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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23336
ELECTRIC FUEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4302784
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
885 Third Avenue, Suite 2900, New York, New York 10022-4834
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 230-2172
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 Par Value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [__]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of March 17, 1996 was approximately
$30,703,899 (based on the last sale price of such stock as reported by The
Nasdaq National Market).
As of March 17, 1997, 14,193,661 shares of registrant's Common Stock,
$.01 par value per share (the "Common Stock"), were issued and outstanding.
EXHIBIT INDEX APPEARS ON PAGE 45
Page 1 of 75
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PART I
ITEM 1. BUSINESS
General
Electric Fuel Corporation ("EFC" or the "Company") is engaged in the
design, development and commercialization of an innovative, advanced zinc-air
battery system for powering zero emission electric vehicles. The Company's
proprietary system for electric vehicles (the "Electric Fuel System") consists
of a refuelable zinc-air battery comprised of a series of cells with removable
zinc anode cassettes (referred to as "Electric Fuel"), a system for expedited
replacement of used batteries with previously refueled batteries ("the Exchange
System"), an automated battery refueling system for mechanically replacing,
rather than electrically recharging, depleted fuel cassettes (the "Refueling
System"), and a regeneration system for recycling the depleted fuel cassettes
(the "Regeneration System"). The Company believes that the Electric Fuel battery
exhibits a combination of performance characteristics superior to those of
electric vehicle batteries that are currently commercially available or, to the
Company's knowledge, under development. To date, the Electric Fuel battery has
been successfully installed and driven in extensive laboratory tests and in
vehicle road tests. Mercedes-Benz MB410 4.6 ton vans, General Motors Opel Corsa
Combo pickup trucks, a Fiat Ducato van and an Italian Marbella subcompact car,
all equipped with Electric Fuel batteries, are being test-driven in development
and demonstration programs in Europe and in Israel. Additionally, pilot Exchange
Systems, Refueling Systems and Regeneration Systems are currently in operation
in Israel, Italy and Germany.
During 1996, in addition to implementing the Company's electric
vehicle programs, the Company has begun to actively expand its activities in
non-electric vehicle applications for its zinc-air battery technology. The
Company is currently developing a battery for torpedoes, has developed and is
selling a signal light powered by water activated batteries for use in life
jackets and other rescue apparatus (the "Survivor Locator Light"), and is
exploring the market for batteries for hand-held electronic devices. It is
expected that the Company will continue to expand its efforts with respect to
these other applications. Other than the Survivor Locator Light, the Company
currently has no commercial products available for sale and does not expect to
generate sales in commercial quantities in the near term. In order to engineer
and establish the exchanging, refueling and regeneration infrastructure
necessary for commercial viability of the Electric Fuel System, the commitment
of significant additional investments and other resources, including capital,
will be required of the Company and other parties.
The Company was incorporated in Delaware in 1990. Unless the context
requires otherwise, all references to the "Company" refer collectively to the
Company and its wholly-owned subsidiary incorporated under the laws of Israel,
Electric Fuel (E.F.L.) Limited ("EFL"), Electric Fuel GmbH, a German
wholly-owned subsidiary of EFL and other subsidiaries of EFC and EFL. EFC's
executive offices are located at 885 Third Avenue, New York, New York 10022, and
its telephone number at its executive offices is (212) 230-2172.
Business Strategy
The Company's strategy is to market the Electric Fuel System initially
to large fleet operators. The Company believes that environmental concerns,
recently enacted and proposed legislation and high gasoline prices create
significant incentives for fleet operators, particularly in Europe, to use
electric vehicles, and that the Electric Fuel System is particularly suitable
for fleet operations. While the Company's initial efforts have focused on
Europe, governmental action continues in the United States and the Far East
which the Company believes will create incentives for fleet operators to
introduce electric vehicles into their fleets. The Company intends to strengthen
existing and develop new networks of strategic alliances with fleet operators,
companies engaged in energy production and transportation, automobile
manufacturers and others in order to establish the infrastructure necessary for
further development and commercialization of the Electric Fuel System. If the
Electric Fuel System is successfully commercialized, the Company expects to
derive revenues from the sale of components of the Electric Fuel System,
including Electric Fuel, manufactured by the Company and from licensing rights
to the Electric Fuel System to third parties. The Company is also researching
and developing other applications for its proprietary technology related to the
Electric Fuel System and other advanced battery technologies.
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The Company has historically derived revenues from licensing its
proprietary technology, supplying components of the Electric Fuel System and
providing technical services to its strategic partners. The Company expects that
in the future, depending on the availability of financing and other resources,
it will derive revenues principally from the manufacture and lease or sale of
commercial quantities of Electric Fuel batteries and Electric Fuel, royalty
payments related to licensing to others the right to manufacture and sell
batteries and Electric Fuel, the establishment of joint ventures for the
manufacture and sale of batteries and Electric Fuel or a combination of the
above. The Company also expects to obtain revenues from licensing to others
rights relating to the Exchange System, the Refueling System and the
Regeneration System, or to enter into joint ventures for the manufacture,
operation and sale of refueling and regeneration equipment, or a combination of
the above. There can be no assurance, however, that the Company will ever derive
such revenues. In a field test currently underway and managed by the German
postal service, the Electric Fuel System is being tested by Deutsche Post in
vehicles powered by the Electric Fuel battery in its operations in Bremen,
Germany (the "Field Test"). Certain other fleet operators (including Deutsche
Telekom, the German telecommunications company) are partners in the Deutsche
Post Field Test, and are expected to test electric vehicles in representative
operations of their fleets in Germany and Sweden.
The Company's Electric Fuel System
The Electric Fuel System consists of a refuelable zinc-air battery, the
battery Exchange System, the Refueling System and the Regeneration System.
The Zinc-Air Battery
The Company's zinc-air battery, with its proprietary air cathode and
zinc anode, delivers a combination of high energy density and high power
density. Energy density and power density determine the range between recharging
stops, and vehicle speed and acceleration. The Company believes that the
performance features of the Electric Fuel System are derived from, among other
things, the Company's patented zinc anode and air cathode. The Company and its
strategic partners in Germany and Italy have conducted extensive laboratory and
in-vehicle tests establishing that the Company's zinc-air battery provides
performance characteristics acceptable for use by fleet operators. The Company
has demonstrated that electric vehicles powered by its battery, depending on
various factors including the size and design of the vehicle, can achieve a
range of two to three hundred miles between refueling stops, at regular drive
cycles, at speeds and rates of acceleration approaching levels which are, at
present, generally attainable by vehicles powered by internal combustion
engines.
In 1993, independent tests were conducted by the TUV, the German
standards and testing institute on a 3.5 ton Mercedes-Benz MB180E van. In 1994,
this van, with a 528-cell battery, was tested on a dynamometer by Automotive
Testing and Development Services, Inc. in Ontario, California ("ATDS"), an
independent testing organization. The distance traveled by the van during the 11
hour stationary test was 427.9 miles (688 kilometers) at an average speed of
38.5 miles per hour (60 kilometers per hour) on a single charge. In 1996 a
Mercedes-Benz MB410 van 4.6 ton van powered by the Electric Fuel battery,
consistently demonstrated ranges of 220 to 260 miles (350 to 420 km) in city and
highway driving. In tests performed at the General Motors-Opel headquarters in
Germany, an Opel Corsa Combo powered by the Electric Fuel battery traveled 250
miles (400km). Also in 1996, an MB410 van powered by the Electric Fuel zinc-air
battery crossed the Alps and traveled from Chambray, France over the Moncenisio
Pass and continued to the Edison zinc-air regeneration plant in Turin, Italy.
The 152 mile (244 km) drive included a 93 mile (150 km) continuous climb over
mountainous terrain in which the vehicle climbed over 4950 feet (1500 meters) to
reach the summit at 6874 feet (2083 meters), using only 65% of the battery's
capacity.
The Company's zinc-air battery is a discharge-only unit consisting of a
number of modular cell stacks, each containing a number of individual cells
connected in series. The size and power of the battery is a function of the
number of cells. Each cell is presently approximately 9 1/2" wide, 10 1/2" long
and 1/2" thick and consists of an anode cassette containing the Electric Fuel
immersed in an electrolyte, and two cathodes consisting of the Company's
proprietary air membrane which allows interaction with oxygen in the
environment. The cells are constructed so as to allow for the rapid removal and
replacement of the anode cassettes in the "refueling" step. The battery also
contains an
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air supply system, scrubbing materials to remove carbon dioxide from the air
prior to exposure to the cathodes, a cooling system and a liquid management
system.
The Battery Exchange System
The Electric Fuel battery is refueled while it is removed from the
vehicle, so that the driver may either wait for the removal and replacement of
cassettes (approximately ten minutes) or have a previously refueled replacement
battery installed. This latter method, which is currently being used in the
Deutsche Post Field Test (referred to as "battery exchanging"), is particularly
applicable to fleet operators since they typically own the replacement
batteries. The battery Exchange System is designed to include control systems,
systems for conveyance of the Electric Fuel containers within the facility and
systems for data exchange with the refueled vehicles' on-board control systems.
The vehicle's on-board control system would then be designed to indicate the
amount of Electric Fuel remaining in the vehicle's battery, enabling the driver
to be credited for any unused amount of Electric Fuel. In Germany, a pilot
Exchange System has been constructed for the Deutsche Post Field Test by
Webasto, which exchanges batteries in both the Mercedes-Benz MB410 and in the
Opel Corsa Combo used in the Field Test.
The Refueling System
The Company's battery is charged by physically removing the consumed
zinc anode cassettes (which have been reduced to zinc oxide in the discharge, or
driving, process) and replacing them with anode cassettes containing fresh or
recycled zinc with the same energy and power content as the original zinc anode.
The Company refers to this removal and replacement process as "refueling."
Depleted cassettes can then be transported to a central facility to be recharged
in a process the Company refers to as "regeneration."
Refueling can be implemented using an automated system at central
depots, at fleet servicing locations or at public service stations. A mechanical
device removes cassettes containing depleted Electric Fuel and replaces them
with cassettes containing fresh Electric Fuel.
The Company believes that refueling stations established by large fleet
operators for their own use could later provide the initial infrastructure for
use by small fleet operators and, potentially, individual customers. Should
wider use of vehicles based on the Electric Fuel System evolve, the Company
believes there would be incentives for others to provide refueling services to
small fleets and individual users.
To date, the Company has constructed prototype semi-automated refueling
systems. Although the Company has not constructed an automated refueling system,
the Company believes that such a system can be constructed on the basis of the
prototypes developed by the Company and with readily available mechanical and
automation technology. However, there can be no assurance that the Company will
succeed in developing an automated battery refueling system suitable for
manufacture in commercial quantities. If the Company cannot develop such a
system, there can be no assurance it will be able to market successfully any
other component of the Electric Fuel System.
The Regeneration System
Battery refueling allows the electrochemical process of converting the
zinc oxide back into zinc (the "regeneration") to be taken "off-line" and
performed outside the battery and away from the car or the battery exchange
system in a controlled, central facility. The Company anticipates that
regeneration facilities will be established by third parties, such as electric
utility and energy companies, under license from the Company.
Regeneration is based on electrowinning, a process of recovering metal
from a solution by electrolysis, in which the recovered metal is deposited at
the cathode of an electrowinning cell. In the Electric Fuel System, reacted zinc
is removed from the depleted anode cassettes and is then mixed with a potassium
hydroxide solution in order to dissolve the zinc oxide. The solution containing
the dissolved zinc oxide is then fed into the electrowinning bath where the zinc
is recovered and collected. If the battery has not been fully discharged, the
remaining unreacted zinc is collected for future use without requiring any
further electricity. Zinc collected from both sources is then shaped and loaded
back
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onto the anode cassettes. As this is the same process used to manufacture
the original zinc anodes, there is no deterioration in the zinc anode produced.
The Company believes that the Electric Fuel System's overall efficiency
is high, as measured by customary standards for in-process energy loss. The
Company also believes that the Electric Fuel System, taken as a whole, will be
energy efficient because centralized regeneration facilities contemplated by the
Electric Fuel System will enjoy economies of scale and may be located near clean
power sources and connected to them by means of efficient high voltage lines.
Further, as Electric Fuel regeneration can occur during periods of off-peak
demand, it can provide a means of stabilizing electricity production for
utilities providing the electricity for regeneration and allow the use of clean
sources of electricity, such as hydro-electric power, which must run on a
continuous basis. The Company believes these features of the Electric Fuel
System should be considered "environmentally friendly."
The Regeneration System includes the electrowinning baths and various
systems for dissolving, mixing, plating, scraping and collecting the zinc,
together with equipment required to provide the necessary electric power. To
date, the Company has constructed two 10 kg/hour regeneration systems, located
in Israel and Italy, and a 100 kg/hr regeneration system in Bremen being used in
the Field Test. Although the Company has not constructed a commercial scale
regeneration system, it believes that a commercial scale system (with a
regeneration capacity of at least 10,000 kg/hour) can be constructed on the
basis of readily available technology. The Company is currently discussing with
potential licensees and others the development of regeneration systems with
increased capacity. However, there can be no assurance that the Company will
succeed in developing a commercial scale regeneration system suitable for
regenerating large quantities of Electric Fuel. If a commercial scale
regeneration system cannot be successfully developed, there can be no assurance
that the Company will be able to market successfully any other component of the
Electric Fuel System.
Refueling Compared to Recharging
In contrast to the mechanical recharging aspects of the Company's
zinc-air battery system, most battery technologies utilize electrical recharging
in which electric power from an outside source is applied directly to the
battery. To avoid overheating and the excessive build-up of pressure within the
battery, the electrical recharging process usually takes one to six hours to
complete. Moreover, the recharging process used for most other batteries results
in the deterioration of the electrodes, so that with each recharge the capacity
and efficiency of the battery are diminished. In contrast, the Company's battery
uses discharge-only electrodes which are regenerated outside of the battery.
This process involves stripping the reacted zinc oxide from the anode,
recycling it, and reconstructing an anode from the recycled zinc in the same
manner that an original anode is constructed. Because the recycled zinc in the
Electric Fuel battery is chemically identical to the zinc used in the original
anode of a new battery, the Company believes its recharged anodes will function
at the same performance level as the anodes contained in its new batteries.
Certain companies have introduced "fast recharge" batteries which can
be partially recharged in 15 to 25 minutes and fully recharged in less than an
hour. Typically, fast recharge requires the establishment of dedicated electric
recharging facilities connected to a source of electric power significantly
greater than that available from household outlets, which would, in most cases,
not be available without rewiring. In addition, fast recharging usually causes
extensive heat build-up in the battery, which can result in an increased
likelihood of a release of hydrogen in dangerous quantities. Further, "fast"
recharging does not fully recharge a battery, thus resulting in shorter drive
ranges and requiring more frequent recharging, thereby reducing the battery's
useful life.
The Deutsche Post Field Test
In a field test managed by the German postal service, the Electric Fuel
System is being tested by the Deutsche Post in vehicles powered by the Electric
Fuel battery in Bremen, Germany (the "Field Test"). The Field Test is a
cooperative and strategic partnership managed by Deutsche Post to conduct a
representative operating test of the Electric Fuel System. Only vehicles powered
by the Electric Fuel System are being tested. In addition to Deutsche Post,
participants in the Field Test currently include other fleet operators such as
Deutsche Telekom, the German telecommunications company and Vattenfall AB, the
largest utility in Sweden, the German state of Bremen, Stadtwerke
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Mainz AG (the municipal utility of Mainz, Germany), the Swedish postal service,
as well as German industrial suppliers such as Mercedes-Benz AG, GM-Opel,
Webasto AG Fahrzeugtechnik, an automotive parts manufacturer ("Webasto"), and
Stadtwerke Bremen AG (the municipal utility of Bremen). A consortium of South
African companies led by ESKOM, the South African utility company, has also
joined the Field Test as an Associate Partner and is considering a demonstration
project in South Africa.
The Company views the Field Test as consisting of three phases. The
first phase of the Field Test began in May 1995, when the Company delivered the
first Mercedes-Benz MB 410 van converted to the Electric Fuel System to be used
in the Field Test, and the Company's 10 kg/hour regeneration plant located in
Beit Shemesh, near Jerusalem, Israel, was completed. The second phase of the
Field Test began upon the opening of the 100 kg/hour regeneration plant in
Bremen in December 1995 and the third phase of the Field Test began when the
plant became operational and vehicles were placed into service. This occurred in
1996 after 10 Mercedes-Benz MB410 vans were converted to electric drivetrains,
equipped with Electric Fuel batteries and delivered to the Deutsche Post. One of
these vans is currently used for testing at the Company's facilities in Israel;
two are in Sweden for the Swedish Postal Service's portion of the Field Test;
and the remaining seven vehicles have been committed for use in the Field Test
by Deutsche Post in Bremen, Germany. While the Company had originally
anticipated the Field Test to expand to a total of 64 vehicles for the Deutsche
Post during 1996 (20 Mercedes-Benz vans and 44 GM-Opel light pick-up trucks), at
recent meetings the Company has discussed with certain other Field Test partners
modifications of the Field Test program. For 1997, Deutsche Post proposes to add
10 more Mercedes-Benz MB410 vans, 20 new Mercedes-Benz Vito vans (a newly
designed 2.6 ton van which Mercedes-Benz plans to convert to electric
drivetrains), and five GM-Opel Corsa Combo pickup trucks for the Field Test. The
Company and Deutsche Post are currently discussing potential modifications to
the Field Test and an expanded relationship with Deutsche Post for continued
development and commercialization of the Electric Fuel System. There can be no
assurance, however, that any agreement will be reached with the Deutsche Post,
or that if no such agreement is reached, the Field Test will continue.
In the Field Test, "Industrial Partners," in addition to the Company,
supply products and services to the Field Test, "Users" operate vehicles in the
Field Test, and "Associate Partners" receive information and limited services in
exchange for their financial contributions.
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Industrial Partners Users Associate Partners
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Mercedes-Benz AG Deutsche Post Vattenfall AB/Swedish Post
GM-Opel Deutsche Telekom ESKOM/South African Consortium
Stadtwerke Bremen AG Stadtwerke Bremen AG
Webasto Federal State of Bremen
Stadtwerke Mainz AG
</TABLE>
With respect to the Industrial Partners in the Field Test,
Mercedes-Benz AG has been requested to supply 20 MB 410 vans and the Deutsche
Post is proposing that Mercedes-Benz also supply 20 Vito vans. While initially
GM-Opel was requested to supply 44 Corsa Combo light pick-up trucks (five of
which are expected to be operating in 1997), the number of additional Opels that
will be requested or delivered to the Field Test is currently uncertain as the
Deutsche Post is proposing to use the Vito vans instead of the Opel trucks.
Webasto has provided the battery exchange equipment. Vattenfall AB and the
Swedish postal service use the refueling and regeneration services provided by
the 100 kg/hour regeneration plant in Bremen. All of the Field Test vehicles are
expected to replace, for purposes of the Field Test, vehicles used in regular
operation by the users of the vehicles.
In connection with the Field Test, the Company has agreed to provide
royalty-free licenses to use the Electric Fuel System to the other Field Test
partners solely for use during the Field Test, subject to confidentiality
agreements. The Company has also agreed to enter into negotiations with other
partners for licenses to use the Electric Fuel System following the Field Test.
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Deutsche Post will decide, on the basis of its own requirements and at
its discretion, whether it deems the Field Test successful. If Deutsche Post
deems the Field Test successful, Deutsche Post has informed the Company that it
intends to begin replacing, over several years, up to 25,000 vehicles in its
fleet with electric vehicles powered by the Electric Fuel System. The Company
believes that acceptance of the Electric Fuel System by Deutsche Post for its
fleet is a key factor with respect to the Company's efforts to commercialize the
Electric Fuel System. There can be no assurance, however, that Deutsche Post
will deem the Field Test to have been successful and accept the Electric Fuel
System as a powering system for a substantial portion of its fleet.
In November 1996 Field Test drives were temporarily suspended following
a fire in a Mercedes-Benz MB410 in Sweden. The vehicle suffered only moderate
damage to its undersection. To investigate the incident, the Deutsche Post
commissioned the TUV, the German testing and standards institute. The TUV report
stated that the cause of the fire was due to an external short circuit outside
the battery blocks. Even though the battery blocks were exposed to severe
temperature conditions for a prolonged period of time during the incident, they
did not catch fire or explode. Subsequently the TUV required design changes,
primarily in the materials used in the battery casings and the electric
connector to the battery casings. These changes have now been incorporated into
the Electric Fuel battery by the Company, and existing batteries are being
upgraded. An upgraded battery was tested by the TUV in Israel and has been
approved for use in limited drives in Germany. Upon completion of the TUV
certification process, which is expected to occur during the second quarter of
1997, Field Test drives are scheduled to resume.
