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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:
o fines;
o injunctions;
o recall or seizure of products; and
o criminal prosecution.
ISRAEL. The CellScan is not currently being used in such a manner
that would require licensing 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
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with:
o traditional cancer screening methods, such as mammograms for breast
cancer, PSA tests for prostate cancer and x-ray techniques such as
MRI; and
o 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 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:
o electrodes, which are devices that emit protons and electrons;
o a hydrogen-based fuel such as methanol; and
o 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:
o potential efficiency;
o ability to operate at a lower cost;
o ability to operate longer without refueling; and
o 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:
o more power delivered relative to the fuel cells' size and weight;
o our small direct liquid methanol fuel cells fueled by a proprietary
electrolyte solution containing methanol operate longer without
refueling;
o 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
o lower cost to produce.
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We attribute these advantages to:
o the use of a special proprietary polymer coating on the electrode
which has the ability to efficiently conduct electrons;
o the use of a proprietary catalyst which allows a substantial
reduction in the platinum component of the electrode; and
o 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, stand-alone applications in such fields as:
o anti-static packaging materials;
o active matrix polymer displays; and
o plastic-coated electrodes and sensors,
and the catalyst will have stand-alone applications in such fields as:
o electro-synthesis;
o organic synthesis;
o producing mineral fertilizer; and
o 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:
o maximize the percentage of methanol or other alcohol product in the
electrolyte, thus allowing for longer life between refueling;
o develop new, more efficient electrodes;
o extend the lifespan of the electrode; and
o develop the appropriate refueling technique.
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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.
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.
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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:
o energy savings of between 30% and 50%;
o enabling manufacturers to meet new energy standards; and
o 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.
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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.
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%.
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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
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 are 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
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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 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-
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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 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
55
<PAGE>
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
#5,693,991 (December 2, 1997) known as the stirling cycle, which works on a
gas cycle.
"Displacer Assembly For Stirling Cycle System" Covers an assembly that converts
a pulse from a #5,907,201 (May 25, 1999) compressor via a thermodynamic
cycle to cold or heat.
"Synchronous Reciprocating Electric Machines" Covers a device that converts reciprocating
#5,903,069 (May 11, 1999) movement of any type into electricity or converts
electricity into reciprocating motion.
"Toroidal Internal Combustion Engine" Covers a rotary engine with one or more toroidal
#09/146,362 (September 3, 1998) (pending) chambers defined by rotors that rotate within
#09/250,239 (February 16, 1999)(pending) cylindrical housings.
<CAPTION>
PATENTS LICENSED TO MEDIS EL
<S> <C>
"System and Method for Cell Selection" Covers both a method and an apparatus for
#4,729,949 (March 8, 1988) selecting cells, including a method of measuring
#4,675,065 (June 23, 1987) and moving cells and a cell carrier with first
and #5,272,081 (December 21, 1993) second outer surfaces.
"Manufacture of Microsieves and Resulting Covers an improvement to known photoresist
Microsieves" methods to form a microsieve.
#4,772,540 (September 20, 1988)
"Apertured Cell Carrier" Defines first and second outer surfaces and
#5,506,141 (April 9, 1996) comprises an 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.
56
<PAGE>
<TABLE>
<CAPTION>
PATENTS OWNED BY NEW DEVICES ENGINEERING A.K.O. LTD.
<S> <C>
"Toroidal Engine" Covers an internal combustion engine that
#5,797,366 (August 25, 1998) comprises a toroidal combustion chamber housing
within which slides at least one piston.
"Direct Current Regulating Device" Covers a gas discharge tube for regulating the
#5,814,943 (September 29, 1998) flow of high power direct current, and a method
for its use.
<CAPTION>
PATENTS OWNED BY MORE ENERGY LTD.
<S> <C>
"A New Class of Electrocatalysts and a Gas Relates to electrochemistry and, more
Diffusion Electrode Based Thereon for Fuel particularly, to a class of electrocatalysts based on
Cells" highly electroconducting polymers, and a gas
#09/377,749 (August 20, 1999) (pending) diffusion electrode based thereon for fuel cells.