Pursuant to the agreement among the partners in the Field Test (the
"Partners Agreement"), the Company is required to deliver a total of thirty
batteries (each containing 528 cassettes) for the Mercedes-Benz 4.6 ton vans and
sixty-six batteries (each containing 264 cassettes) for the Opel Corsa Combo
light pick-up trucks. In addition, the Company is required to deliver three
Mercedes-Benz batteries and five Opel batteries to Vattenfall AB. As a result of
the costs of the Field Test exceeding the Field Test budget, as described below,
the Company does not currently expect to meet these requirements, primarily with
regard to the Opel vehicles. Furthermore, the Company is required to design,
construct, install and operate a 100 kg/hour regeneration plant in Bremen, as
well as refueling equipment for the batteries. The 100 kg/hour plant, which
provides regeneration services necessary for the Field Test, has been
constructed in a facility the Company is leasing from Stadtwerke Bremen. The
regeneration plant became operational during the first half of 1996, although it
is not currently operating at full capacity.
The Field Test will permit an analysis of the economic feasibility and
infrastructure of the Electric Fuel System. Deutsche Post has budgeted
approximately DM 25.7 million (approximately $17.6 million) for the Field Test,
to be funded by Deutsche Post and its partners, including the Company. Of this
amount, Deutsche Post has committed to contribute DM 10.0 million (approximately
$6.8 million). Deutsche Post has budgeted approximately DM 21.0 million for
batteries, equipment and services from the Company relating to the Field Test.
In addition, the Company has received orders of approximately DM 1.0 million
from Vattenfall AB, for an aggregate total of approximately DM 22.0 million
(approximately $15.0 million), less a required contribution to costs of the
Field Test of DM 7.0 million (approximately $4.8 million) by the Company,
resulting in net revenues to the Company of DM 15.0 million (approximately $10.2
million) related to the Field Test. However, in connection with the Company's
discussions with the Deutsche Post with respect to the Opel batteries, the
Company has reduced anticipated revenues related to the supply of batteries from
its budgeted Field Test revenues, resulting in a reduction of anticipated net
project revenues to DM 12.2 million (approximately $8.5 million). Expenses
incurred in connection with the Field Test have exceeded revenues related
thereto.
The Partners Agreement relating to the Field Test provides that the
Company will supply the batteries for the Field Test. The Company has undertaken
that the batteries which will be supplied for the Field Test will meet
previously established performance standards and, if any battery does not meet
those standards, the Company is required to provide a satisfactory replacement
battery. Currently, 15% of the total budgeted cost of the batteries remains
unpaid and is not due until final delivery of the batteries. The remaining 20%
of the budgeted cost of regeneration equipment was due upon final installation
and initial operation of the 100 kg/hour regeneration plant in Bremen and was
paid during the first quarter of 1997.
In December 1995, in addition to payments made pursuant to the terms of
the Partners Agreement, as a result of increased costs incurred by the Company
in connection with the construction of the regeneration plant in Bremen,
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Deutsche Post paid the Company an additional DM 1.5 million (approximately $1.0
million), reflecting 50% of the then anticipated increased costs of DM 3.0
million (approximately $2.0 million).
In the fourth quarter of 1996, the Deutsche Post requested that the
Company refund the sum of approximately DM 1.8 million (approximately $1.2
million), representing milestone payments on account of Opel batteries which are
the subject of a dispute between the Deutsche Post and the Company. The payments
were made in accordance with mutually agreed contractual milestones, previously
acknowledged by the Deutsche Post as having been achieved, and therefore, the
Company does not believe that it is required to refund any of the payments.
However, until the resolution of this issue, the Company has eliminated the
payments from its budgeted Field Test revenues, in addition to other anticipated
revenues related to the supply of the Opel batteries.
To date, the costs of the Field Test incurred by the Company have
exceeded the related program budgeted amounts by more than 20%, and the Company,
pursuant to the terms of the Field Test Partners Agreement, has entered into
discussions to obtain additional funding from the Deutsche Post. In addition,
the engineering and manufacturing costs required to integrate the Electric Fuel
System into the Mercedes-Benz Vito are not included in the current Field Test
budget. The Company is continuing funding discussions with the Deutsche Post in
this regard. To date however, there has been no resolution of this issue, and
there can be no assurance that the Company will be able to obtain any such
funding. The Field Test is scheduled to end in December 1997, but could be
extended by the Deutsche Post with the agreement of the Field Test partners.
Because of the budgetary constraints noted above, the Company expects that,
without a significant increase to the budget, only a limited number of vehicles
will continue to be tested through the third quarter of 1997.
Strategic Alliances Relating to the Field Test
The Company has entered into a number of strategic alliances with
partners in the Field Test which involve arrangements extending beyond the scope
and time period of the Field Test. The Company believes that the cost of
participation by partners in the Field Test will exceed revenues to them, if
any, related to the Field Test. Accordingly, participants have sought and
continue to seek agreements with the Company regarding the receipt of use,
manufacturing, distribution, commission, rebate or other rights relating to the
Electric Fuel System, both during and after the completion of the Field Test.
Deutsche Post
The Company has granted Deutsche Post an option, which may be exercised
prior to December 31, 1997 and after the successful completion of the Field
Test, for a royalty-free non-exclusive license to use the Electric Fuel System
in its own fleet in Germany. The Company has agreed to pay Deutsche Post, in
recognition of its role in organizing and funding the Field Test, a percentage
of the Company's licensing and royalty revenues earned by the Company from
certain parts of Europe. Pursuant to this Agreement, the percentage of these
revenues to be received by Deutsche Post decline from 19.5% to 7.5% as the total
amount of payments received increases. Additionally, the Company has agreed to
reimburse Deutsche Post the portion of the purchase price it may pay to third
party licensees of the Electric Fuel System related to royalties paid by such
third parties to the Company until the earlier of (i) Deutsche Post receiving a
total of DM 45 million (approximately $29.0 million) in such payments when
combined with the payments described above related to the Company's European
revenues, or (ii) ten years after the date on which Deutsche Post receives a
total of DM 30 million (approximately $19.3 million) in such payments when
combined with the payments related to the Company's European licensing revenues,
the aggregate total of all such payments not to exceed DM 60 million
(approximately $38.7 million).
In addition, the Company granted Deutsche Post the non-exclusive right,
subject to Deutsche Post's beginning to convert its fleet to the Electric Fuel
System, to provide refueling and regeneration services to third parties, with
royalties for this license to be at a rate equal to the Company's most favored
European customer rates as in effect from time to time.
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Deutsche Telekom
Deutsche Telekom has informed the Company that if the Field Test is
successful it intends to convert between 12,000 and 15,000 vehicles of its fleet
to vehicles powered by the Electric Fuel System, although there can be no
assurance that it will do so. After the completion of the Field Test, in
exchange for Deutsche Telekom's DM 3.0 million (approximately $2.1 million)
investment in the Field Test, the Company has agreed to reimburse Deutsche
Telekom 10% of Deutsche Telekom's investment for each 1,250 vehicles Deutsche
Telekom converts to the Electric Fuel System. The Company expects to enter into
additional agreements similar to its agreement with Deutsche Telekom with other
Users in the Field Test.
Krupp UHDE
The Company has entered into a three year agreement with Krupp UHDE
under which both companies will cooperate in the joint development and marketing
of Electric Fuel regeneration plants during the term of the Field Test.
Additionally, the Company and Krupp UHDE have entered into an agreement which
provides for a cooperative marketing arrangement for commercial Electric Fuel
regeneration plants in Germany, Austria, Switzerland, Belgium, Luxembourg and
The Netherlands. This cooperation agreement is for an exclusive basis until five
years after the completion of the Field Test and will terminate in the year
2011. Pursuant to this agreement, the Company is entitled to receive fees on a
per transaction basis based on Krupp UHDE's revenues related to the sale of
regeneration plants as well as recurring fees from the purchasers of these
plants.
Stadtwerke Bremen
The Company has agreed to grant to Stadtwerke Bremen AG ("Stadtwerke"),
the municipal utility of Bremen, Germany, the right, after the completion of the
Field Test, to become the Company's partner in Germany. This right may be
implemented, at the option of the Company, by either (i) granting to Stadtwerke
a right of first refusal for contracts to own and operate regeneration plants in
Bremen and Niedersachsen and to sell certain components of the Electric Fuel
System, or (ii) allowing Stadtwerke to participate in a regeneration joint
venture in Germany with the Company.
Other Strategic Alliances
The Company has and will continue to seek to exploit its zinc-air
battery technology through strategic alliances with fleet operators, companies
engaged in energy production and transportation, automobile manufacturers and
others, in order to provide the other resources required to further develop and
commercialize the Electric Fuel System. To that end, the Company has formed or
engaged in preliminary discussions for other alliances in Europe.
Italy/Edison
In May 1993, the Company entered into an exclusive license agreement
(pursuant to the exercise of an option granted in 1991) with Edison, Italy's
leading private operator in the field of electric energy production. Pursuant to
this license, which terminates in 2008, Edison is authorized to manufacture, use
and sell Electric Fuel batteries, Refueling Systems, Regeneration Systems and
related services based on the Company's technology in Italy, France, Spain and
Portugal. The license also grants Edison non-exclusive license rights for the
sale of Electric Fuel battery systems and related services to Deutsche Post and
Deutsche Telekom, if the Company has first sold in excess of an aggregate of 250
batteries to those customers.
As part of the license agreement, Edison agreed to cooperate in a
development program which will cover a maximum of four years commencing in
December 1996. During this four-year period, Edison will purchase from the
Company batteries and related components and services in an amount up to $4.0
million, but not less than 600 million Italian lira (approximately $393,000) per
year. In October 1996, the Company agreed to offset the $4.0 million obligation
by an amount equal to the amount of certain prior payments made by Edison to the
Company of approximately $2.0 million with respect to the purchase of products
and services from the Company in connection with Edison's activities to date.
Edison's present commitment has therefore been reduced to $2.0 million. After
the
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earlier of (x) the end of the four-year period or (y) Edison selling at least
150 battery systems in any consecutive four-month period, the cooperation
described above will terminate and Edison will be obligated to purchase from the
Company no less than 35% of all battery cells required by it for manufacturing
battery systems and no less than 20% of the refueling systems it requires so
long as the Company is able to provide these products at prices competitive with
Edison's internal costs of producing these products itself. There can, however,
be no assurance that the Company will be able to produce such components in a
manner that will make such sales profitable to the Company. The license expires
in the year 2008, and Edison is under no obligation to exploit the Company's
technology.
Through December 31, 1996, the Company had reported revenues from
Edison of $6.7 million for a licensing fee, the supply of prototype batteries
and other system components, a refueling system and a pilot 10 kg/hour
regeneration plant. In December 1996, Edison paid the Company the final balance
of $335,000 owed for the license, following the satisfactory completion of
certain in-vehicle battery performance tests, and thereby commencing the term of
the development program. In accordance with the license agreement, Edison has
agreed to pay the Company royalties on net sales of products and services
incorporating the Company's technology, after those sales exceed $10 million, at
the following rates: 5% on net sales over $10 million up to $100 million; 4% on
net sales over $100 million up to $125 million; 3% on net sales over $125
million up to $150 million; and 2% on net sales over $150 million.
Sweden/Vattenfall
Contemporaneously with the Field Test in Bremen, Vattenfall AB and the
Swedish postal service, Posten Distribution AB, plan to operate three of the
Field Test vehicles in Sweden, one Mercedes-Benz MB 410 van and two Opel Corsa
Combos. For this purpose, Vattenfall has contracted with the Company to purchase
up to eight Electric Fuel batteries, identical to those being used in the Field
Test. At the present time two Mercedes-Benz vehicles and the related batteries
have been supplied to Vattenfall. The Company has agreed to provide refueling
and regeneration services to Vattenfall from the 100 kg/hour regeneration plant
in Bremen. In connection with this strategic agreement, Vattenfall has agreed to
make payments to the Company over time upon the achievement of certain
milestones, including delivery of batteries to Vattenfall and the completion and
commencement of operations of the Company's regeneration facilities. Vattenfall
has also agreed to use its best efforts to promote the use of the Electric Fuel
System. In addition, until the completion of the Field Test, Vattenfall may
exercise a right of first refusal for a license, to own and operate regeneration
facilities and sell Electric Fuel in Sweden, Denmark, Norway and Finland.
In November 1996 Field Test drives were temporarily suspended following
a fire in a Mercedes-Benz MB410 in Sweden. The vehicle suffered only moderate
damage to its undersection. To investigate the incident, the Deutsche Post
commissioned the TUV, the German testing and standards institute. The TUV report
stated that the cause of the fire was due to an external short circuit outside
the battery blocks. Even though the battery blocks were exposed to severe
temperature conditions for a prolonged period of time during the incident, they
did not catch fire or explode. Subsequently the TUV required design changes,
primarily in the materials used in the battery casings and the electric
connector to the battery casings. These changes have now been incorporated into
the Electric Fuel battery by the Company, and existing batteries are being
upgraded. An upgraded battery was tested by the TUV in Israel and has been
approved for use in limited drives in Germany. Upon completion of the TUV
certification process, which is expected to occur during the second quarter of
1997, Field Test drives are scheduled to resume.
Israel/GM-UMI
In December 1995, the Company entered into a non-binding letter of
intent with General Motors Corporation and its Israeli representative, Universal
Motors Israel Ltd. (together, "GM-UMI"). In the letter, GM-UMI and the Company
have stated their intent to cooperate in implementing a demonstration fleet of
GM vans, to be used in GM-UMI's day-to-day operations, powered by Electric Fuel
batteries and using the Company's refueling and regeneration facilities in Beit
Shemesh. The parties intend to coordinate the details of the project during
1997. The Company and GM-UMI are in the preliminary stages of negotiations,
however, and there can be no assurance that this project will be initiated.
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Israel/Israel Electric Corporation
During the fourth quarter of 1996, the Company and the Israel Electric
Corporation ("IEC") entered into an agreement (the "IEC Agreement") pursuant to
which the Company and IEC agreed to cooperate with respect to a demonstration
program for and marketing of the Electric Fuel System in Israel. Pursuant to the
IEC Agreement, IEC was also granted the exclusive license for sales of Electric
Fuel and the provision for zinc-air battery refueling and regeneration services
in Israel, Egypt, Jordan, Lebanon, Syria and the Palestinian Authority. In
addition, IEC has agreed to pay to the Company royalties based on a percentage
of revenues related to the license after June 30, 1999. The IEC Agreement also
provides a right of first refusal to IEC with respect to similar licenses
covering Saudi, Arabia, Iraq, Iran and the United Arab Emirates. The IEC
Agreement may be terminated by either party for breach and by IEC, in any event,
upon 60 days notice to the Company. IEC has paid the Company $960,000 in
connection with the IEC Agreement.
The Netherlands
Electric Fuel has undertaken to participate in a program with the
Province of Gelderland, the largest province in Holland, to utilize the Electric
Fuel system in passenger van "train-taxis", cabs which transport people between
train stations and their final destinations. The program is managed by KEMA, an
international consulting and management organization which specializes in
electric energy systems. Other project partners include electric utility
companies NUON of Holland and Vattenfall of Sweden.
South Africa
Eskom, South Africa's electric utility, has formed a consortium of
South African companies who have joined the Deutsche Post Field Test as
Associate Partners. The consortium is working to commercialize the Electric Fuel
system in other programs in South Africa.
THERMIE
The Company is also performing research and development services in
connection with a study funded by the European Community relating to the
creation of a zinc-air system infrastructure for the widespread use of vehicles
using the Electric Fuel System. The project is part of the THERMIE program,
which is a continuous project for members of the European Community, supporting
studies for the promotion of European energy technology. The project is being
carried out by TUV and Edison. The total budget of this project is estimated at
$1.8 million (1.5 million ECU), of which the European Community will contribute
approximately $780,000. As a subcontractor to TUV, the Company's share of the
funding is expected to be approximately $227,000 (180,000 ECU). To date the
Company has reported income of approximately $160,000. The project is expected
to be completed in the first half of 1997.
Competition
The competition to develop electric vehicle battery systems and to
obtain funding for the development of electric vehicle battery systems is, and
is expected to remain, intense. The Company's technology competes with other
battery technologies as well as with different zinc-air batteries. The
competition consists of development stage companies as well as major
international companies, and consortia including such companies, including
automobile manufacturers, battery manufacturers, and energy production and
transportation companies, many of which have financial, technical, marketing,
sales, manufacturing, distribution and other resources significantly greater
than those of the Company. Although the Company does not have extensive
knowledge of specific competitive activities, the Company is aware that a
substantial amount of electric vehicle battery research is in progress
worldwide. To date, various competing electric battery technologies have been
proposed and utilized by various automobile and battery manufacturers for
powering electric vehicles. Moreover, other advanced battery technologies are in
various stages of research and development.
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There are many entities, including governmental, quasi-governmental,
non-profit and private organizations, involved in advancing research and
development of electric vehicle and low emission vehicle technologies. In
addition, several consortia have been formed to fund research on electric
vehicle battery technologies which compete with the Company's battery
technology, including the United States Advanced Battery Consortium ("USABC"),
an organization committed to funding a total of $260 million by 1998, which is
financed by the United States Department of Energy, General Motors Corporation,
Ford Motor Company, Chrysler Corporation, and the Electric Power Research
Institute; the Advanced Lead-Acid Battery Consortium, funded by North American
lead manufacturers; and the New Energy Development Organization, a Japanese
consortium funded by the Japanese government and certain Japanese battery
manufacturers.
The following battery technologies are among those being considered for
use in electric vehicles by other manufacturers and developers. All of these
competing battery technologies (other than the zinc-air battery being developed
by the Lawrence Livermore National Laboratory ("LLNL")) are electrically
rechargeable as compared to the mechanically rechargeable Electric Fuel battery.
<TABLE>
<CAPTION>
Battery Technologies Manufacturers and Developers
- -------------------- ----------------------------
<S> <C>
Lead-Acid................................ Johnson Controls, Inc., Delco Remy, a division of
General Motors Corporation; Trojan Technologies, Inc.;
Sonnenschein GmbH; and Electrosource, Inc.
Nickel-Cadmium........................... SAFT America Inc.; Acme Battery Manufacturing Co., Inc.
Nickel-Metal Hydride..................... Ovonic Battery Company; GM Ovonic; Varta AG
Sodium-Nickel Chloride................... AEG Anglo Batteries GmbH
Lithium-Ion.............................. Sony Corporation and Nissan Motor Company, Japan;
SAFT France; Varta AG
Lithium-Polymer.......................... Valence Technology Inc.; Minnesota Mining & Manufacturing
Company
Lithium-Iron Sulfide..................... Argonne National Laboratory; SAFT America Inc.;
Westinghouse Electric Corporation
Zinc-Air ................................ BAT/Kummerow; Zinc-Air Power Corporation; LLNL
</TABLE>
The Company believes that competing zinc-air battery technologies are
at a much earlier stage of development, not just in terms of size and number of
cells, modules and demonstrations in electric vehicles, but also in terms of the
scale of development effort. BAT/Kummerow are developing a zinc-air battery with
removable zinc plates that can be electrically recharged outside the battery.
The Company believes that this system has limited energy and power per unit
weight and operates at a low voltage. In the United States, the Lawrence
Livermore National Laboratory, which is operated by the University of California
under contract with United States Department of Energy, is currently seeking
funding for final-stage development and demonstration of a patented zinc-air
refuelable battery ("ZARB") and electromechanical battery ("EMB") technologies
for mobile applications, including passenger cars, trucks, buses and delivery
vans. The ZARB technology includes not only the battery but also a refueling
unit and is based on a pumpable slurry of zinc pellets. If the final stage
development and demonstration of the ZARB and EMB is successful, LLNL intends to
seek the commercialization of the technology. The Company believes that LLNL's
testing to date has been limited.
Currently, approximately 60 electric cars, small vans (for the
transport of packages) and mini-vans (including so-called "minibuses"), buses
and pickup trucks using lead-acid, nickel cadmium and certain other types of
batteries are being test driven by residents and city officials of the Isle of
Rugen in one of the largest field trials of electric vehicles ever conducted in
Germany with batteries other than the Electric Fuel battery. This field trial is
subsidized by Germany's federal government with the participation of German
automakers and battery manufacturers. In addition, lead-acid and nickel-cadmium
battery technologies are currently being used in electric vehicle demonstration
programs in Gothenburg, Sweden, where 50 vehicles are being tested, and in
Malmo, Sweden, where between 10 and 20 vehicles are being tested. The success of
any of these demonstration programs could have an adverse impact on acceptance
of the Electric Fuel System.
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The Company believes that the Electric Fuel System exhibits a
combination of performance characteristics superior to those of other electric
vehicle battery technologies that are currently commercially available or, to
the Company's knowledge, currently under development. Electric vehicle
performance requirements that are likely to be established by fleet operators
will include vehicle range, load capacity, speed and acceleration
characteristics, refueling/recharging time and operating cost per mile.
To be successful, the Company's products must be available at a price
that is competitive with alternative technologies, particularly those intended
for use in low-emission vehicles. These technologies include "hybrid systems",
which combine internal combustion, battery technologies, use of hydrogen, and
low pollution fuels such as compressed natural gas, liquified natural gas,
ethanol and methanol. Other alternative technologies presently using
unacceptable costly components, include use of fuel cells, supercapacitors,
flywheels and catalytic removal of pollutants. These various technologies are at
differing stages of development and any one of them, or a new technology, may
prove to be more cost effective, or otherwise more readily acceptable by
consumers, than the Electric Fuel System. In addition, the California Air
Resource Board has expressed concerns to the Company about the infrastructure
requirements of the Electric Fuel System as opposed to battery technologies
which use electrical recharging.
Research and Development
During the years ended December 31, 1994, 1995, and 1996, the Company's
gross research and product development expenditures, including costs of revenues
of prototype batteries and components of the Electric Fuel System, were $4.8
million, $14.4 million, and $12.8 million, respectively. During these periods,
the Office of the Chief Scientist of the Israel Ministry of Industry and Trade
participated in research and development efforts of the Company thereby reducing
the Company's gross research and product development expenditures in the amounts
of $699,000, $1.6 million, and $1.5 million, respectively.
Under the terms of the grants from the Chief Scientist and current
Chief Scientist regulations, the Company is obligated to pay royalties at the
rate of 3% of the net sales of products developed from projects funded by the
Chief Scientist for the first three years of sales, with increasing levels
thereafter, up to 5%. The Company currently pays royalties at the rate of 3%.
The obligation to make such royalty payments ends when 100% of the amount
granted (in NIS linked to the dollar) is repaid. The Government of Israel does
not own proprietary rights in the technology developed using its funding, but
certain restrictions with respect to the technology apply, including the
obligation to obtain the Israeli Government's consent to manufacture the product
based on such technology outside of Israel or for the transfer of the technology
to a third party, which consent may be conditioned upon an increase in royalty
rates or in the amount to be repaid. Current regulations require, that in the
case of the approved transfer of manufacturing rights out of Israel, the maximum
amount to be repaid will be increased to 120% to 300% of the amount granted,
depending on the extent of the manufacturing to be conducted outside of Israel,
and that an increased royalty rate will be applied.
In December 1994, the Company reached an agreement with the Chief
Scientist, which was formalized in 1995, regarding the approval of the transfer
of certain manufacturing rights to Edison, the prepayment by the Company of
certain royalty obligations to the Chief Scientist and the effect on royalty
rates and repayment ceilings of any transfer by the Company of manufacturing
rights to third parties outside of Israel in the future. The Company agreed to
prepay royalties owed to the Chief Scientist in connection with grants received
by the Company from 1991 through 1993 by making payments totaling $1.3 million
plus interest over a two-year period ending December 31, 1996. Accordingly, in
1994 the Company recorded a net charge of $1.1 million in selling, general and
administrative expenses, reflecting the $1.3 million obligation, less
approximately $200,000 of net royalty obligations to the Chief Scientist accrued
previously by the Company. Pursuant to the agreement the entire obligation has
been paid. As a result of this agreement, the Company had no additional royalty
obligation to the Chief Scientist from the Company's sales through June 1996.
Since July 1996, the Company has been paying royalties of 3% of all sales
income, other than certain revenues that were exempted under the agreement with
the Chief Scientist.
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Marketing
In recent years the Company has focused its marketing efforts and
resources in Europe. In 1996, the Company expanded its active marketing efforts
to the United States and the Far East. In October 1996 Electric Fuel
participated in the 13th Electric Vehicle Symposium (EVS-13) in Osaka, Japan.
The Company exhibited a Deutsche Post Mercedes-Benz MB410 van in its exhibition
booth. Two vehicles powered by the Electric Fuel zinc-air battery (the Swedish
Post s MB410 van and the Edison 1-ton subcompact car) were driven in the EVS-13
parade as part of the Midosuji Parade, a 3 km long parade down the main street
of Osaka, Japan. Both vehicles also participated in the EVS-13 Ride and Drive.
In the United States, the Electric Power Research Institute ("EPRI")
conducted a preliminary scoping study of the Electric Fuel zinc-air battery
system. The study was carried out in cooperation with Electric Fuel to establish
principal markets for the Electric Fuel battery system for powering electric
vehicles in the United States. The preliminary evaluation concluded that the
Electric Fuel zinc-air battery system offers outstanding range and test
refueling capabilities at competitive costs and that overall, the Electric Fuel
system looks promising for fleet applications. EPRI has recommended to proceed
with a techno-economic analysis and a US demonstration program.
The Company plans to continue to develop demonstration and evaluation
programs that will illustrate how the Electric Fuel System is able to meet the
needs of fleet operators. The Company plans to concurrently seek to expand its
existing strategic alliances in Europe, the United States and in the Far East,
benefiting from experience gained in connection with the Field Test and its
alliances with the Deutsche Post, Edison, Vattenfall and KEMA. The Company also
intends to seek the support of government agencies, electric utilities and zinc
manufacturers.
Manufacturing
The Company is currently producing prototype batteries at its
facilities in Israel, based upon standard industrial techniques. In addition,
the Company has constructed a production facility in leased premises in Beit
Shemesh, Israel for manufacturing and assembling the Electric Fuel batteries and
related components of the Electric Fuel System. This facility was completed
during the second quarter of 1995 at an aggregate cost of approximately $1.7
million, including the regeneration equipment, and will initially be utilized to
manufacture and assemble Electric Fuel batteries for the Field Test, producing
both 80 kWh and 160 kWh battery systems for use in the participating GM-Opel and
Mercedes-Benz vehicles. The Company plans to expand this facility to enable more
efficient assembly of batteries in greater quantities. The Company believes that
the manufacturing process required to produce its batteries incorporates
relatively standard and inexpensive procedures and, therefore, the establishment
of a full-scale production facility will be commercially feasible.
It is the Company's plan that zinc anodes for its battery will be
manufactured by parties licensed by the Company to operate regeneration
facilities. Regeneration and refueling equipment will be manufactured by the
Company and by third parties licensed by the Company to do so, although
proprietary components of the equipment may be manufactured and supplied by the
Company. Prototype regeneration and refueling systems have been constructed by
the Company and are in operation at its facilities in Israel and a prototype
regeneration facility is in operation in Italy. The Company has also constructed
a 100 kg/hr regeneration facility in Bremen, Germany and designs for larger
scale versions of these systems are currently under development.
New Applications
The Company is continually researching and developing other
applications for its proprietary technology related to the Electric Fuel System
and other advanced battery technologies. The Company is currently developing, in
cooperation with STN Atlas Elektronik GmbH ("STN Atlas"), a German defense and
marine industry contractor, a high power zinc-oxygen battery for torpedoes. STN
Atlas has exclusive rights to sell torpedoes with the Company's zinc-oxygen
batteries until 2001, subject to automatic extension if full-scale production
commences, as well as certain rights with respect to the application of the
Company's proprietary technology for batteries.
The Company has also developed Survivor Locator Light ("SLL"), a signal
light powered by a water activated magnesium-cuprous chloride battery, used to
locate survivors of airplane or boat accidents in the water. The
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Company has received certification of the SLL by both the United States Federal
Aviation Administration and the Civil Aviation Authority of Israel for use of
the SLL in aircraft. The Company received an initial order to produce 60,000
SLLs over a two year period, and began first product shipments in August 1996.
The Company is in the preliminary stage of researching and developing
applications for its proprietary zinc-air battery technology in portable
electronic devices such as cellular telephones and notebook computers.
Regulatory and Environmental Matters
The Company believes that its zinc-air batteries as currently
contemplated will be in compliance with applicable Israeli, European, and United
States federal, state and local standards that govern the manufacture, storage,
use and transport of the various chemicals used, and waste materials produced,
in the manufacture and use of the Company's zinc-air battery, including zinc and
potassium hydroxide. The Company has applied for, but not yet received, the
necessary permits under the Israeli Dangerous Substances Law, 1993, required for
the use of zinc metal, potassium hydroxide and certain other substances in its
facilities in Israel. Although the Company believes that the permits will be
granted, no assurance can be given in this regard.
The presence of potassium hydroxide as an electrolyte in the Company's
batteries may subject its disposal to regulation under some circumstances. This
electrolyte is the same as the electrolyte used in primary alkaline batteries
and rechargeable nickel-cadmium and nickel-metal hydride batteries. The
Company's technology uses relatively small amounts of spillable potassium
hydroxide. The United States Department of Transportation regulates the
transport of potassium hydroxide, and it is likely that the over-the-road
transport of Electric Fuel will require manifesting and placarding.
The EPA, the Occupational Safety and Health Administration and other
federal, state and local governmental agencies would have jurisdiction over
operations of Company facilities were they to be located in the United States.
Based upon risks associated with potassium hydroxide, government agencies may
impose additional restrictions on the manufacture, transport, handling, use, and
sale of the Company's products.
Patents and Trade Secrets
The Company relies on certain proprietary technology and seeks to
protect its interests through a combination of patents, know-how, trade secrets
and security measures, including confidentiality agreements. The Company's
policy generally is to secure protection for significant innovations to the
fullest extent practicable. Further, the Company continuously seeks to expand
and improve the technological base and individual features of the Electric Fuel
System through on-going research and development programs.
In general, the Company's proprietary technology may be categorized as
follows: the overall Electric Fuel System or a combination of the Electric Fuel
System components; the zinc anode, including its physical and mechanical
attributes; the construction of the air cathode; cell structure and
arrangements; connectors; the automatic refueling system; zinc regeneration and
safety features. The Company's issued patents and pending and anticipated patent
applications are principally related to inventions within these categories. The
Company believes that these patents, together with its trade secrets,
experience, know-how and contractual arrangements adequately protect the
Company's technology. The Company holds 34 unexpired patents granted in the
United States of which five are non-zinc-air patents covering such items as
water activated batteries. The Company also holds nine approved patent
applications in Europe and two approved patent applications in Israel. The
Company has patent applications pending in the United States, in Europe, Israel
and Japan, and is continually preparing additional patent applications for
filing in the United States and elsewhere. All of the Company's currently issued
patents expire between June 2009 and January 2014.
In addition to patent protection, the Company relies on the laws of
unfair competition and trade secrets to protect its proprietary rights. The
Company attempts to protect its trade secrets and other proprietary information
through agreements with customers and suppliers, proprietary information and
confidentiality agreements with
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employees and consultants and other security measures. Although the Company
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful.
Employees
As of February 28, 1997, the Company had, in its Israeli subsidiary,
169 full-time employees, of whom 8 hold doctoral degrees and 96 hold other
advanced degrees. Of the total, 61 employees were engaged in product research
and development, 91 were engaged in prototype production and operations, and the
remainder in general and administrative functions. The Company had, in its
German subsidiary, 20 employees engaged in plant operations there. The Company's
success will depend in large part on its ability to attract and retain skilled
and experienced employees.
The employees and the Company are not parties to any collective
bargaining agreements. However, as substantially all of the Company's employees
are located in Israel and employed by EFL, certain provisions of the collective
bargaining agreements between the Histadrut (General Federation of Labor in
Israel) and the Coordination Bureau of Economic Organizations (including the
Manufacturers' Association of Israel) are applicable to EFL's employees by order
(the "Extension Order") of the Israeli Ministry of Labor and Welfare. These
provisions principally concern the length of the work day and the work week,
minimum wages for workers, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment, including certain automatic
salary adjustments based on changes in the Israeli CPI.
Israeli law generally requires severance pay upon the retirement or
death of an employee or termination of employment without due cause. EFL
currently funds its ongoing severance obligations by making monthly payments to
approved severance funds or insurance policies. In addition, Israeli employees
and employers are required to pay specified sums to the National Insurance
Institute, which is similar to the United States Social Security Administration.
Since January 1, 1995, such amounts also include payments for national health
insurance. The payments to the National Insurance Institute are approximately
14.6% of wages (up to a specified amount), of which the employee contributes
approximately 66% and the employer contributes approximately 34.0%. The majority
of the permanent employees of EFL are covered by "managers insurance," which
provides life and pension insurance coverage with customary benefits to
employees, including retirement and severance benefits. The Company contributes
14.33% to 15.83% (depending on the employee) of base wages to such plans and the
permanent employees contribute 5% of base wages.
In 1993, an Israeli court held that companies that are subject to the
Extension Order are required to make pension contributions exclusively through
contributions to Mivtachim Social Institute of Employees Ltd. ("Mivtachim"), a
pension fund managed by the Histadrut. The Company subsequently reached an
agreement with Mivtachim with respect to providing coverage to certain
production employees and bringing it into conformity with the court decision.
The agreement does not materially increase the Company's pension costs or
otherwise materially adversely affect its operations. Mivtachim has agreed not
to assert any claim against EFL with respect to any past practices of EFL
relating to this matter. Although the arrangement does not bind employees with
respect to instituting claims relating to any nonconformity by EFL, the Company
believes that the likelihood of the assertion of claims by employees is low and
that any potential claims by employees against EFL, if successful, would not
result in any material liability to the Company.
The Reorganization
Immediately prior to the Company's initial public offering in March,
1994, one of the Company's principal stockholders, Advanced Materials
Technologies, Inc. ("Amtec") was merged with and into the Company (the
"Reorganization"). The Boards of Directors of EFC and Amtec determined that a
reorganization of the ownership of EFC and Amtec was necessary in order to
simplify the corporate structure, achieve operating efficiencies and put
publicly traded stock in the hands of EFC's ultimate stockholders. The
Reorganization was accomplished by a merger pursuant to which Amtec was merged
with and into EFC, with EFC being the surviving corporation and with holders of
Amtec's Common and Preferred Stock receiving shares of EFC's Common Stock in
exchange for the Amtec equity held by them. Thus, the effects of the
Reorganization were (1) to eliminate Amtec by merging it with and into EFC,
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and (2) to give former stockholders of Amtec equity interests directly in EFC in
exchange for their equity interests in Amtec. EFC also acquired certain assets
totaling approximately $328,000 in connection with the Reorganization.
ITEM 2. PROPERTIES
EFC's corporate headquarters are located in New York, New York and
leased on a month-to-month basis. The Company's research and development and
administrative facilities, constituting approximately 9,000 square feet, are
located in Jerusalem, Israel and held under a lease agreement expiring on
November 30, 1998. The Company's production facilities for the manufacture and
assembly of Electric Fuel batteries and related Electric Fuel System components,
constituting approximately 34,000 square feet, are located in Beit Shemesh, near
Jerusalem, Israel and held under lease agreements expiring on December 31, 1997.
The Company may extend the term of the leases for an additional three-year
period at the terms and rental rate prevailing under the lease agreements at the
time of the extension. In addition, during 1996, the Company leased in Beit
Shemesh, additional space of approximately 16,000 square feet. The lease
agreement expires on March 19, 1999, and the term of the lease may be extended
for up to two years upon six months' prior written notice. The Company intends
to transfer the production facilities currently located in Beit Shemesh to a new
facility in Jerusalem, once it is constructed.
The Company's wholly owned subsidiary, Electric Fuel GmbH ("EFGmbH"),
has leased a facility located in Bremen, Germany from Stadtwerke Bremen AG
within which it has established a regeneration plant to operate vehicles for the
Deutsche Post Field Test. The lease is currently in effect and will remain in
effect until 6 months after the end of the Field Test. EFGmbH has the option of
extending the term of the lease until December 12, 2006. In the event that
EFGmbH exercises its option, it has the right to terminate the agreement at the
end of each calendar quarter upon three months written notice. In addition
EFGmbH has leased approximately 3,000 square feet of office space alongside the
regeneration facility. Part of the space is sub-leased. The lease agreement
expires on November 14, 1997, and may be extended for two additional years.
The aggregate rental payments under the above leases, at rates in
effect at December 31, 1996, are approximately $437,000, $193,000, and $18,000
in the years ended December 31, 1997, 1998 and 1999 respectively. The rental
payments in Israel are payable in Israeli currency linked to the Israeli
Consumer Price Index and in Germany are payable in DM.
The Company is actively looking for additional land to construct larger
premises near its Jerusalem facilities. The Company received a letter in August
1995 from the Israel Ministry of Industry and Trade authorizing the allocation
to the Company of approximately 5.4 dunam (approximately 1.4 acres) with rights
to construct facilities of up to approximately 90,000 square feet in Jerusalem,
near its existing facilities. Although the Company has paid the Jerusalem Land
Development Authority approximately $77,000 in development fees related to this
site, the Company continues to look for a more suitable site. If the Company
does not enter into a lease agreement for the site, the development fees will be
returned to the Company.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Since February, 1994, the Company's Common Stock has been traded under the
symbol EFCX in The Nasdaq National Market. The following table sets forth, for
the periods indicated, the range of high and low closing prices of the Company's
Common Stock in the NASDAQ National Market System.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1994
First Quarter $14.25 $ 8.00
Second Quarter 12.50 6.50
Third Quarter 8.50 5.50
Fourth Quarter 8.50 5.75
1995
First Quarter $ 6.25 $ 4.25
Second Quarter 13.875 4.625
Third Quarter 11.375 7.875
Fourth Quarter 10.00 7.875
1996
First Quarter $11.75 $ 6.25
Second Quarter 8.00 6.125
Third Quarter 7.25 5.875
Fourth Quarter 7.00 5.875
</TABLE>
As of March 17, 1997 the Company had approximately 220 holders of
record of its Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Board of Directors presently intends to retain all earnings for use in the
Company's business. Any future determination as to payment of dividends will
depend upon the financial condition and results of operations of the Company and
such other factors as are deemed relevant by the Board of Directors.
Pursuant to a Stock Purchase Agreement dated September 30, 1996 between
the Company and Mr. Leon Gross, one of the Company's existing shareholders (the
"Purchase Agreement"), on October 2, 1996, the Company issued 1,538,462 shares
of the Company's unregistered common stock, $.01 par value per share to Mr.
Gross at a price of $6.50 per share, for a total purchase price of $10.0
million. In connection with the Purchase Agreement, the Company granted
registration rights to Mr. Gross and entered into voting rights arrangements
with Mr. Gross and certain management stockholders. Because the common stock was
issued pursuant to a private placement to Mr. Gross, it was not registered under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
the private placement exemption therefrom provided by Section 4(2) of the
Securities Act.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below with respect to the
statements of income (loss) for each of the five fiscal years in the period
ended December 31, 1996, and with respect to the balance sheets at the end of
each such fiscal year has been derived from the financial statements of the
Company, which have been audited by Kesselman & Kesselman, independent certified
public accountants in Israel, and a member firm of Coopers and Lybrand
International. The financial information set forth below is qualified by and
should be read in conjunction with the Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ............................................ $1,519 $3,694 $4,873 $4,372 $5,405
Research and development
expenses and costs of revenues .................... 1,426 1,830 4,770 14,379 12,805
Less: royalty-bearing grants......................... (594) (578) (699) (1,561) (1,506)
- ---- ---- ---- ---- ------ ------
..................................................... 832 1,252 4,071 12,818 11,299
Provision for anticipated program losses............. - - 1,500 2,600 -
Selling, general and administrative
expenses........................................... 623 1,694 3,365 2,752 4,956
------ ----- ------- ----- -----
Operating income (loss).............................. $ 64 $ 748 $(4,063) $(13,798) $(10,850)
Financial income (expenses).......................... (19) 50 583 664 794
------ ------ ----- ---- ------
Income (loss) before taxes on income................. $ 45 $ 798 $(3,480) $(13,134) $(10,056)
Taxes on income...................................... 8 147 20 35 (38)
------ ------ ----- ------ ------
Income (loss) from the operations of the Company
and its subsidiaries................................. $ 37 $ 651 $(3,500) $(13,169) $(10,018)
====== ====== ======= ======== ========
Share in loss of investee Company.................... $ - - 61 52 -
------ ------ ------- -------- --------
Net Income (loss).................................. 37 651 (3,561) (13,221) (10,018)
====== ====== ======= ======== ========
Earnings (loss) per share............................ $ * $ 0.08 $(0.43) $(1.55) $(0.81)
====== ====== ====== ====== ======
Weighted average number of common
shares outstanding (in thousands).................. 7,760 7,926 8,319 8,530 12,336
- --------------------
*less than $0.01
<CAPTION>
Year Ended December 31
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and investments .............. $1,444 $2,514 $18,222 $9,580 $23,959
in marketable debt securities
Receivables and other assets......................... 209 958 2,528 4,135 3,259
Fixed assets, net of depreciation.................... 105 398 1,989 5,986 7,304
--- --- ----- ----- -----
Total Assets......................................... $1,758 $3,870 $22,739 $19,701 $34,522
====== ====== ======= ======= =======
Liabilities.......................................... $1,285 $2,783 $3,736 $13,880 $6,652
Long term debt....................................... 0 0 0 0
Stockholders' equity................................. 473 1,087 19,003 5,821 27,870
--- ----- ------ ----- ------
Total liabilities and stockholders equity............ $1,758 $3,870 $22,739 $19,701 $34,522
====== ====== ======= ======= =======
</TABLE>
-19-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this Report.
Amounts reported here have been rounded to the nearest thousand, unless such
amounts are more than 1.0 million, in which event such amounts have been rounded
to the nearest hundred thousand.
General
From its inception, the Company has been engaged principally in the
research, design, development and commercialization of an advanced zinc-air
battery system for powering zero emission electric vehicles. The Electric Fuel
System consists of a refuelable zinc-air battery comprised of a series of cells
with removable zinc-anode cassettes, a battery refueling system for refueling
the depleted fuel cassettes, a battery exchange system and a regeneration system
for recycling the depleted cassettes. The Company continues to develop and
engineer all components of the Electric Fuel System, currently primarily for use
in the Field Test, as well as in connection with its other strategic alliances.