</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 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.
57
<PAGE>
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 CellScan machine. The settlement required
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. As part of the settlement,
Medis El was afforded the option, commencing on January 3, 2000, to repurchase
the settlement shares at the rate of 3,000 shares per week, initially at $6.00
per share, and increasing by $0.50 per share every month thereafter beginning on
March 1, 2000. As of the date of this prospectus, Medis El has repurchased an
aggregate of 39,000 of the settlement shares at an average price of $6.35, or an
aggregate of $247,500. Medis El intends to continue to purchase settlement
shares pursuant to this option throughout the duration of this Exchange Offer.
Medis El's repurchase option will expire concurrently with the conclusion or
earlier termination of this exchange offer. 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.
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<PAGE>
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 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>
59
<PAGE>
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 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.
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<PAGE>
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 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.
61
<PAGE>
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>
(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.
62
<PAGE>
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:
o an annual base salary of $180,000;
o a mandatary bonus of $62,000;
o a payment of $30,000 per annum for an educational fund; and
o 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> <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:
o Zvi Rehavi ..................................................200,000
o Robert K. Lifton ............................................100,000
o Jacob S. Weiss ..............................................100,000
o Howard Weingrow...............................................75,000
o Israel Fisher.................................................15,000
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
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<PAGE>
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.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding
ownership of our common stock as of March 15, 2000 by:
o each beneficial owner of five percent or more of our common stock;
o each of our directors and executive officers and our director and
executive officer nominees; and
o 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 as
a group - (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
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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 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.
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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.
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 Mr. Weiss options to purchase 100,000 shares of our
common stock at an exercise price per share of $2.93.
From December 1999 to April 2000, Medis El purchased an additional
23% of the outstanding shares of More Energy Ltd., giving Medis El a 93%
interest in such company, for an aggregate purchase price of $410,000.
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:
o finding potential licensees and cooperating with Medis El to
demonstrate its stirling cycle linear technologies;
o preparing licensing agreements between Medis El and third parties;
o overseeing legal proceedings between Medis El and third parties
arising out of or in connection with such licensing arrangements;
and
o 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:
o 10,625,619 shares of our common stock were issued and outstanding,
held of record by 70 persons; and
o 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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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:
o the issue or sale of common stock for consideration per share less
than the warrant price;
o the issue, sale, grant or assumption of any options for
consideration per share less than the warrant price;
o the declaration or payment of dividends payable in common stock; and
o 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:
o our right to extend the expiration date of the warrants; and
o 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.
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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.
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.
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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:
o 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 reasonably believed
that the act would not prejudice the company, as well as for
monetary liabilities charged against him; and
o a company may indemnify its officers for:
o monetary liability incurred pursuant to a judgment from an
action brought against him by a third party; or
o 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:
o any breach of the director's duty of loyalty to the corporation or
its stockholders;
o acts or omissions in bad faith or which involve intentional
misconduct or a knowing violation of law;
o intentional or negligent payments of unlawful dividends or unlawful
stock purchases or redemption; or
o any transaction from which the director derives an improper personal
benefit.
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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:
o 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
o 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 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:
o two directors or one quarter of the serving directors; or
o 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.
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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.
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:
o the appointment and discharge of directors;
o 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;
o approval of a merger; and
o 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:
o 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;
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o 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
o 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.
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
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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:
o 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;
o 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 approved
in good faith by the vote of our shareholders; or
o 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:
o affiliated with the other merging company;
o acting on the merging company's behalf; or
o controlled by the merging company.
76
<PAGE>
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:
o the board's audit committee;
o the board; and
o stockholders at the company's general meeting, on the condition
that one of the following applies:
o 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
o 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.
77
<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:
o 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;
o 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;
o 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;
o 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.
78
<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.
79
<PAGE>
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.
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.
80
<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
--------------------
April 24, 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 July 24, 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.
================================================================================