During 1996, in addition to implementing the Company's electric vehicle
programs, the Company has begun to actively expand its activities in
non-electric vehicle applications for its zinc-air battery technology. The
Company is currently developing a battery for torpedoes, has developed and is
selling a signal light powered by water activated batteries for use in life
jackets and other rescue apparatus and is exploring the market for batteries for
hand-held electronic devices. It is expected that the Company will continue to
expand its efforts with respect to these other applications.
The Company has experienced significant fluctuations in the sources and
amounts of its revenues and expenses, and the Company believes that the
following comparisons of results of operations for the periods presented do not
provide a meaningful indication of the development of the Company. During these
periods, the Company has received periodic lump-sum payments relating to
licensing and other revenues from Deutsche Post in connection with the Field
Test, the Israel Electric Company, and from Edison, which have been based on the
achievement of certain milestones, rather than ratably over time. The Company's
expenses have been based upon meeting the contractual requirements under its
agreements with various strategic partners and, therefore, have varied according
to the timing of activities, such as the need to provide prototype products and
to establish and engineer refueling and regeneration facilities. The Company's
research and development expenses have been offset, to some extent, by the
periodic receipt of research grants from the Chief Scientist. The Company
expects that, because of these and other factors, including general economic
conditions and delays due to legislation and regulatory and other processes and
the development of competing battery technologies, future results of operations
may not be meaningfully compared with those of other periods. Thus, the Company
believes that period-to-period comparisons of its past results of operations
should not be relied upon as indications of future performance.
The Company incurred significant operating losses for the years ended
December 31, 1996, 1995 and 1994, and expects to continue to incur significant
operating losses over the next several years. These losses may increase and be
incurred over a longer period of time as the Company expands its research and
development activities and establishes production and regeneration facilities,
and such losses may fluctuate from quarter to quarter. However, if the Electric
Fuel System is successfully commercialized, the Company expects to derive
revenues from the sale of components of the Electric Fuel System manufactured by
the Company, including Electric Fuel, and from licensing rights to the Electric
Fuel System to third parties. There can be no assurance that the Company will
ever derive such revenues or achieve profitability.
-20-
<PAGE>
Functional Currency
The Company's management considers the United States dollar to be the
currency of the primary economic environment in which EFL operates and,
therefore, EFL has adopted and is using the United States dollar as its
functional currency. Further, the Company believes that the operations of EFL's
subsidiaries are an integral part of the Israeli operations. While a growing
proportion of EFL's revenues have been denominated in Deutsche Marks as a result
of its involvement in the Field Test, based on the Company's historical
experience and the Company's strategic objectives, management continues to
consider the United States dollar to be the currency of the primary economic
environment in which EFL operates, and the Company does not believe that any
change in this condition would have a material impact on the analysis of the
Company's historical financial condition and results of operations. Transactions
and balances originally denominated in United States dollars are presented at
the original amounts. Gains and losses arising from non-dollar transactions and
balances are included in net income.
Forward Looking Statements
When used in this discussion, the words "believes", "anticipated" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. See "Important Factors
Regarding Forward-Looking Statements" incorporated herein by reference. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operations
Years Ended December 31, 1996 and 1995
Revenues for the year ended December 31, 1996, totaled $5.4 million
compared with $4.4 million in the comparable period in 1995, an increase of $1.0
million. Revenues for 1996 were principally derived from activities relating to
the Field Test program. The balance of the revenues related to the Field Test
are expected to be recognized in 1997. The Company also recognized revenues in
connection with the granting of a license to the Israel Electric Company for
zinc-air battery refueling and regeneration in Israel and other neighboring
countries. Additionally, the Company completed recognition of revenues related
to phase 1 of its development program with STN Atlas Elektronik GmbH ("STN") to
develop a high power zinc oxygen battery for torpedoes, and began recognition of
revenues from Phase 2 of its STN program. Finally, the Company recognized
revenues from Edison in connection with the license granted to it. Revenues for
the year ended December 31, 1995, were principally derived from activities
relating to the Field Test, and a grant of marketing rights and the sale of
equipment to Vattenfall AB when Vattenfall and the Swedish Post joined the Field
Test as associate partners. In addition, revenues related to phase 1 of the
Company's agreement with STN and the completion and delivery of all of the
Company's outstanding orders from Edison were recognized in 1995.
Research and development expenses and cost of revenues totalled $12.8
million during 1996 compared with $14.4 million during 1995. However actual 1996
research and development expenses and cost of revenues of $14.7 million were
offset by $1.9 million, representing utilization of a portion of the previously
accrued provision for project losses. These expenses for both 1996 and 1995
include expenses in connection with the Field Test, including costs related to
construction of the Bremen regeneration facility and battery production costs;
costs associated with the operation of the Company's production facilities in
Israel, and the continued development and engineering costs relating to the
Electric Fuel System. The Company believes that, given the Company's stage of
development, it is not, at this time, meaningful to distinguish between research
and development expenses and cost of revenues. In the year ended December 31,
1996, the Company recorded $1.5 million of royalty-bearing grants representing
substantially all of the expected grants from the Chief Scientist in connection
with the Company's 1996 research and development program,
-21-
<PAGE>
including an increase of $320,000 in Chief Scientist grants in connection with
the Company's 1995 research and development program. For the year ended December
31, 1995, the Company recorded $1.6 million of Chief Scientist grants. Expenses
related to the Field Test are expected to continue to be incurred through 1997
as the Company continues to deliver batteries and operates the Bremen
regeneration plant. Field Test expenses have substantially exceeded any expected
revenues related thereto. Since the plant is currently dedicated to the Field
Test, the cost of the plant (net of anticipated residual value) is reflected as
a current expense.
Selling, general and administrative expenses for the year ended
December 31, 1996 increased to $5.0 million compared with $2.8 million in 1995.
This increase was attributable to the following: increased salaries, fees and
allocated overhead expenses with respect to the Company's expanded activities,
particularly in Germany; a settlement arrangement with respect to a terminated
consultant included in marketing expenses (see Note 5(a)4 to the Consolidated
Financial Statements); increased severance accruals resulting from modifications
to certain named executive officers' employment agreements; and increased costs
as the Company intensified its marketing efforts into new geographic areas.
Further increases in recurring selling, general and administrative expenses are
expected as the Company expands its activities.
The provision for anticipated program losses previously recorded by the
Company reflects the program losses related to the Field Test currently
estimated by management, and accordingly no increase to the provision was
recorded in 1996. In the future, however, the provision may be increased to
reflect any revised estimates of project costs. The balance of the provision for
the uncompleted portions of the program amounts to $2.2 million as at December
31, 1996. The overall provision includes cost estimates based on the Company's
production experience to date for the supply of batteries and battery-vehicle
interface equipment, the estimated service expenses for the Field Test fleet and
costs related to the regeneration plant in Bremen, Germany which is supporting
the Mercedes-Benz Field Test vehicles in service at December, 1996.
Financial income, net of interest expense, bank charges, and other
fees, totaled approximately $794,000 in 1996 compared to $665,000 in 1995.
Financial income, primarily interest earned in the United States and Israel from
both taxable and tax-exempt securities, increased to $1.1 million in 1996 from
$781,000 in 1995.
The Company has incurred net operating losses or had earnings arising
from tax-exempt income during the years ended December 31, 1996 and 1995 and,
accordingly, no provision for income taxes was required. Taxes paid in 1996 and
1995 are primarily composed of United States federal alternative minimum taxes.
The Company reported a net loss of $10.0 million in 1996 compared with
a net loss of $13.2 million in 1995 due to the factors cited above.
Years Ended December 31, 1995 and 1994
Revenues for the year ended December 31, 1995, totaled $4.4 million
compared with $4.9 million in the comparable period in 1994, a decrease of
$500,000. In 1994, the Company recognized revenues from Deutsche Post in
connection with the granting of a use license, as well as from Edison for the
construction and delivery of equipment related to the Electric Fuel System.
Revenues for the year ended December 31, 1995, were principally derived from
activities relating to the Field Test, including the construction of the 100
kg/hr regeneration facility in Bremen and the initial production of battery
components and related equipment; and a grant of marketing rights and the sale
of equipment to Vattenfall AB when it and the Swedish Post joined the Field Test
as associate partners. In addition, revenues related to the Company's agreement
with STN Atlas Elektronik GmbH to develop a high power zinc oxygen battery for
torpedoes and the completion and delivery of all of the Company's outstanding
orders from Edison were recognized in 1995.
-22-
<PAGE>
Research and development expenses and cost of revenues were $14.4
million during 1995 compared with $4.8 million during 1994. The increase in
expenses of $9.6 million compared to 1994 is principally attributable to:
expenses in connection with the Field Test, including costs related to
construction of the Bremen regeneration facility and initial battery production
costs; costs associated with the operation of the Company's production
facilities in Israel (which were expanded in 1995 to include a new facility in
Beit Shemesh); increased personnel and consulting costs relating to the
foregoing; and further engineering costs related to the integration of the
Electric Fuel battery into vehicles being used in the Field Test. In the year
ended December 31, 1995, the Company recorded $1.6 million of royalty-bearing
grants representing substantially all of the expected grants from the Chief
Scientist in connection with the Company's 1995 research and development
program, including an increase of $185,000 in Chief Scientist grants in
connection with the Company's 1994 research and development program. For the
year ended December 31, 1994 the Company recorded $699,000 of Chief Scientist
grants.
Selling, general and administrative expenses for the year ended
December 31, 1995 decreased to $2.8 million compared with $3.4 million in 1994.
Selling, general and administrative expenses for 1994 included a royalty accrual
to the Chief Scientist of $1.1 million, resulting, without reflecting the
royalty accrual, in a net increase in selling, general and administrative
expenses of $500,000 in 1995. This increase was attributable to increased costs
as the Company intensified its marketing efforts in to new geographic areas,
provided administrative support for the Company's expanded activities, and
continued to develop its managerial infrastructure to meet its growth
requirements.
Management currently estimates the total program losses related to the
Field Test to approximate $5.7 million and, at December 31, 1995, the provision
for anticipated program losses on the uncompleted portions of the program
amounted to $4.1 million. Accordingly, the 1995 financial statements reflect a
$2.6 million net increase in the provision for anticipated program losses from
$1.5 million recorded in 1994.
This provision, in addition to the provision recorded in 1994, reflects
anticipated losses from the Field Test based on the most recent estimates of
costs related to the Field Test, and may be offset by future revenues or
increased to reflect any future revised estimates of project costs. The overall
increase to the provision includes revised cost estimates based on the Company's
production experience to date for the supply of the battery-vehicle interface
equipment, batteries, the estimated service expenses for the Field Test fleet
and the 100 kg/hour regeneration plant being built in Bremen, Germany. Since the
plant is currently dedicated to the Field Test, the cost of the plant (net of
anticipated residual value) is reflected as a current expense.
Financial income, net of interest expense, bank charges, and other
fees, totaled approximately $665,000 in 1995 compared to $584,000 in 1994.
Financial income reflects primarily interest earned on United States tax-exempt
securities, which increased to $781,000 in 1995 from $689,000 in 1994.
The Company has incurred net operating losses or had earnings arising
from tax-exempt income during the years ended December 31, 1995 and 1994 and,
accordingly, no provision for income taxes was required. Taxes payable in 1995
and 1994 are primarily composed of United States federal alternative minimum
taxes.
The Company reported a net loss of $13.2 million in 1995 compared with
a net loss of $3.6 million in 1994 due to the factors cited above.
Liquidity and Capital Resources
Total consideration to the Company, under its current contractual
arrangements, for the batteries, equipment and services to be supplied in
connection with the Field Test (including DM 1.0 million from Vattenfall AB) is
expected to be DM 22.0 million (approximately $15.0 million), less a
contribution to the costs of the Field Test by the Company of DM 7.0 million
(approximately $4.8 million), leaving a net balance of approximately DM 15.0
million
-23-
<PAGE>
(approximately $10.2 million). However, in connection with the Company's
discussions with the Deutsche Post with respect to the Opel batteries, the
Company has reduced anticipated revenues related to the supply of Opel batteries
from its budgeted Field Test revenues, resulting in a reduction of anticipated
net project revenues to DM 12.2 million (approximately $8.5 million).
Battery and vehicle deliveries for Mercedes-Benz' participation in the
Field Test are expected to continue into 1997. The Company currently anticipates
that deliveries of Opel batteries will be reduced to support five vehicles in
1997. Under the currently anticipated project scope, and after the revenue
reduction related to the Opel batteries, the Company has recognized to date
approximately $6.5 million of the Field Test revenues. The remaining revenues
and expenses related to the Field Test are expected to be recognized during
1997.
The Company expects that, in connection with its ongoing efforts in the
engineering and commercialization of the Electric Fuel System, the Company's
research and development, operational and selling, general and administrative
expenses will continue to increase.
As of December 31, 1996, the Company had cash, cash equivalents and
investments of $24.0 million compared with $9.6 million as of December 31, 1995.
The Company used available funds during 1996 primarily for the
advancement of its commitments with regard to the Field Test, continued research
and development expenditures and other working capital needs. The Company
increased its investments in fixed assets by $2.2 to $8.8 million during 1996.
Fixed assets include $3.2 million related to the residual value of the Bremen
facility after its use in the Field Test, based on construction costs to date.
The Company currently anticipates that the total residual value of the Bremen
facility will be approximately $3.3 million.
In the first quarter of 1996, the Company completed a public offering
of 3,750,000 shares of its Common Stock at an offering price of $6.50 per share.
The offering resulted in net proceeds to the Company of approximately $21.6
million.
Also during the first quarter of 1996, the Company's Israeli
subsidiary, Electric Fuel Ltd. ("EFL"), established a line of credit with the
First International Bank of Israel Ltd. ("FIBI") (the "Credit Facility").
Borrowings under the Credit Facility will bear interest at FIBI's prime rate +
2% per annum, be unconditionally guaranteed by Electric Fuel Corporation ("EFC")
and be secured by a pledge of foreign currency deposits in the amount of NIS
750,000 (approximately $231,000). Additionally the Credit Facility imposes
financial and other covenants on EFC and EFL and presently expires on July 31,
1997, at which time the Credit Facility will be reviewed for renewal by FIBI.
The Credit Facility provides EFL with a line of credit in the maximum principal
amount of NIS 3.8 million (approximately $1.1 million), which is expected to be
used as credit support for various obligations of the Company, and will enable
EFL to enter into up to U.S. $ 4.0 million in currency hedging forward contracts
with a 5% collateral requirement. As of December 31, 1996 the bank had issued
letters of credit and bank guarantees totaling approximately $177,000. At the
present time, the Company is not engaged in any hedging activities.
Pursuant to a Stock Purchase Agreement dated September 30, 1996 between
the Company and Mr. Leon Gross, one of the Company's existing shareholders, on
October 2, 1996, the Company issued 1,538,462 shares of the Company's common
stock, $.01 par value per share, to Mr. Gross at a price of $6.50 per share. The
offering resulted in net proceeds to the Company of approximately $9.9 million.
As a result of this transaction, and following other open market purchases,
approximately 48% of the stock of the Company's Israeli-based subsidiary, EFL,
is now owned (directly, indirectly or by application of certain attribution
rules) by three United States citizens. If 50% of the shares of the Company is
ever acquired or deemed to be acquired by five or fewer individuals (including,
if applicable, those individuals who currently own an aggregate of 48% of the
Company) who are United States citizens or residents, EFL would satisfy the
foreign personal holding company ("FPHC") stock ownership test under the
Internal Revenue Code and the Company could be subject to additional U.S. taxes
on any undistributed FPHC income of EFL. For 1996, EFL
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<PAGE>
has not had, income which would qualify as undistributed FPHC income. However,
no assurance can be given that in the future EFL will not have income which
qualifies as undistributed FPHC income.
The Company currently has no long-term debt outstanding and expects
that its cash flow from operations, cash reserves and amounts available under
the Credit Facility, will be sufficient to fund the Company's projected
activities through the second quarter of 1998. However, costs related to the
Field Test have exceeded, and may continue to exceed, budgeted amounts. While
the Company is negotiating with the Deutsche Post for additional funding to
support the Field Test there can be no assurance that the Company will be able
to obtain any such funding. Moreover, if the Field Test is successful and
Deutsche Post, or any other participant in the Field Test, begins to convert all
or a portion of their fleets, to the Electric Fuel System, the Company could be
required to produce batteries in increased quantities as well as to construct
new regeneration and refueling facilities or expand its existing facility to
commercial capacity. Additional strategic alliances may also require the
establishment or expansion of facilities in Israel or elsewhere. In addition,
the Company may determine that it should invest in certain programs, such as
additional electric vehicle demonstration programs, which it believes will
advance the development and commercialization of the Electric Fuel System. The
Company also intends to use its resources to research and develop other
applications exploiting its proprietary technology including batteries for
portable electronic devices. Accordingly, the Company may be required to seek
additional funding or pursue other options, such as joint ventures with Field
Test partners or others, during this period. The Company continues to consider
financing alternatives when presented and, if financing becomes available on
satisfactory terms, including price, the Company may obtain additional funding,
including through the issuance of equity securities.
Actual cash requirements will depend in part upon actual and
anticipated sales and licenses. The Company may also be able to finance some
portion of its fixed asset and equipment needs through Approved Enterprise
grants from the Government of Israel.
Impact of Inflation and Currency Fluctuations
Historically, the majority of the Company's revenues have been in U.S.
dollars, although an increasing proportion of the Company's revenues are
currently in Deutsche Marks. Most of the Company's expenses are measured in
dollars and in NIS. The United States dollar cost of the Company's operations in
Israel, with regard to expenses incurred in NIS, is influenced by the extent to
which an increase in the rate of inflation in Israel is not offset by the
devaluation of the NIS in relation to the dollar. In most recent years,
inflation in Israel has not been fully compensated by the devaluation of the
NIS, and, accordingly, the dollar cost of the Company's NIS expenses has
increased. The Company does not believe that continuing inflation in Israel or
delays in the devaluation of the NIS are likely to have a material adverse
effect on the Company, except in the event that such circumstances have such an
impact on Israel's economy as a whole. In the years ended December 31, 1993,
1994, 1995 and in 1996, the annual rates of inflation in Israel were 11.2%,
14.5%, 8.1% and 10.6%, respectively, compared to the devaluation of the NIS
against the dollar during such periods of 8%, 1%, 3.9%, and 3.7% respectively. A
growing portion of the Company's revenues are in Deutsche Marks. Any decrease in
the value of the Deutsche Mark as against the dollar would result in a decrease
in the dollar value of such revenues. While in the past, the Company has engaged
in currency hedging, in an effort to decrease the impact of short-term currency
fluctuations, the Company is not currently engaging in currency hedging.
Effective Corporate Tax Rate
The Company's production facilities in Israel have been granted
"Approved Enterprise" status under the (Israeli) Law for Encouragement of
Capital Investments, 1959 (the "Investment Law"), and consequently are eligible
for certain tax benefits for up to ten years after they first generate taxable
income (provided the maximum period as prescribed by the Investment Law has not
elapsed). The Company has elected to receive a grant of funds together with a
reduced tax rate (presently 15%) for the aforementioned period.
-25-
<PAGE>
The Company's effective corporate tax rate may be affected by the
classification of certain items of income as being "approved income" for
purposes of the Approved Enterprise Law, and hence subject to a lower tax rate
(25% to 10%, depending on the extent of foreign ownership of EFL - presently
15%) than is imposed on other forms of income under Israeli law - presently 36%.
The effective tax upon income distributed by the Company to its stockholders
would be increased as a result of the withholding tax imposed upon dividends
distributed by EFL to EFC, resulting in an overall effective corporate tax rate
of approximately 28% for income arising from EFL's Approved Enterprises and 44%
regarding other income.
EFC and its subsidiaries have incurred net operating losses or had
earnings arising from tax-exempt income during the years ended December 31, 1996
and 1995 and, accordingly, no provisions for income taxes were required. Tax
expense in these years arose primarily from United States alternative minimum
taxes.
As of December 31, 1996 the Company has U.S. net operating loss
carryforwards of approximately $165,000 which are available to offset future
taxable income, expiring primarily in 2009 and foreign net operating loss
carryforwards of approximately $20 million which are available to offset future
taxable income, indefinitely.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Form 10-K
(Page)
<S> <C>
Report of Independent Auditors.......................................................................... 27
Consolidated Balance Sheets at December 31, 1995 and 1996............................................... 28-29
Consolidated Statements of Income (Loss) for the Three Years
in the Period Ended December 31, 1996.......................................................... 30
Consolidated Statements of Changes in Stockholders' Equity for
the Three Years in the Period Ended December 31, 1996.......................................... 31-32
Consolidated Statements of Cash Flows for the Three Years
in the Period Ended December 31, 1996.......................................................... 33-34
Notes to Consolidated Financial Statements.............................................................. 35
</TABLE>
-26-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
ELECTRIC FUEL CORPORATION
We have audited the financial statements of Electric Fuel Corporation (hereafter
- - the "Company") and its subsidiaries: balance sheets at December 31, 1996 and
1995 and statements of loss, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's board of directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
Our audits were performed in accordance with auditing standards generally
accepted in Israel and in the United States, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards
require that we plan and perform the audits to obtain reasonable assurance that
the financial statements are free of material misstatement, whether caused by an
error in the financial statements or by misleading information included therein.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by the Company's
board of directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a fair basis for our
opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries at December 31, 1996 and 1995 and the consolidated results of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with accounting
principles generally accepted in the United States.
Kesselman & Kesselman
Certified Public Accountants (Israel)
Jerusalem, Israel
March 25, 1997
-27-
<PAGE>
ELECTRIC FUEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1995
--------------- -------------
U.S. dollars
------------------------------
A s s e t s
-----------
CURRENT ASSETS (note 7):
- --------------
<S> <C> <C>
Cash and cash equivalents (note 1m) 12,662,776 5,364,867
Marketable debt securities (notes 1e and 8a) 11,296,382 4,215,518
Accounts receivable:
Trade 369,442 398,535
Other (note 8b) 1,915,628 2,421,804
Inventories (note 1f) 915,032 535,208
----------- -----------
T o t a l current assets 27,159,260 12,935,932
--------- ----------- -----------
INVESTEE COMPANY (note 1g) 35,849 35,849
- ---------------- ----------- -----------
FIXED ASSETS (notes 1h and 2):
- ------------
Cost 8,754,771 6,639,926
L e s s - accumulated depreciation and amortization 1,451,095 654,391
------- ----------- -----------
7,303,676 5,985,535
----------- -----------
OTHER ASSET AND DEFERRED CHARGES, net of
- ---------------------------------
accumulated amortization (notes 1i and 8c) 23,333 743,885
----------- -----------
----------- -----------
34,522,118 19,701,201
=========== ===========
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1995
----------- --------------
U.S. dollars
---------------------------------
Liabilities and stockholders' equity
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES (note 7):
Accounts payable and accruals:
Trade 1,079,284 2,743,539
Other (note 8d) 3,505,594 6,357,706
Advances from customers 926,599 4,223,066
------------ ------------
T o t a l current liabilities 5,511,477 13,324,311
---------
LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT,
- ---------------------------------------------
net of amount funded (note 3) 1,141,030 555,908
COMMITMENTS AND CONTINGENT LIABILITIES (note 4)
- --------------------------------------
------------ ------------
T o t a l liabilities 6,652,507 13,880,219
--------- ------------ ------------
STOCKHOLDERS' EQUITY (note 5):
- --------------------
Common stock - $ 0.01 par value;
authorized - 28,000,000 shares as of December 31, 1996, and
14,000,000 shares as of December 31, 1995; issued - 14,257,508
shares as of December 31, 1996, and 11,328,110 shares as of
December 31, 1995; outstanding - 14,185,208 shares as of
December 31, 1996
and 8,675,947 shares as of December 31, 1995 142,575 113,282
Preferred stock -$ 0.01 par value; authorized - 1,000,000 shares,
no shares outstanding
Additional paid-in capital 57,341,451 24,168,108
Accumulated deficit (26,890,958) (16,873,340)
Unrealized gain on available-for-sale securities 3,157 29,048
Treasury stock, at cost (common stock - 72,300 shares as of December
31, 1996 and 2,652,163 shares as of
December 31, 1995) (456,394) (193,174)
Notes receivable from stockholders (note 5a(4) and b(4)) (2,270,220) (1,422,942)
------------ ------------
T o t a l stockholders' equity 27,869,611 5,820,982
-------
============ ============
34,522,118 19,701,201
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-29-
<PAGE>
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------
U.S. dollars
--------------------------------------------------
<S> <C> <C> <C>
REVENUES (notes 1j, 4a and 9a) 5,405,303 4,371,610 4,872,688
- -------- -------------- ------------ -------------
RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------
AND COST OF REVENUES (note 1k):
--------------------
Expenses incurred (note 9b) 12,805,055 14,378,805 4,770,182
L e s s - royalty-bearing grants (note 4b) 1,505,720 1,560,792 698,911
------- -------------- ------------ -------------
11,299,335 12,818,013 4,071,271
PROVISION FOR ANTICIPATED
- -------------------------
PROGRAM LOSSES (notes 1a(4), j and 4a) 2,600,000 1,500,000
--------------
SELLING, GENERAL AND ADMINISTRATIVE
- ----------------------------------
EXPENSES (note 9c) 4,955,700 2,752,033 3,364,752
-------- -------------- ------------ -------------
16,255,035 18,170,046 8,936,023
============== ============ =============
OPERATING LOSS (10,849,732) (13,798,436) (4,063,335)
- --------------
FINANCIAL INCOME - net (note 9d) 793,853 664,722 583,563
- ---------------- -------------- ------------ -------------
LOSS BEFORE TAXES ON INCOME (10,055,879) (13,133,714) (3,479,772)
- ---------------------------
TAXES ON INCOME (note 6) (38,261) 35,210 19,814
- ---------------- -------------- ------------ -------------
LOSS FROM THE OPERATIONS OF THE COMPANY
- ---------------------------------------
AND ITS SUBSIDIARIES (10,017,618) (13,168,924) (3,499,586)
--------------------
SHARE IN LOSS OF INVESTEE COMPANY (note 1g) 52,134 61,276
- --------------------------------- -------------- ------------ -------------
LOSS (10,017,618) (13,221,058) (3,560,862)
- ---- ============== ============ =============
LOSS PER SHARE (note 9e) (0.81) (1.55) (0.43)
- -------------- ===== ===== =====
WEIGHTED AVERAGE NUMBER OF SHARES
- ---------------------------------
OUTSTANDING (note 9e) 12,335,586 8,530,388 8,318,985
------------ =============== ================= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
-30-
<PAGE>
(Continued) -1
--------------
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Common stock Additional gain-on
------------ paid-in Accumulated available-for
Shares Amount capital deficit sale securities
------ ------ ---------- ----------- ---------------
U. S. Dollars
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 9,145,828 91,458 1,804,216 (91,420)
- --------------------------
CHANGES DURING 1994:
- -------------------
Shares issued in a public offering
(note 5a(1)) 2,000,000 20,000 21,919,284/1/
Shares issued in connection with
Amtec merger (note 1d) 26,262 263 328,012
Shares issued in connection with
the exercise of options 11,460 115 4,325
Options issued as compensation for
services rendered by consultants 3,750
Loan granted to stockholder
(note 5a(4))
Accrued interest on notes receivable
from stockholders
Loss (3,560,862)
---------- ------- ---------- ----------- ------
BALANCE AT DECEMBER 31, 1994 11,183,550 111,836 24,059,587 (3,652,282)
- ----------------------------
CHANGES DURING 1995:
- --------------------
Shares issued in connection with the 144,560 1,446 108,521
exercise of options
Purchase of treasury stock (8,700 shares)
(note 5a(2))
Accrued interest on notes receivable from
stockholders
Payments of interest and principal on
notes receivable from stockholders
Unrealized gain on available-for-sale
securities 29,048
Loss (13,221,058)
---------- ------- ---------- ----------- ------
BALANCE AT DECEMBER 31, 11,328,110 113,282 24,168,108 (16,873,340) 29,048
- ----------------------- ========== ======= ========== =========== ======
1995: - forward
----
<CAPTION>
Notes
receivable
Treasury from
stock stockholders Total
-------- ------------ -----
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 (146,187) (570,779) 1,087,288
- --------------------------
CHANGES DURING 1994:
- -------------------
Shares issued in a public offering
(note 5a(1)) 21,939,284
Shares issued in connection with
Amtec merger (note 1d) 328,275
Shares issued in connection with
the exercise of options 4,440
Options issued as compensation for
services rendered by consultants 3,750
Loan granted to stockholder (720,000) (720,000)
(note 5a(4))
Accrued interest on notes receivable (79,501) (79,501)
from stockholders
Loss (3,560,862)
-------- ---------- -----------
BALANCE AT DECEMBER 31, 1994 (146,187) (1,370,280) 19,002,674
- ----------------------------
CHANGES DURING 1995:
- --------------------
Shares issued in connection with the 109,967
exercise of options
Purchase of treasury stock (8,700 shares)
(note 5a(2)) (46,987) (46,987)
Accrued interest on notes receivable from
stockholders (77,291) (77,291)
Payments of interest and principal on
notes receivable from stockholders 24,629 24,629
Unrealized gain on available-for-sale
securities 29,048
Loss (13,221,058)
-------- ---------- -----------
BALANCE AT DECEMBER 31, (193,174) (1,422,942) 5,820,982
- ----------------------- ======== ========== ===========
1995: - forward
----
</TABLE>
-31-
<PAGE>
<TABLE>
<CAPTION>
(Continued) -2
--------------
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized Notes
Common stock Additional gain-on receivable
------------ paid-in Accumulated available-for Treasury from
Shares Amount capital deficit sale securities stock stockholders Total
------ ------ ---------- ----------- --------------- -------- ------------ -------
U. S. Dollars
------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 11,328,110 113,282 24,168,108 (16,873,340) 29,048 (193,174) (1,422,942) 5,820,982
- -----------------------
1995- forward
- -------------
CHANGES DURING 1994:
-------------------
Shares issued in a
public offering
(note 5a(3)) 3,750,000 37,500 21,562,647/2/ 21,600,147
Shares issued in a
private placement
(note 5a(6)) 1,538,462 15,384 9,920,407/3/ 9,935,791
Shares issued in
connection with
the exercise of
options (note 5b(4)) 293,099 2,931 1,516,933 (1,465,978) 53,886
Compensation cost in
connection with
exercise of options
see note 5b(4), 159,834 159,834
Treasury stock retired (2,652,163) (26,522) (166,652) 193,174
Purchase of treasury
stock (72,300 shares)
and options issued as
compensation for
services rendered
by consultant
(note 5a(4)) 68,000 (456,394) 815,046 426,652
Options issued as
compensation for
services rendered
by consultant 9,959 9,959
Loans granted to
stockholders
(note 5b(4)) (94,131) (94,131)
Accrued interest on notes
receivable from
stockholders 102,215 (102,215)
Realization of gain on
available-for-sale
securities (25,891) (25,891)
Loss (10,017,618) (10,017,618)
---------- ------- ---------- ------------ --------- --------- ----------- ------------
14,257,508 142,575 57,341,451 (26,890,958) 3,157 (456,394) (2,270,220) 27,869,611
========== ======= ========== ============ ========= ========= =========== ============
</TABLE>
/(1)/ Net of $3,060,716 - offering expenses.
/(2)/ Net of $2,774,853 - offering expenses.
/(3)/ Net of $64,211 - issuing expenses.
The accompanying notes are an integral part of the financial statements.
-32-
<PAGE>
(Continued) - 1
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
U.S. dollars
--------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
Loss (10,017,618) (13,221,058) (3,560,862)
Adjustments required to reconcile loss to net cash
provided by or used in operating activities:
Share in loss of investee company 52,134 61,276
Depreciation and amortization 951,955 506,895 148,530
Amortization of net premium on marketable
debt securities 278,455 70,804
Deferred income taxes - net 142,744
Capital loss (gain) from disposal of fixed assets 7,145 (3,786) 6,494
Capital loss from disposal of marketable debt
securities, net 30,991 348
Liability for employee rights upon retirement - net 585,122 260,775 259,671
Waiver of loan to stockholder (note 5a(4)) 358,652
Compensation cost with connection to exercise
of options 159,834
Issue of stock options as compensation for
services rendered by consultants 77,959 3,750
Interest accrued on notes and loan to stockholders (77,291) (79,501)
Changes in operating asset and liability items:
Decrease (increase) in accounts receivable 118,619 268,712 (1,703,314)
Increase in inventories (379,824) (403,458) (131,750)
Increase (decrease) in accounts payable and
accruals (4,516,367) 5,718,556 1,789,466
Changes in related parties - net 10,141 132,606
Decrease in advances from customers (3,296,467) 4,164,945 (862,331)
----------------- ----------------- -----------------
Net cash used in operating activities (15,919,999) (2,444,632) (3,722,417)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Purchase of fixed assets (2,225,459) (5,333,875) (1,772,885)
Investment grant relating to fixed assets 355,137 108,090
Purchase of marketable debt securities (16,984,980)
Loans granted to stockholders (note 5a(4)) (94,131) (720,000)
Merger of Amtec (stockholder) in 1994 (a) 146,177
Amounts carried to other asset and deferred charges (710,552) (50,000)
Proceeds from disposal of fixed assets 19,731 9,559 57,101
Sale or redemption of (purchase of) marketable
debt securities - net (7,137,746) 12,448,903
----------------- ----------------- -----------------
Net cash provided by (used in) investing activities (9,082,468) 6,414,035 (19,216,497)
================= ================= =================
Forward (25,002,467) 3,969,403 (22,938,914)
</TABLE>
-33-
<PAGE>
(Concluded) - 2
ELECTRIC FUEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
U.S. dollars
--------------------------------------------------------
<S> <C> <C> <C>
Forward (25,002,467) 3,969,403 (22,938,914)
--------------- ------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Issue of share capital (including additional paid
in capital), net of offering expenses 32,246,490 21,978,863
Payment to the Estate of Luz International Limited (250,000)
Proceeds from exercise of options 53,886 109,967 4,440
Payment on note receivable from stockholders 24,629
Purchase of treasury stock (b) (46,987)
Short-term bank credit - net (468)
--------------- ------------- ---------------
Net cash provided by financing activities 32,300,376 87,609 21,732,835
--------------- ------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH
- ------------------------------------
EQUIVALENTS 7,297,909 4,057,012 (1,206,079)
-----------
BALANCE OF CASH AND CASH EQUIVALENTS
- ------------------------------------
AT BEGINNING OF YEAR 5,364,867 1,307,855 2,513,934
-------------------- --------------- ------------- ----------------
BALANCE OF CASH AND CASH EQUIVALENTS
- ------------------------------------
AT END OF YEAR 12,662,776 5,364,867 1,307,855
-------------- =============== ============= ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
- ------------------------------------
INFORMATION - CASH PAID DURING THE YEAR FOR:
--------------------------------------------
Interest 28,247 48,810 1,083
=============== ============= ================
Advances to income tax authorities 92,483 65,448 22,821
=============== ============= ================
(a) Merger of Amtec (stockholder) in 1994,
see note 1d:
Assets and liabilities of Amtec at date of merger:
Working capital (excluding cash and cash
equivalents) (25,842)
Investment in associated company 149,259
Fixed assets - net 58,681
----------------
182,098
Stock of the Company issued upon merger (328,275)
----------------
(146,177)
================
</TABLE>
(b) As to transaction during 1996 not involving cash flows,
see note 5a(4) and b(4)).
The accompanying notes are an integral part of the financial
statements.
3198550.05 -34-
<PAGE>
ELECTRIC FUEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
The significant accounting policies, applied on a consistent basis, are
as follows:
a. General:
-------
1) Nature of operations
--------------------
Electric Fuel Corporation ("EFC") - a Delaware corporation -together
with its subsidiaries, is referred to as the Company. Almost all
operating assets of the Company are situated at, and operations of
the Company are primarily carried out by, Electric Fuel (E.F.L.)
Ltd. ("EFL") - an Israeli wholly-owned subsidiary. The Company is
engaged in one business segment -design, development, and
commercialization of innovative advanced zinc-air batteries. The
Company's products have not reached the commercial stage. Until
commencement of commercial product sales occurs, the Company plans
to meet its funding requirements through fees from potential users
of its technology, sales of pre-production battery systems and
equipment, grants from various programs from the State of Israel's
Ministry of Industry and Trade and the funds raised from public
offerings and private placements of EFC's shares.
The other subsidiaries are:
Electric Fuel B.V. - a Netherlands company, wholly-owned by EFL.
Vipco Israel Limited - a wholly-owned Israeli company (not presently
active).
Erbato GmbH - German company, 80%-owned by EFL (disposed of in
1996 - see note 5a(4)).
E.F.L. GmbH - a German company, wholly owned by EFL.
2) In these financial statements - investee company - Coatec Ltd., an
Israeli company (3.9% owned as at December 3 1, 1996; 16% owned as
at December 31, 1995) which was acquired as a result of the merger
of Amtec.
3) Accounting principles
---------------------
The financial statements are prepared in accordance with U.S.
generally accepted accounting principles ("GAAP").
4) Estimates and assumptions in the financial statements
-----------------------------------------------------
The preparation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reported periods. Actual results could differ from those
estimates.
-35-
<PAGE>
As stated in j. below, the Company fully provides for anticipated
losses on its contractual program commitments (see also note 4a(1)). As
at December 31, 1996 and 1995, the provision for anticipated program
losses amounted to $ 2.2 million and $ 4.1 million, respectively. The
ultimate cost of the program, however, may fluctuate as the project
progresses. The Company expects the project to be substantially
completed in 1997.
b. Functional currency of subsidiaries
-----------------------------------
The Company's management considers the United States dollar to be the
currency of the primary economic environment in which EFL operates and,
therefore, EFL has adopted and is using the United States dollar as its
functional currency. Further, the Company believes that the operations
of EFL's subsidiaries are an integral part of the Israeli operations.
While a growing proportion of EFL's revenues have been denominated in
Deutsche Marks as a result of its involvement in the Field Test, based
on the Company's historical experience and the Company's strategic
objectives, management continues to consider the United States dollar
to be the currency of the primary economic environment in which EFL
operates, and the Company does not believe that any change in this
condition would have a material impact on the analysis of the Company's
historical financial condition and results of operations. Transactions
and balances originally denominated in United States dollars are
presented at the original amounts. Gains and losses arising from
non-dollar transactions and balances are included in net income.
c. Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of EFC and
its subsidiaries. Intercompany balances and transactions have been
eliminated.
d. Merger of Amtec
---------------
Immediately prior to the closing of the Company's initial public
offering ("IPO") of its capital stock in February 1994, Amtec was
merged into the Company. The primary asset of Amtec was its
stockholding in the Company. Other assets (net of liabilities) as per
Amtec's book value amounted to $ 328,275 and were exchanged for stock
of the Company at the IPO price of $ 12.50 per share. This transaction
has been recorded by the Company as a purchase of these assets at the
aforementioned book value.
e. Marketable debt securities
--------------------------
These securities are classified as available-for-sale. Accordingly,
these securities are stated at fair market value and the changes in
their value are carried directly to Stockholders' Equity. Realized
gains and losses are carried to the statements of loss.
f. Inventories
-----------
Composed of raw materials and supplies valued at the lower of cost or
market. Cost is determined on the "first-in, first-out" basis.
g. Investee company
----------------
The investment in this company was accounted by the equity method
through July 1995 as long as EFC's investment therein was over 20%. At
December 31, 1996 and 1995 due to the decrease in EFC's holding in this
company (following issuances of shares by the investee company to third
parties) this investment is stated at cost.
-36-
<PAGE>
h. Fixed assets
------------
These assets are stated at cost, net of related investment grant.
The assets are depreciated by the straight-line method, on the basis of
their estimated useful life.
Annual rates of depreciation are as follows:
<TABLE>
<CAPTION>
%
-
<S> <C>
Machinery and equipment 10;25
(mainly 10%)
Computers and related equipment 20
Office furniture and equipment 6;10
Vehicles 15
</TABLE>
Leasehold improvements are amortized by the straight-line method over
the term of the lease, which is shorter than the estimated useful life
of the improvements.
i. Other asset and deferred charges
--------------------------------
Other asset represents know-how purchased in 1994. The know-how is
stated at cost and amortized over five years.
Deferred charges represented costs incurred in 1995 in connection with
the Company's public offering in February 1996, which were charged in
1996 against the premium arising upon the issuance of the stock.
j. Revenue recognition
-------------------
Revenues in respect of contracts for prototype equipment, technical
assistance, services, etc. are recognized upon the delivery of the
equipment or as the services are performed. Payment from technology
licenses is recognized upon sale of the license.
If such payment is uncertain, revenue is recognized to the extent of
non-refundable fees received.
Revenue and costs in connection with the Company's contractual program
commitments (see note 4a(1)) are recognized on the "percentage of
completion" method. The percentage of completion is determined
according to the ratio of amounts already expended to estimated total
cost as projected at balance sheets dates. Full provision is made for
losses arising from these commitments upon their anticipation.
k. Research and development
------------------------
Research and development expenses are included under "Research and
development expenses and cost of revenues". Because of the nature of
the Company's operations, management is of the opinion that it is not
meaningful to segregate these costs. Research and development expenses,
net of related participations, are charged to operations as incurred.
l. Deferred income taxes
---------------------
The Company uses the liability method of accounting for income taxes,
as set forth in Statement No. 109 of the FASB, "Accounting for Income
Taxes". Under this method, deferred income taxes are provided on the
-37-
<PAGE>
basis of the differences between the financial reporting and income tax
bases of assets and liabilities at the statutory rates enacted for
future periods.
m. Cash equivalents
----------------
The Company considers all highly liquid debt instruments, purchased
with a maturity of three months or less, to be cash equivalents.
n. Foreign currency forward contracts
----------------------------------
In order to hedge foreign currency exposure on firm commitments, the
Company periodically entered into foreign currency forward contracts.
Gains and losses from these contracts are deferred and recognized in
the same period as the underlying hedged transaction.
o. Concentration of credit risks
-----------------------------
Most of the Company's cash and cash equivalents and marketable debt
securities at December 31, 1996 and 1995 are deposited with Israeli
and U.S. banks and U.S. brokers. Accordingly, the Company considers the
inherent credit risks to be remote.
The Company's revenues are earned primarily in Europe, from large
institutional customers. In general, the exposure to concentration of
credit risks relating to trade receivables is limited, due to the
nature of the Company's customers.
p. Reclassification
----------------
Certain prior years' amounts have been reclassified to conform to the
1996 presentation.
NOTE 2 - FIXED ASSETS
- ------ ------------
a. Composition of assets, grouped by major classifications, is as follows:
<TABLE>
<CAPTION>
Accumulated
Cost* depreciation
and amortization
------------------------------- -----------------------------
December 31 December 31
---------------- ----------------
1996 1995 1996 1995
--------- --------- --------- ---------
U.S. $
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Machinery and equipment** 7,109,177 5,191,697 967,050 377,652
Computers and related equipment 292,770 175,895 105,001 60,119
Office furniture and equipment 249,594 173,131 58,922 20,395
Vehicles 539,788 426,428 149,237 84,469
Leasehold improvements 563,442 672,775 170,885 111,756
----------- ----------- ----------- -----------
8,754,771 6,639,926 1,451,095 654,391
=========== =========== =========== ===========
</TABLE>
* Net of related investment grant in the amount of $925,164 and
$986,677 as at December 31, 1996 and 1995, respectively (see also
note 6b).
** Including residual value of equipment relating to the field test
in Germany in the net amount of $3,153,909 and $1,987,062 as at
December 31, 1996 and 1995, respectively.
b. As to liens on fixed assets, see note 6b(1)(c).
-38-
<PAGE>
NOTE 3 - EMPLOYEE RIGHTS UPON RETIREMENT:
- ----------------------------------------
a. Israeli law generally requires payment of severance pay upon
dismissal of an employee or upon termination of employment in
certain other circumstances. EFL's severance pay liability to its
Israeli employees, based upon the number of years of service and
the latest monthly salary (see also note 4d), is partly covered by
purchase of insurance policies and by deposits with severance pay
funds.
The amounts accrued and the portion funded primarily by purchase
of insurance policies (plan assets) are composed as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1995
---------------- --------------
U.S. $
---------------------------------
<S> <C> <C>
Accrued severance pay 1,803,944 999,880
L e s s - plan assets 662,914 443,972
================ ==============
Unfunded balance* 1,141,030 555,908
================ ==============
</TABLE>
EFL may only make withdrawals from the funds for the purpose
of paying severance pay.
* Reflects primarily obligations of the Company in
connection with employment agreements with certain senior
employees (see note 4d).
b. Expenses included for employee rights upon retirement for each
of the years ended December 31, 1996, 1995 and 1994 amounted
to approximately $ 1,140,000, $ 470,000 and $ 459,000,
respectively.
NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES:
- -----------------------------------------------
a. Agreements relating to the Company's technology:
------------------------------------------------
1) Field test with German Postal Authority - Deutsche
--------------------------------------------------
Post AG (Deutsche Post)
-----------------------
In September 1994, an agreement was signed with the
Deutsche Post regarding the licensing of the Company's
technology for testing during a field test, for
Deutsche Post's internal use and for costs incurred by
the Company in connection with the start up of the
field test program. Receipt of DM 5 million
(approximately $ 3.1 million) by the Company was
included in 1994 revenues. The Company has also agreed
to pay royalties based on future sales of its products
in certain parts of Europe.
In December 1994, EFL finalized an agreement with
Deutsche Post and other partners for the purpose of
conducting a field test using EFL's technology, which
is anticipated to reach completion in 1997.
The current anticipated cost of the Company's share in
the Field Tests is approximately $ 5.7 million greater
than anticipated revenues. These estimates are based on
the Company's current budget for the program (as
described below) and accordingly management of the
Company is of the opinion that the provision for
anticipated losses, recorded in prior years, is
adequate and the ultimate outcome of the matters
described below will not have a material adverse effect
upon the financial condition of the Company. The
balance of the provision for anticipated losses
(relating to the uncompleted portion of the budget)
amounted to $ 2.2 million and $ 4.1 million as at
December 31, 1996 and 1995, respectively.
-39-
<PAGE>
Pursuant to the agreement among the partners in the
Field Test (the "Partners Agreement"), the Company is
required to deliver a total of thirty batteries for
the Mercedes-Benz 4.6 ton vans and sixty-six
batteries for the Opel Corsa Combo light pick-up
trucks. In addition, the Company is required to
deliver three Mercedes-Benz batteries and five Opel
batteries to Vattenfall AB. As a result of the costs
of the Field Test exceeding the Field Test budget, as
described below, the Company does not currently
expect to meet these requirements, primarily with
regard to the Opel vehicles. Furthermore, the Company
is required to design, construct, install and operate
a 100 kg/hour regeneration plant in Bremen, as well
as refueling equipment for the batteries. The 100
kg/hour plant, which provides regeneration services
necessary for the Field Test, has been constructed in
a facility the Company is leasing from Stadtwerke,
Bremen. The regeneration plant became operational
during the first half of 1996, although it is not
currently operating at full capacity.
-40-
<PAGE>
In the fourth quarter of 1996, the Deutsche Post
requested that the Company refund the sum of
approximately DM 1.8 million (approximately $1.2
million), which are the subject of a dispute between
the Deutsche Post and the Company. The Company does
not believe that it is required to refund any of the
payments. However, until the resolution of this
issue, the Company has eliminated the aforementioned
payments, in addition to other anticipated revenues
related to the supply of the Opel batteries, in
computing its provision for anticipated program
losses.
To date, the costs of the Field Test incurred by the
Company have exceeded the related program budgeted
amounts by more than 20%, and the Company, pursuant
to the terms of the Field Test Partner Agreement, has
entered into discussions to obtain additional funding
from the Deutsche Post. In addition, the engineering
and manufacturing costs required to integrate the
Electric Fuel System into any additional vehicles are
not included in the current Field Test budget. The
Company is continuing funding discussions with the
Deutsche Post in this regard. To date however, there
has been no resolution of this issue, and there can
be no assurance that any agreement will be reached
with the Deutsche Post, or that if no such agreement
is reached, the Field Test will continue. The Field
Test is scheduled to end in December 1997, but could
be extended by the Deutsche Post with the agreement
of the Field Test partners. Because of the budgetary
constraints noted above, the Company expects that,
without a significant increase to the budget, only a
limited number of vehicles will continue to be tested
through the third quarter of 1997.
2) Edison
------
Pursuant to agreements between the Company, through
its Dutch subsidiary, and a major Italian energy
company (Edison Termoelettrica subsidiary of Edison
S.P.A., hereafter "Edison"), the Company has provided
batteries and related equipment and technical
assistance in respect of the Company's technology.
The Company has also granted Edison a sublicense for
its technology in certain areas in Europe until the
year 2008 and will be entitled to royalties of 3% to
5% of sales in excess of $ 10 million. Edison has
agreed to purchase $ 2 million of equipment and
services during the four years commencing December
1996, as stipulated in the agreements.
3) Israel Electric Corporation
---------------------------
During 1996, EFL signed an agreement with the Israel
Electric Corporation (hereafter "IEC") granting a
license for production, distribution and marketing of
Electric Fuel in Israel and certain Middle East
countries.
The agreement calls for a payment of $ 960,000 to the
Company which has been included in 1996 revenues. IEC
has also agreed to pay royalties of 3% to 5%, based
on future gross revenues from the sale, lease or any
revenue, in connection with the EFL technology.
4) Other
-----
(a) The Company is currently developing, in
cooperation with STN Atlas Elektronik GmbH
("STN Atlas"), a German defense and marine
industry contractor, a high power
zinc-oxygen battery for torpedoes. STN Atlas
has exclusive rights to sell torpedoes with
the Company's zinc-oxygen batteries until
2001, subject to automatic extension if
full-scale production commences, as well as
certain rights
-41-
<PAGE>
with respect to the application of the
Company's proprietary technology for
batteries.
(b) The Company has also developed Survivor
Locator Light ("SLL"), a signal light
powered by a water activated
magnesium-cuprous chloride battery, used to
locate survivors of airplane or boat
accidents in the water. The Company received
an initial order to produce 60,000 SLLs over
a two year period, and began first product
shipments in August 1996.
(c) The Company is providing research and
development services in connection with a
study funded by the European Community
relating to the creation of zinc-air system
infrastructure for the widespread use of
vehicles using the Electric Fuel System in
the amount of approximately $ 227,000. To
December 31, 1996, the Company has reported
income of approximately: 1996 - $ 65,000;
1995 - $ 95,000. The project is expected to
be completed in the first half of 1997.
b. Royalty commitments
-------------------
Since its inception, EFL has received royalty-bearing research
and development ("R&D") grants from the Chief Scientist's
Office ("Chief Scientist") of the Israeli Ministry of Industry
and Trade. Pursuant to the terms of these grants, EFL is
obligated to pay royalties to the Chief Scientist on proceeds
from the sale of products in the R&D of which the Chief
Scientist participated.
Royalties in connection with the grants received are payable
at a rate of 3%-5% of net sales (up to 100% of grants
received). In the case of approved transfer of technology out
of Israel, the rate of payment may be accelerated and total
payments may reach 300% of the amount granted.
Total commitments to pay royalties to the Chief Scientist at
the 100% rate (if the R&D projects are successful) are in the
approximate amount of $ 4.7 million as at December 31, 1996.
c. Lease commitments
-----------------
The Company has entered into various noncancellable operating
lease agreements for the premises it occupies. The leases will
expire in 1999.
The rental payments under the above leases, at rates in effect
at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
U.S. $ in
thousands
---------------
Year ending December 31:
<S> <C>
1997 437
1998 193
1999 18
</TABLE>
The rental payments are primarily payable in Israeli currency
linked to the Israeli Consumer Price Index ("CPI").
As security in connection with these agreements, the Company
has given a lessor a letter of credit in the approximate
amount of $ 62,000.
Rental expenses totaled approximately $ 525,000, $ 360,000 and
$ 214,000 in 1996, 1995 and 1994, respectively.
-42-
<PAGE>
d. Employment contracts
--------------------
Three senior employees (related parties) have employment
agreements with the Company expiring in 1998 and 2000. Base
salary presently payable by the Company under these agreements
amounts to $ 387,000 annually, with further amounts payable as
bonuses of not less than 50% of base salary or in the
aggregate 5% of net income as defined, subject to certain
conditions, including attainment of the Company's budgeted
goals. Base salaries are to be adjusted for the increase in
the Israeli inflation rate over the devaluation of the shekel.
As regards two of the employees, the increase shall not be
less than 3% per annum.
The employees are entitled to other usual benefits and are to
receive a termination payment equal to 36 times monthly base
salary - in addition to the usual severance pay required by
Israeli law - upon fulfillment of the contractual terms. Two
of the aforementioned employees are entitled to an additional
bonus payment upon termination based upon past bonuses paid to
such employees, based on a vesting schedule as stipulated in
the agreements. The Company has fully provided for all vested
benefits under the employee agreements.
NOTE 5 - STOCKHOLDERS' EQUITY:
- ------------------------------
a. Capital transactions:
---------------------
1) In February 1994, EFC completed an IPO of 2,000,000
shares of its common stock of par value of $0.01 per
share, at an offering price of $ 12.50 per share.
2) During 1995, EFC purchased 8,700 shares of its common
stock for $ 46,987.
3) In February and March 1996, the Company completed a
public offering of 3,750,000 shares of its common stock
of par value of $ 0.01 per share, at an offering price of
$ 6.50 per share.
4) During 1996, the Company purchased 72,300 shares of its
common stock from a consultant, in consideration of the
following:
a) Partial waiver of a loan granted to the consultant
in 1994 in the principal amount of $ 720,000,
bearing 6% interest per annum and payable on
December 31, 1996.
b) Sale to the consultant of the Company's 80% interest
in Erbato GmbH in consideration of DM 1.
c) Granting to the consultant 5-year options to
purchase 20,000 shares of the Company's stock at $
6.25 per share.
As a result of the aforementioned transactions, the
Company recorded additional treasury stock in the
amount of $ 456,394 determined based on the market
price of the Company's share on the transaction
date, and the balance - approximately $ 460,000 was
charged to selling, general and administrative
expenses in the Company's 1996 financial statements.
5) In March 1996, the Board of Directors resolved that the
2,652,163 shares of EFC's common stock of par value of $
0.01 per share, currently held as treasury stock, be
retired and resume the status of unissued authorized
shares of common stock.
-43-
<PAGE>
6) In October 1996, EFC issued 1,538,462 shares of its
common stock of $ 0.01 par value in a private placement
at $ 6.50 per share.
b. Common stock option plans:
-------------------------
1) The Company has adopted the following 10 year stock
option plans whereunder options may be granted for
purchase of the Company's common stock:
(a) 1991 Employee Plan - 2,115,600 shares reserved for
issuance.
(b) 1993 Employee Plan - 1,200,000 shares reserved for
issuance.
(c) 1993 Employee Plan (Amendment) additional 1,500,000
shares reserved for issuance, subject to stockholder
approval.
Under the terms of the employee plans, the Board of
Directors or the designated committee will grant
options and will determine the vesting period and
the exercise terms.
(d) 1995 Non-Employee Director Plan - 500,000 shares
reserved for issuance.
Non-employee directors will receive an initial grant
of options to purchase 15,000 shares of the
Company's common stock and thereafter will receive
options to purchase 5,000 shares of Common Stock per
year of service to the Board. All such options will
be granted at fair market value.
2) The Company accounts for its common stock option plans
(the "plans") using the treatment prescribed by
Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Under APB 25,
compensation cost for employee and director common stock
option plans is measured using the intrinsic value based
method of accounting.
In October 1995, the FASB issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
This Statement, effective as of the 1996 financial
statements, established a fair value based method of
accounting for an employee stock option or similar equity
instrument, and encourages adoption of such method for
stock compensation plans. However, it also allows
companies to continue to account for those plans using
the accounting treatment prescribed by APB 25.
The Company has elected to continue accounting according
to APB 25 and has accordingly complied with the
disclosure requirements set forth in SFAS 123 "for
companies electing to apply APB 25."
Had compensation cost for the Company's plans been
determined based on the fair value at the grant dates for
awards granted during 1995 and 1996 under the plan
consistent with the method of SFAS 123, the Company's
loss and loss per share would have been increased to the
pro-forma amounts indicated below:
-44-
<PAGE>
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
--------------------------------- ---------------------------------
As reported Pro-forma As reported Pro-forma
---------------- ---------------- ---------------- ----------------
U.S. dollars U.S. dollars
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Loss 10,017,618 11,997,287 13,221,058 13,872,902
================ ================ ================ ================
Loss per share 0.81 0.97 1.55 1.63
================ ================ ================ ================
</TABLE>
3) As of December 31, 1996, the total number of
options authorized under the plans is 5,315,600, (of
which 1,500,0000 options are subject to shareholder
approval) and 1,895,510 options are available for
future grant. Under these plans, options usually
expire no later than 10 years from the date of grant.
Options outstanding and excercisable as at December
31, 1996, 1995 and 1994 amounted to 657,181; 694,864
and 186,035 options respectively. The balance of the
outstanding options vest as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------
1996 1995 1994
----------------- ------------------ ------------------
Number of shares
-------------------------------------------------------
<S> <C> <C> <C>
First year 142,767 248,936 208,323
Second year 181,766 146,533 208,323
Third year 115,667 82,700 61,667
Fourth year 75,000
Seventh year and thereafter *300,000 *430,000
================= ================== ==================
815,200 478,169 908,313
================= ================== ==================
</TABLE>
* The exercise date may be accelerated based on the share price of EFC's
common stock.
-45-
<PAGE>
4) A summary of the status of the Company's plans as of
December 31, 1996, 1995 and 1994, and changes during
the years ended on those dates, is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ------------------------------ -------------------------------
Weighted Weighted Weighted
Number average Number average Number average
exercise exercise exercise
price price price
---------------- ------------ ---------------- ------------- ---------------- --------------
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,173,033 4.71 1,094,348 3.60 747,621 4.70
Changes during the year:
Granted /(1)(3)/617,286 6.30 245,200 7.37 /(1)/620,000 5.76
Exercised /(2)/(293,099) 5.19 (144,560) 0.76 (11,460) 0.39
Forfeited or cancelled (24,839) 7.05 (21,955) 5.16 (261,813) 11.97
---------------- ------------ ---------------- ------------- ---------------- --------------
Options outstanding at
end of year 1,472,381 5.24 1,173,033 4.71 1,094,348 3.60
================ ============ ================ ============= ================ ==============
Options exercisable at
year-end 657,181 3.66 694,864 4.36 186,035 0.87
================ ============ ================ ============= ================ ==============
Weighted average fair value
of options granted
during the year* $ 3.33 $ 2.66 $ 3.12
================ ================ ================
</TABLE>
* The fair value of each option grant is estimated on the date of grant
using the Black & Scholes option-pricing model with the following
weighted average assumptions: Dividend yield of 0% for all years;
expected standard deviation of 55%; risk-free interest rates of 6% to
8%; and expected lives of up to 10 years.
/(1)/ Includes options issued to consultants as compensation for services
rendered: 1996 - 22,286 options; 1994 - 5,000 options.
The compensation cost that has been charged against income in the years
ended December 31, 1996 and 1994 is $ 77,959 and $ 3,750, respectively.
/(2)/ Included in the options exercised during 1996, were 255,333 options
exercised by related parties. The purchase of the common stock upon
exercise of these options and the related taxes payable by the employee
were financed by the Company's acceptance of 5 year non-recourse notes
receivable due in 2001 and bearing interest at the higher of the
increase in the Israeli CPI or linkage to the dollar + 6.2% interest.
The notes are collateralized by a pledge on the shares issued. The
notes receivable, including accrued interest, are reflected as a
reduction of Stockholders' Equity in the financial statements.
/(3)/ Includes 300,000 options which were granted in 1996 to related parties.
The exercise date may be accelerated based on the share price of EFC's
common stock.
-46-
<PAGE>
5) The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------------------- ----------------------------
Range Number Weighted Weighted Number Weighted
of outstanding at average average exercisable at average
exercise December 31, remaining exercise December 31, exercise
prices 1996 contractual price 1996 price
life
------------- ---------------- -------------- -------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
$ Years $ $
- ----- - -
0-2 293,962 1.41 0.82 293,962 0.82
4-6 635,833 5.93 5.80 299,833 5.74
6-8 542,586 7.09 5.99 63,386 6.97
---------------- -----------------
0-8 1,472,381 5.46 5.24 657,181 3.66
================ =================
</TABLE>
NOTE 6 - TAXES ON INCOME:
- -------------------------
a. Taxation of U.S. parent (EFC)
Since EFC incurred net losses or had earnings arising from
tax-exempt income during the reported years, no provisions for
income taxes were required. Taxes in 1994, 1995 and 1996 are
primarily composed of federal alternative minimum taxes. The
difference between the tax provision and the total tax benefit
computed by applying the statutory federal income tax rate to
pre-tax loss is the valuation allowance which was established
to eliminate the deferred tax assets.
As at December 31, 1996, EFC has operating loss carryforwards
for U.S. federal income tax purposes of approximately
$165,000, which are available to offset future taxable income,
if any, expiring primarily in 2009.
b. Israeli subsidiary (EFL):
1) Tax benefits under the Law for the Encouragement of
---------------------------------------------------
Capital Investments, 1959 (hereinafter - the "law")
---------------------------------------------------
EFL's manufacturing facility has been granted
"approved enterprise" status under the above law, and
is entitled to investment grants from the State of
Israel of 38% on fixed assets located in Jerusalem
and 20% on fixed assets located at its plant in Beit
Shemesh and to reduced tax rates on income arising
from the approved enterprise, as detailed below. The
initial approved investment program is in the
approximate amount of $ 500,000. EFL substantially
placed the program into operation during 1993 and
should enjoy the tax benefits available under the
law. EFL is entitled to additional tax benefits as a
"foreign investment company", as defined by the law.
Further, in 1995, EFL received approval for a second
approved enterprise program for investment in fixed
assets of approximately $ 6 million and approval for
grants at the aforementioned rates for these approved
fixed assets.
-47-
<PAGE>
The main tax benefits available to EFL are:
a) Reduced tax rates
-----------------
During the period of benefits - 10 years -
commencing in the first year in which EFL
earns taxable income from the approved
enterprise (provided the maximum period to
which it is restricted by law has not
elapsed), a reduced corporate tax rate of
10%-25% (depending on percentage of foreign
ownership; based on present ownership
percentages - 15%) will apply, instead of
the regular tax rates (see (4) hereafter).
b) Accelerated depreciation
------------------------
EFL is entitled to claim accelerated
depreciation in respect of machinery and
equipment used by the approved enterprise
for the first five years of the operation of
these assets.
c) Conditions for entitlement to the benefits
------------------------------------------
The entitlement to the above benefits is
conditional upon EFL's fulfilling the
conditions stipulated by the law,
regulations published thereunder and the
instruments of approval for the specific
investments in approved enterprises. In the
event of failure to comply with these
conditions, the benefits may be canceled and
EFL may be required to refund the amount of
the benefits, in whole or in part, with the
addition of interest.
As security for compliance with the terms
attaching to investment grants (see above),
EFL has registered floating charges on all
its assets in favor of the State of Israel.
2) Measurement of results for tax purposes under the
-------------------------------------------------
Income Tax (Inflationary Adjustments) Law, 1985
-----------------------------------------------
(hereafter - the "inflationary adjustments law")
Under this law, results for tax purposes are measured
in real terms, in accordance with the changes in the
Israeli CPI. As explained in note 1b, the financial
statements are presented in dollars. The difference
between the change in the Israeli CPI and in the
Israeli currency/dollar exchange rate - both on
annual and cumulative bases - causes a difference
between loss for tax purposes and the loss reflected
in the financial statements.
3) Tax benefits under the Law for the Encouragement of
---------------------------------------------------
Industry (Taxation), 1969
-------------------------
EFL is an "industrial company" as defined by this law
and as such is entitled to certain tax benefits,
mainly accelerated depreciation as prescribed by
regulations published under the inflationary
adjustments law, the right to claim public issue
expenses and amortization of know-how, patents and
certain other intangible property rights as
deductions for tax purposes.
4) Tax rates applicable to income from other sources
-------------------------------------------------
Income not eligible for approved enterprise benefits
mentioned in (1) above is taxed at the regular rate
of 36% applicable in 1996 and thereafter (1995 - 37%;
1994 - 38%).
-48-
<PAGE>
5) Tax rates applicable to income distributed as
---------------------------------------------
dividends by EFL
----------------
The effective tax on income distributed by EFL to its
parent, EFC, would be increased as a result of the
Israeli withholding tax imposed upon such dividend
distributions. The overall effective tax rate on such
distribution would be 28% in regard of income arising
from EFL's approved enterprise and 44% regarding
other income. EFL does not have any earnings
available for dividend distribution nor does it
intend to distribute any dividends in the foreseeable
future.
6) Tax loss carryforwards
----------------------
As at December 31, 1996, EFL has operating loss
carryforwards for Israeli tax purposes of
approximately $ 20 million, which are available,
indefinitely, to offset future taxable income.
c. European subsidiaries
---------------------
The European subsidiaries are taxed based upon tax laws in
their country of residence.
d. Deferred income taxes - presented in the balance sheets as
---------------------
follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1996 1995
---------------- -----------------
U.S. $
-----------------------------------
<S> <C> <C>
Domestic income taxes:
Deferred tax asset 50,000 97,000
Less - valuation allowance (50,000) (97,000)
---- ---------------- -----------------
-,- -,-
================ =================
Foreign income taxes:
Deferred tax asset* 4,700,000 3,900,000
Less - valuation allowance (4,700,000) (3,900,000)
---- ---------------- -----------------
-,- -,-
================ =================
</TABLE>
* Mainly in respect of provision for anticipated program loss
and loss carryforwards, deductible expenditures reported as a
reduction of the proceeds from issuing capital stock, accrued
employee rights upon retirement and depreciation on fixed
assets.
-49-
<PAGE>
e. Taxes on income included in the statements of loss, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- --------------- ---------------
U.S. $
-------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. 30,000 52,010 19,184
Israeli (1996 - in respect
of prior years) (68,261) (142,744)
European (16,800) 630
-------------- --------------- ---------------
(38,261) 35,210 (122,930)
Deferred - Israeli 142,744
============== =============== ===============
(38,261) 35,210 19,814
============== =============== ===============
</TABLE>
f. Tax assessments:
----------------
1) EFL received final assessment through the year ended
December 31, 1994.
2) EFC and its other subsidiaries have not been assessed
for tax purposes since incorporation.
NOTE 7 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:
- ----------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-----------------------------------------------------------
Israeli Other Israeli Other
currency- non-dollar currency- non-dollar
unlinked currencies unlinked currencies
------------- ------------- ---------- -------------
U.S. $
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Assets - current:
----------------
Cash and cash equivalents 249,859 796,402 3,559,341
Accounts receivable 646,929 200,639 1,854,151 457,817
--------- ------- --------- ---------
896,788 997,041 1,854,151 4,017,158
========= ======= ========= =========
Liabilities - current -
-----------
accounts payable and accruals 1,332,248 429,267 2,720,635 1,327,288
========= ======= ========= =========
</TABLE>
-50-
<PAGE>
NOTE 8 - SUPPLEMENTARY BALANCE SHEET INFORMATION:
- -------------------------------------------------
a. Marketable debt securities:
--------------------------
The securities, which are due in one year or less, are
composed as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------ ------------------------------
Fair market Fair market
Cost value Cost value
--------------- -------------- -------------- ---------------
U.S. $
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial paper 3,927,350 3,927,350
Corporate debt securities 7,365,875 7,369,032
Obligations of states and
political subdivisions 4,186,470 4,215,518
--------------- -------------- ------------------------------
11,293,225 11,296,382 4,186,470 4,215,518
=============== ============== ==============================
</TABLE>
Unrealized gain in respect of these securities - at December
31, 1996 - aggregate $ 3,157.
51
<PAGE>
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1995
-------------- ---------------
U.S. $
------------------------------
<S> <C> <C>
b. Accounts receivable - other:
---------------------------
Israeli government departments and agencies:
Research and development grant receivable 471,028 447,952
Investment grant receivable 461,937 878,587
VAT and other receivables 180,341 826,663
Other 76,921 76,921
------------- ---------------
1,190,227 2,230,123
Employees 80,139 18,282
Prepaid expenses 84,754 39,965
Interest receivable 411,972 72,208
Sundry 148,536 61,226
------------- ---------------
1,915,628 2,421,804
============= ===============
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
December 31
---------------------------
1996 1995
------------- ------------
U.S. $
---------------------------
<S> <C> <C>
c. Other asset and deferred charges:
--------------------------------
Deferred public offering expenses 710,552
------------
Know-how purchased 50,000 50,000
L e s s - accumulated amortization 26,667 16,667
------- ------------- ------------
23,333 33,333
============= ============
23,333 743,885
============= ============
</TABLE>
d. Accounts payable and accruals - other:
-------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Employees and employee institutions 498,465 459,814
Provision for vacation pay 252,644 261,943
Income taxes payable 20,199
Accrued expenses 545,109 1,501,602
Provision for anticipated program losses 2,200,000 4,100,000
Sundry 9,376 14,148
------------ ------------
*3,505,594 *6,357,706
============= ============
* Including related parties 234,544 183,542
============= ============
</TABLE>
e. Fair value of financial instruments
-----------------------------------
SFAS No. 107 "Disclosure About Fair Value of Financial
Instruments" requires disclosure of information about the fair
value of certain financial instruments for which it is
practicable to estimate that value.
The financial instruments of the Company consist of cash and
cash equivalents, marketable debt securities, accounts
receivable and accounts payable and accruals.
In view of their nature, the fair value of the financial
instruments included in working capital of the Company is
usually identical or close to their carrying value.
53
<PAGE>
NOTE 9 - SELECTED INCOME STATEMENT DATA:
- ----------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ---------------- -----------------
U.S. $
---------------------------------------------------
<S> <C> <C> <C>
a. Revenues - classified by geographical
--------
distribution (see also note 4a):
Europe:
Germany and Sweden (primarily Field
Test - see note 4a) 3,135,000 3,597,650 3,164,908
Germany - STN Atlas 722,655 251,288 38,000
Italy - Edison 429,414 423,732 1,616,122
Others 139,736 95,157
U.S.A. 5,950 50,000
Israel:
IEC 960,000
Other 12,548 3,783 3,658
---------------- -------------- --------------
5,405,303 4,371,610 4,872,688
================ ============== ==============
</TABLE>
b. Research and development
------------------------
expenses and cost of revenues:
-----------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Materials, subcontracted work
and consulting 4,307,617 8,389,716 2,390,930
Salaries and related expenses 5,443,748 3,831,004 2,266,105
Other 3,053,690 2,158,085 113,147
---------------- -------------- --------------
12,805,055 14,378,805 4,770,182
================ ============== ==============
</TABLE>
54
<PAGE>
c. Selling, general and administrative expenses:
<TABLE> --------------------------------------------
<CAPTION>
1996 1995 1994
-------------- ---------------- -----------------
U.S. $
---------------------------------------------------
<S> <C> <C> <C>
Salaries and related expenses 2,222,356 1,112,574 363,746
Consulting and professional fees 1,251,286 736,836 611,222
Royalties (note 4b) 28,800 1,136,910
Other 1,453,258 902,623 1,252,874
---------- --------- ---------
(1) (1) (1)
4,955,700 2,752,033 3,364,752
========== ========= =========
(1) Including advertising and promotion. 216,682 162,950 227,026
========== ========= =========
(2) Including related parties 30,000
=========
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ------------------ -----------
U.S. $
--------------------------------------------------
<S> <C> <C> <C>
d. Financial income (expenses) - net:
---------------------------------
Interest, bank charges and fees (117,721) (142,492) (64,643)
Exchange differences, net (162,653) 26,090 (40,885)
Interest income 1,074,227 781,124 689,091
------------- ------------------ -----------
793,853 *664,722 *583,563
============= ================== ===========
*Including related parties 77,291 79,501
=============== ===========
</TABLE>
e. Loss per share:
--------------
1) Loss per share is computed based on the weighted average
number of shares outstanding (net of treasury stock)
during each year.
2) Common stock equivalents were not taken into account
since their effect was anti-dilutive.
3) The notes receivable from stockholders relating to
exercised options are assumed - for per share
computation - to be proceeds used to purchase stock under
the treasury stock method.
------------
----------------------------
------------
-56-
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Executive Officers, Directors and Significant Employees
Executive Officers and Directors
The Company's executive officers and directors and their ages as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Robert S. Ehrlich 58 Chairman of the Board of Directors and
Chief Financial Officer
Yehuda Harats 45 President, Chief Executive Officer and
Director
Menachem Korall 50 Senior Vice President
of Technology
Stewart Edelman 36 Treasurer and Principal Accounting
Officer
Dr. Jay M. Eastman 48 Director
Jack E. Rosenfeld 58 Director
Harvey M. Krueger 67 Director
Lawrence M. Miller* 50 Director
</TABLE>
- ------------------
*Lawrence M. Miller was elected to the Board of Directors in November, 1996.
The Company's By-Laws provide for a Board of Directors of one or more
directors, and the number of directors is currently fixed at six. Under the
terms of the Company's certificate of incorporation, the Board of Directors is
composed of three classes of similar size, each elected in a different year, so
that only one-third of the Board of Directors is elected in any single year. Mr.
Harats and Dr. Eastman are designated Class I directors and have been elected
for a term expiring in 1998 and until their successors are elected and
qualified; Messrs. Rosenfeld and Miller are designated Class II directors
elected for a term expiring in 1999 and until their successors are elected and
qualified; and Mr. Ehrlich and Mr. Krueger are designated Class III directors
elected for a term which expired in 1996 and is continuing until their
successors are elected and qualified.
57
<PAGE>
Robert S. Ehrlich has been Chairman of the Board of the Company since
January 1993 and Chief Financial Officer of the Company since May 1991. From May
1991 until January 1993, Mr. Ehrlich was Vice Chairman of the Board. From May
1990 until March 1994, Mr. Ehrlich was also President, Chief Executive Officer
and a director of Advanced Materials Technology, Inc. ("Amtec"), a former
stockholder which was merged with and into EFC immediately prior to the Closing
of the Company's initial public offering. From December 1987 until July 1992,
Mr. Ehrlich was Chairman of the Board of PSC Inc., a New York corporation
("PSCX"), a manufacturer and marketer of hand-held laser diode bar code
scanners. He continues to serve as Vice Chairman and a director of PSCX. From
February 1987 until October 1989, Mr. Ehrlich was Chairman and CEO of Fresenius
USA, Inc., a Massachusetts corporation ("FRN") (formerly Delmed, Inc.), a
manufacturer and distributor of renal care systems, solutions and supplies. Mr.
Ehrlich served as Chairman of the Executive and Compensation Committees of FRN
until 1996 when it was combined with another entity. From 1974 until 1989, Mr.
Ehrlich was President of Ehrlich & Co., a private investment banking firm. Mr.
Ehrlich was also Executive Vice President and Chief Financial Officer and a
director of Mattel Inc. ("Mattel") during 1972 and 1973 and continued as a
director of Mattel through 1987. Mr. Ehrlich received a B.S. and J.D. from
Columbia University in New York, New York.
Yehuda Harats has been President, Chief Executive Officer and a
director of the Company since May 1991. Previously, from 1980 to May 1991, he
was the Executive Vice President, Director of the Process Division and head of
the Heat Collection Element Division, at Luz Industries Israel Limited ("LII").
In 1989, he was part of the team awarded the Rothschild Award for Industry,
granted by the President of the State of Israel, for his work at LII. Before
joining LII in 1980, Mr. Harats was Manager of the Maintenance Planning Unit of
the Israel Air Force. Mr. Harats received a B.Sc. in Mechanical Engineering from
the Israel Institute of Technology (Technion) in Haifa, Israel.
Menachem Korall has been Senior Vice President of Technology since 1994
and was Vice President of Technology since the Company's inception in 1991. From
1989 until 1991, Mr. Korall was employed by LII as Technical Director of the
Advanced Battery Program. Prior to joining LII, Mr. Korall spent six years as
General Manager of AVX Israel, a subsidiary of AVX Corporation USA, a
manufacturer of electronic components, which is now owned by Kyocera
Corporation. He has also worked in process engineering and production management
and has been a lecturer at the Jerusalem College of Technology. Mr. Korall holds
a B.Sc. in Mathematics and Physics and an M.Sc. in Materials Science from the
Hebrew University in Jerusalem, Israel.
Stewart Edelman was elected Treasurer of the Company in March 1995.
Stewart Edelman has been Controller of Electric Fuel since July 1994 when he
joined the Company. From 1992 through June 1994, Mr. Edelman was in private
practice specializing in high technology companies. From 1989 through 1991, he
was Vice President of Capital Finance and Investment Company, a real estate
investment corporation. Prior to that, Mr. Edelman was employed as a certified
public accountant in various accounting firms, as well as a controller in a
large employee leasing company. He has been qualified as a Certified Public
Accountant in both Israel and the USA, and is currently licensed to practice in
Israel. Mr. Edelman received a B.A. in Accounting and Economics from the Hebrew
University in Jerusalem.
Dr. Jay M. Eastman has been a director of the Company since October
1993. Since November 1991, Dr. Eastman has served as President and Chief
Executive Officer of Lucid Technologies, Inc., which is developing laser
technology applications for medical diagnosis and treatment. Dr. Eastman also
serves as Senior Vice President of Strategic Planning and Director of PSCX, a
position he has held since January 1, 1996. From December 1987 through December
1995, Mr. Eastman was Executive Vice President of PSCX. He joined PSCX in 1986
when PSCX acquired Optel Systems, Inc., a corporation which he co-founded and
served as Chairman, President and Chief Executive Officer from its formation in
1981. Dr. Eastman is also a director of Chapman Instruments, Inc., which
develops manufacturers and selling surface profiling instruments and Dimension
Technologies, Inc., a developer and manufacturer of 3D displays for computer and
video displays. From 1981 until January 1983, Dr. Eastman was Director of the
University of Rochester's Laboratory for Laser Energetics, where he was a member
of the staff from September 1975 to 1981.
-58-
<PAGE>
Jack E. Rosenfeld has been a director of the Company since October
1993. Mr. Rosenfeld was President and Chief Executive Officer of Hanover Direct,
Inc. ("Hanover"), formerly Horn & Hardart Co., which operates a direct mail
marketing business from September 1990 until December 1995 and had been
President and Chief Executive Officer of its direct marketing subsidiary, since
May 1988. Mr. Rosenfeld is currently acting as a consultant to the Board of
Directors of Hanover. From July 1986 until May 1988, Mr. Rosenfeld was a partner
in Rosenfeld & Co. (a private investment banking group). Mr. Rosenfeld is also a
director emeritus of Hanover Direct, Inc. and a director of PSCX.
Harvey M. Krueger was elected to the Board of Directors in February
1996. Mr. Krueger has been a Senior Managing Director of Lehman Brothers Inc.,
an investment banking firm and the lead manager of the Company's recent equity
offering, since May 1984. From December 1977 to May 1984, he was Managing
Director of Lehman Brothers Kuhn Loeb, Inc. From 1965 to 1977, he was a Partner
of Kuhn Loeb & Co. and in 1977, he served as President and Chief Executive
Officer of Kuhn Loeb & Co. Mr. Krueger serves as a director on the boards of
directors of a number of companies, including Automatic Data Processing, Inc.,
R.G. Barry Corporation, a manufacturer of footwear, Chaus, Inc., a manufacturer
of women's apparel, and IVAX Corporation, a generic pharmaceutical manufacturer.
In addition, he serves on the International Advisory Board of Club Mediterranee,
S.A. and as chairman of the board of directors of Stockton Partners, Inc., the
general partner of the manager of the Renaissance Fund LDC, a private closed-end
investment fund.
Lawrence M. Miller was elected to the Board of Directors in November
1996. Mr Miller has been a senior partner in the Washington D.C. law firm of
Schwartz, Woods and Miller since 1990. He served from August 1993 through May
1996 as a member of the board of directors of The Phoenix Resource Companies,
Inc., a publicly traded energy exploration and production company, and as a
member of the Audit and Compensation Committee of that board. That company was
merged into Apache Corporation in May 1996.
Board of Directors
The Board of Directors of the Company has an Audit Committee consisting
of Messrs. Rosenfeld, Krueger, Miller and Dr. Eastman, and a Compensation
Committee consisting of Dr. Eastman, and Messrs. Rosenfeld, and Miller. Created
in December 1993, the purpose of the Audit Committee is to review the results of
operations of the Company with officers of the Company who are responsible for
accounting matters and, from time to time, with the Company's independent
auditors, Kesselman & Kesselman, a member of Coopers & Lybrand International.
The Compensation Committee recommends annual compensation arrangements for the
Chief Executive Officer and Chief Financial Officer and reviews annual
compensation arrangements for all officers and significant employees.
Voting Agreements
Messrs. Ehrlich, Harats and Korall are parties to a Stockholders Voting
Agreement pursuant to which each of the parties agrees to vote the shares of the
Company's Common Stock held by that person in favor of the election of Messrs.
Ehrlich and Harats (or their designees) as directors of the Company. Messrs.
Gross, Ehrlich and Harats are parties to a Voting Rights Agreement dated
September 30, 1996 pursuant to which each of the parties agrees to vote the
shares of the Company's Common Stock held by that person in favor of the
election of Messrs. Ehrlich, Harats and Miller for five years following October
1996.
Director Compensation
Non-employee members of the Board of Directors of the Company are paid
$1,000 (plus expenses) for each Board of Directors meeting attended and $500
(plus expenses) for each meeting of a committee of the Board of Directors
attended. In addition, the Board of Directors has adopted a Non-Employee
Director Stock Option Plan pursuant to which non-employee directors receive an
initial grant of options to purchase 15,000 shares of the Company's Common Stock
upon the effective date of such plan or upon the date of his or her election as
a director. Thereafter, non-employee directors will receive options to purchase
5,000 shares of Common Stock per year of service
-59-
<PAGE>
on the Board. All such options will be granted at fair market value and vest
ratably, over three years from the date of the grant.
Delinquent Filings
Under the securities laws of the United States, the Company's
directors, certain of its officers, and any persons holding more than ten
percent of the Company's Common Stock are required to report their ownership of
the Company's Common Stock and any changes in that ownership to the Securities
and Exchange Commission. Specific due dates for these reports have been
established and the Company is required to report in this Report any failure to
file by these dates during 1996. All of these filing requirements were satisfied
by its directors and officers and, to the knowledge of the Company, ten percent
holders, except as follows: Robert S. Ehrlich was required to file a Form 4 on
or prior to April 10, 1996, for his gift of 18,000 shares of the Company's
common stock in March, 1996; Mr. Ehrlich reported this transaction on a Form 5
filed February 14, 1997.
Significant Employees
The Company's significant employees and their ages as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Dr. Inna Gektin 53 Senior Research Associate
Menachem Givon 49 Project Manager - Regeneration
Dr. Jonathan Goldstein 50 Chief Scientist
Binyamin Koretz 39 Director of Strategic Planning
Dr. Neal Naimer 38 Director of Electrode Engineering
Amnon Sherf 36 Vice President - Operations
Jonathan Whartman 42 Vice President - Marketing
</TABLE>
Dr. Inna Gektin is a Senior Research Associate of the Company. Prior to
emigrating to Israel in 1990 from the former Soviet Union, Dr. Gektin studied at
the University of Kharkov, and received her Ph.D. from the Physical Technical
Institute of Low Temperature where she worked as Senior Research Associate for
over 20 years.
Menachem Givon is Project Manager - Regeneration. Mr. Givon earned his
bachelors and masters degree in Physics at Ben-Gurion University, and in
parallel has taken considerable coursework in Electrical Engineering. From 1978
to 1990, he specialized in the development of production and quality control
systems at Shoval Metal Industries in the Negev.
Dr. Jonathan Goldstein is Chief Scientist, responsible for scientific
support of battery technologies, patents, literature, innovative concepts and
advanced systems. From 1977 to 1989, Dr. Goldstein was Senior Electrochemist at
Tadiran Batteries in Rehovot, Israel, providing scientific leadership and
support at various Tadiran battery plants. He was educated at Imperial College,
London, where he obtained a B.Sc., and at City University of London, where he
earned a Ph.D. in Chemistry. Dr. Goldstein is the author of 25 papers, 20 U.S.
patents, and several current patent applications pending in Europe, U.S. and
Japan.
-60-
<PAGE>
Binyamin Koretz is Director of Strategic Planning, responsible for
new business development, economic modeling, intellectual property protection,
and other planning activities. Mr. Koretz was the Company's Treasurer from 1993
until December 1994. Mr. Koretz previously spent six years at American Telephone
and Telegraph, where he was responsible for planning and management of capital
investment in that company's long-distance network. He holds a B.Sc. in Civil
Engineering/Transportation Systems from the Massachusetts Institute of
Technology and an M.B.A. from the University of California at Berkeley.
Dr. Neal Naimer is Director of Electrode Engineering of the
Company's Air Electrode development program. From 1987 to 1989, he was the
Manager of the Chemical Vapor Deposition (Thin Films) Group at Intel Electronics
Jerusalem, and was Project Manager of the photo voltaic IR detector development
program at Tadiran Semiconductor Devices in Jerusalem from 1984 to 1987.
Dr. Naimer was educated at University College of London, England, where he
received his B.Sc. in Chemical Engineering and a Ph.D. in Chemical Engineering.
Amnon Sherf is Vice President - Operations of the Company. Amnon Sherf
has been Vice President of Operations since August 1994. Prior to joining the
Company, Mr. Sherf served as deputy Operations Manager and Industrial
Engineering Manager at Nilit, a developer and manufacturer of nylon yarn. From
1990 to 1993, Mr. Sherf was logistics manager for Fibronics, a computer
communication products company. He received his BSc in Industrial Management
Engineering from the Israel Institute of Technology (the Technion) in 1988, and
is presently enrolled in an MBA program at Tel Aviv University.
Jonathan Whartman was Director of Special Projects of the Company
from 1991 until his election to Vice President of Marketing in 1994.
Mr. Whartman was also Director of Marketing of Amtec from its inception in 1989
through the merger of Amtec into EFC. Before joining Amtec, Mr. Whartman was
Manager of Program Management at LII, Program Manager for desk-top publishing at
ITT Qume, San Jose, California and Marketing Director at Kidron Digital Systems,
an Israeli computer developer. Mr. Whartman holds a B.A. in Economics and a
M.B.A. from the Hebrew University, Jerusalem, Israel.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows the compensation paid and accrued by the
Company for services rendered for 1994, 1995 and 1996 to the Chief Executive
Officer and the two highest paid executive officers who received more than
$100,000 in salary and bonuses during the year ended December 31, 1996 (the
"Named Executive Officers").
-61-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------------
Name and Principal Position Securities
Underlying
Other Annual Options All Other
At December 31, 1996 Year Salary Bonus Compensation (Number) Compensation
-------------------- ---- ------ ----- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Yehuda Harats/(1)/ 1996 $145,220 $47,000/(2)/ $127,558/(3)/ 150,000 $372,875/(4)/
President, Chief Executive 1995 140,684 40,364 1,742 0 175,309
Officer and Director 1994 127,445 30,000 1,447 170,000 192,029
Robert S. Ehrlich/(1)/ 1996 $145,238 $47,000/(2)/ $75,890/(5)/ 150,000 $166,628/(6)/
Chairman and 1995 140,684 40,364 6,148 0 123,657
Chief Financial Officer 1994 114,034 30,000 0 170,000 118,442
Menachem Korall/(1)/ 1996 $110,002 $35,000/(2)/ $9,635/(7)/ 0 $169,956/(8)/
Vice President of Technology 1995 106,491 30,328 1,744 0 102,703
1994 95,458 27,000 1,447 90,000 95,458
</TABLE>
- -------------------------
(1) The amounts reported for each Named Executive Officer were paid in New
Israeli Shekels ("NIS") and have been translated into U.S. dollars at
the exchange rate of NIS into U.S. dollars at the time of payment or
accrual.
(2) Reflects amounts accrued to date. The actual amount of bonuses, if any,
will be determined by the Compensation Committee of the Board of
Directors during 1997.
(3) Of this amount, $106,250 represents the dollar value of the difference
between the price paid by Mr. Harats in connection with the exercise of
options to purchase shares of the Company's Common Stock at an exercise
price of $5.75 per share (by receipt of a non-recourse loan from the
Company) and the fair market value of such shares on the date of the
purchase of $6.375 per share and $21,308 represents the costs of taxes
paid by Mr. Harats and reimbursed by the Company.
(4) Of this amount, $224,496 represents the Company's accrual for severance
pay which would be payable to Mr. Harats upon a "change of control" of
the Company or upon the occurrence of certain other events, $17,226
represents the Company's accrual for sick leave and vacation redeemable
by Mr. Harats, $6,398 consisted of payments to Mr. Harats in lieu of
vacation, $45,290 consisted of the Company's payments and accruals to a
pension fund which provides a savings plan, insurance and severance pay
benefits and an education fund which provides for the on-going
education of employees. Additionally, $77,512 represents the Company s
accrual to fund Mr. Harats pension fund as well as provide him with
certain other post-termination benefits, and $1,953 represents the
value charged for tax purposes for the use of a car provided by the
Company.
(5) Of this amount, $50,000 represents the dollar value of the difference
between the price paid by Mr. Ehrlich in connection with the exercise
of options to purchase shares of the Company's Common Stock at an
exercise price of $5.75 per share (by receipt of a non-recourse loan
from the Company) and the fair market value of such shares on the date
of the purchase of $6.375 per share and $25,890 represents the costs of
taxes paid by Mr. Ehrlich and reimbursed by the Company.
(6) Of this amount, $57,008 represents the Company's accrual for severance
pay which would be payable to Mr. Ehrlich upon a "change of control" of
the Company or upon the occurrence of certain other events, $19,859
represents the Company's accrual for sick leave and vacation redeemable
by Mr. Ehrlich, $562 represents the Company's accrual for severance pay
which would be payable to Mr. Ehrlich under the laws of the State
-62-
<PAGE>
of Israel upon the termination of his employment by the Company, and
$45,362 represents the Company's payments and accruals to pension and
education funds. Additionally, $37,386 represents the Company's accrual
to fund Mr. Ehrlich s pension fund as well as provide him with certain
other post-termination benefits, and $6,451 represents the value
charged for tax purposes for the use of a car provided by the Company.
(7) Represents the costs of taxes paid by Mr. Korall and reimbursed by the
Company.
(8) Of this amount, $82,645 represents the Company's accrual for severance
pay which would be payable to Mr. Korall upon a "change of control" of
the Company or upon the occurrence of certain other events, $(2,675)
represents the Company's reduction in the accrual for sick leave and
vacation redeemable by Mr. Korall, $669 represents the Company's
accrued severance pay which would be payable to Mr. Korall under the
laws of the State of Israel upon the termination of his employment by
the Company, $22,127 consisted of payments to Mr. Korall in lieu of
vacation, and $28,232 represents the Company's payments and accruals to
pension and education funds. Additionally, $37,002 represents the
Company s accrual to fund Mr Korall s pension fund as well as provide
him with certain other post-termination benefits, and $1,956 represents
the value charged for tax purposes for use of a car provided by the
Company.
-63-
<PAGE>
The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 1996.
<TABLE>
<CAPTION>
Options Grants in Last Fiscal Year
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term
----------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying granted to Exercise
Options Employees or Base
Granted(1) in Price Expiration 5% 10%
Name # Fiscal Year ($/Sh) Date ($) ($)
---------- ----------- ------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Yehuda Harats 150,000 27.02 $6.625 6/24/06 $624,964 $1,583,782
Robert S. Ehrlich 150,000 27.02 $6.625 6/24/06 $624,962 $1,583,782
</TABLE>
(1) The option granted to the Named Executive Officers are performance
based options which become exercisable upon the earlier of (x) the date
on which the closing sale price of the Company s Common Stock has been
at least $12.50 per share for a period of 20 consecutive trading days
on The Nasdaq National Market or (y) seven years from the date of
grant. These options also become exercisable upon the termination of
the Named Executive Officer s employment with the Company under certain
circumstances. The options expire ten years from the date of grant.
The table below sets forth information for the Named Executive Officers with
respect to fiscal 1996 year-end option values.
<TABLE>
<CAPTION>
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End Fiscal-Year-End (1)
------------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
Name (Number) (Number) ($) ($)
---- -------- -------- --- ---
<S> <C> <C> <C> <C>
Yehuda Harats 0 150,000 0 56,250
Robert S. Ehrlich 127,478 150,000 344,114 56,250
Menachem Korall 90,000 0 112,500 0
</TABLE>
- -----------------------
In-the-money options are options for which the fair market value of the
underlying securities exceeds the exercise or base price of the option.
The table below sets forth information with respect to stock options exercised
by the Named Executive officers during fiscal year 1996.
-64-
<PAGE>
<TABLE>
<CAPTION>
Options Exercised in Last Fiscal Year
Shares Acquired
Name on Exercise Value Realized
(#) ($)
---------------------- --------------------- ----------------------
<S> <C> <C>
Yehuda Harats 170,000 106,250
Robert S. Ehrlich 80,000 50,000
</TABLE>
Employment Contracts and Termination of Employment Arrangements
Each of Messrs. Ehrlich, Harats and Korall are parties to employment
agreements with the Company (the "Employment Agreements") which can be extended
automatically for additional terms of two years each unless terminated sooner by
either the executive or the Company. Mr. Korall's Employment Agreements ends
December 1998 and each of Messrs. Harats and Ehrlich's Employment Agreements end
December 15, 2000. The Employment Agreements provide for a base salary of
$11,736, $11,736, and $7,500 per month for Messrs. Ehrlich, Harats and Korall,
respectively (the "Base Salary"). On each anniversary of Mr. Korall's Employment
Agreement, Base Salary is adjusted in an amount equal to the excess, if any, of
any increase in the Israeli Consumer Price Index over any devaluation in
currency of Israel compared to the U.S. dollar during the immediately preceding
year. With respect to Messrs. Harats and Ehrlich, Base Salary is adjusted in an
amount equal to the greater of 3% or in an amount equal to the excess, if any,
of any increase in the Israeli Consumer Price Index over any devaluation in
currency of Israel compared to the US Dollar, in each case during the
immediately preceding year. Accordingly, Base Salary for Messrs. Ehrlich, Harats
and Korall is, as of January 1, 1997, $12,565, $12,565 and $9,423 per month,
respectively. In addition, the Employment Agreements provide for bonuses to be
paid in an amount of (a) not less than 50% of Base Salary or (b) 2%, 2% and 1%,
respectively of Net Earnings (defined as net income before taxes and
extraordinary and other nonrecurring items) (the "Bonus"), subject to certain
conditions, as well as other benefits such as vacation, sick leave, provision of
automobiles and insurance contributions. The determination of the amount of
Bonus to be paid pursuant to the Employment Agreements is based on attainment of
the Company's budgeted results, including Net earnings. Additionally the
Compensation Committee will set qualitative goals annually as a basis for paying
the bonus to each of Messrs. Ehrlich, Harats and Korall. The Employment
Agreements also contain confidentiality and non-competition covenants. Pursuant
to the Employment Agreements, each of Messrs. Ehrlich, Harats and Korall was
granted demand and "piggyback" registration rights covering shares of the
Company's Common Stock held by them. The Employment Agreements may be terminated
by the Company in the event of death, disability or for "Cause" (defined as
conviction of certain crimes, willful failure to carry out directives of the
Company's Board of Directors or gross negligence or willful misconduct). Messrs.
Ehrlich, Harats and Korall each have the right to terminate their employment for
"Good Reason," which is defined to include adverse changes in employment status
or compensation, insolvency of the Company, material breaches and certain other
events. Upon termination of employment, the Employment Agreements provide for
payment of all accrued and unpaid compensation, any Bonus due for the year in
which employment is terminated and a termination payment equal to thirty-six
times monthly Base Salary at the highest rate in effect within the 90 day period
prior to the termination of employment and certain benefits will continue and
all outstanding options will be fully vested. In addition, Messrs. Harats and
Ehrlich are entitled to an amount equal to the greater of (x) the average of all
bonuses paid to the executive during the three most recent full calendar years
immediately preceding the Termination Date or (y) all bonuses paid to the
executive during the most recent full calendar year immediately preceding the
Termination Date. Furthermore, Mr. Harats has the right to terminate his
employment even without a "Good Reason", prior to the end of the agreement, and
will still be entitled to all the termination benefits indicated above.
Other employees have entered into individual employment agreements with
the Company. These agreements govern the basic terms of the individual's
employment, such as salary, vacation, overtime pay, severance arrangements and
pension plans. Subject to Israeli law, which restricts a company's right to
relocate an employee to a work site further than sixty kilometers from his or
her regular work site, the Company has retained the right to transfer certain
employees to other locations and/or positions provided that such transfers do
not result in a decrease in salary or benefits. In addition, all of these
agreements contain provisions governing the confidentiality of information and
-65-
<PAGE>
ownership of intellectual property learned or created during the course of the
employee's tenure with the Company. Under the terms of these provisions,
employees must keep confidential all information regarding the Company's
operations (other than information which is already publicly available) received
or learned by the employee during the course of employment. This provision
remains in force for five years after the employee has left the service of the
Company. Further, intellectual property created during the course of the
employment relationship belongs to the Company.
A number of the individual employment agreements, but not all, contain
non-competition provisions which restrict the employee's rights to compete
against the Company, or work for an enterprise which competes against the
Company, for a period of two years after the employee has left the service of
the Company.
Under the laws of Israel, an employee of the Company who has been
dismissed from service, died in service, retired from service upon attaining
retirement age, or left due to poor health, maternity or certain other reasons,
is entitled to severance pay at the rate of one month's salary for each year of
service. The Company funds this obligation currently by making monthly payments
to approved private provident funds and by its accrual for severance pay in the
consolidated financial statements. See Note 3 of the Notes to the Consolidated
Financial Statements.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors for the 1996
fiscal year consisted of Dr. Jay Eastman and Jack Rosenfeld, and for parts of
the year Harvey Krueger and Lawrence Miller. None of the members have served as
officers of the Company.
Robert S. Ehrlich, Chairman and Chief Financial Officer of the Company
serves as Vice Chairman and a director of PSC, Inc., a New York Corporation, for
which Dr. Eastman serves as Senior Vice President of Strategic Planning and
Director and Mr. Rosenfeld serves as director.
In January 1993, each of Messrs. Ehrlich, Harats and Korall exercised
options to purchase 423,116, 719,304 and 343,785 shares of the Company's Common
Stock, respectively, at an exercise price of $0.35 per share. In payment for the
option exercise, each of Messrs. Ehrlich, Harats and Korall issued non-recourse
promissory notes (the "Promissory Notes") secured by the shares of Common Stock
purchased, bearing interest at one point over the applicable United States
federal funds rate. In December 1994, the Promissory Notes were amended to
change the interest rate to the higher of a United States dollar rate of 7% or
the percentage increase in the Israeli CPI between the date of the Promissory
Notes and the date interest is calculated, based on the original principal
amount of the loan expressed in NIS. Interest is payable at maturity. As of
December 31, 1996, the aggregate amount outstanding pursuant to the Promissory
Notes for each of Messrs. Ehrlich, Harats and Korall was $192,943, $331,186 and
$151,219, respectively (including an aggregate of $162,144 in accrued interest
receivable), which are also the largest aggregate amounts outstanding since the
issuance of the Promissory Notes. The Promissory Notes mature on January 3,
1998.
In August 1996, each of Messrs. Ehrlich, Harats exercised options to
purchase 80,000, and 170,000 shares of the Company's Common Stock, respectively,
at an exercise price of $5.75 per share. In payment for the option exercise,
each of Messrs. Ehrlich, and Harats issued new non-recourse promissory notes
(the "New Promissory Notes") secured by the shares of Common Stock purchased,
bearing interest at the rate of 6.2% per annum. The income taxes due on the
option exercise were also added to the loan balance. Interest accrues at the
higher of the abovementioned rate or the percentage increase in the Israeli CPI
between the date of the New Promissory Notes and the date interest is
calculated, based on the original principal amount of the loan expressed in NIS.
Israel Value Added Tax ("VAT") is being added to the interest. Both Interest and
the related VAT are payable at maturity. As of December 31, 1996, the aggregate
amount outstanding pursuant to the New Promissory Notes for each of Messrs.
Ehrlich and Harats was $499,538 and $1,061,627, respectively (including an
aggregate of $48,978 in accrued interest and VAT receivable), which are also the
largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes mature on August 20, 2001.
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<PAGE>
In September 1996, Mr. Edelman exercised options to purchase 5,333
shares of the Company's Common Stock, at an average exercise price of $5.83 per
share. In payment for the option exercise, Mr. Edelman issued a non-recourse
promissory note (the "Promissory Note") secured by the shares of Common Stock
purchased, bearing interest at the rate of 6.2% per annum. The income taxes due
on the option exercise were also added to the loan balance. Interest accrues at
the higher of the abovementioned rate or the percentage increase in the Israeli
CPI between the date of the Promissory Note and the date interest is calculated,
based on the original principal amount of the loan expressed in NIS. VAT is
being added to the interest and is paid currently. Interest is payable at
maturity. As of December 31, 1996, the aggregate amount outstanding pursuant to
the Promissory Note was $33,708 (including an aggregate of $888 in accrued
interest and VAT receivable), which is also the largest aggregate amount
outstanding since the issuance of the Promissory Note. The Promissory Note
matures on September 10, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the security
ownership of those persons owning of record or known to the Company to be
beneficial owners of more than five percent of the Company's Common Stock as of
March 3, 1997, each of the Company's Named Executive Officers and directors, and
the shares of Common Stock held by all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
Shares Percentage of
Beneficially Owned/(1)(2)/ Total Shares
Outstanding/(2)/
Five Percent Holders
- --------------------
<S> <C> <C>
Newton D. Becker 1,746,904/(3)/ 12.3%
2743 Aqua Verde Circle
Los Angeles, California
4.5%
Newton Becker Irrevocable Trust No. 1 633,350/(4)/
c/o Bryan Gordon
4046 San Remo Way
Tarzana, California
23.5%
Leon S. Gross 3,338,862/(5)/
c/o Enterprises, Inc.
River Park House
3600 Conshohocken Avenue
Philadelphia, PA 19131
Named Executive Officers & Directors
------------------------------------
Robert S. Ehrlich 1,112,979/(6)(9)(12)/ 7.7%
Yehuda Harats 1,536,207/(7)(9)/ 10.7%
Menachem Korall 530,632/(8)(9)/ 3.7%
Dr. Jay M. Eastman 5,000/(10)/ *
Jack E. Rosenfeld 5,000/(10)/ *
Harvey M. Krueger 8,000/(11)/ *
Lawrence Miller 6,5 14 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
All Directors and Executive Officers
of the Company as a group 3,211,332//(5)(6)(7)(8)(10)// 21.80%
(8 persons)
</TABLE>
- ----------------------------
(1) Unless otherwise indicated in these footnotes, each of the persons or
entities named in the table has sole voting and sole investment power
with respect to all shares shown as beneficially owned by that person,
subject to applicable community property laws.
(2) For purposes of determining beneficial ownership of the Company's
Common Stock, owners of options exercisable within sixty days are
considered to be the beneficial owners of the shares of Common Stock
for which such securities are exercisable. The percentage ownership of
the outstanding Common Stock reported herein is based on the assumption
(expressly required by the applicable rules of the Securities and
Exchange Commission) that only the person whose ownership is being
reported has converted his options into shares of Common Stock.
(3) All shares are held in the name of the Becker Family Trust of which Mr.
Becker is the trustee and sole beneficiary during his lifetime.
Excludes 633,350 shares held by the Newton Becker Irrevocable Trust No.
1, as to which Mr. Becker disclaims beneficial ownership.
(4) Shares held for the benefit of members of Mr. Becker's family. David E.
Becker and Bryan Gordon, Mr. Becker's son and stepson, respectively,
are co-trustees.
(5) Based upon a Form 4 dated February 6, 1997.
(6) Includes 277,478 shares of Common Stock issuable upon exercise of
options exercisable, or potentially exercisable, within 60 days.
(7) Includes 150,000 shares of Common Stock issuable upon exercise of
options exercisable, or potentially exercisable, within 60 days.
(8) Includes 90,000 shares of Common Stock issuable upon exercise of
options exercisable, or potentially exercisable, within 60 days.
(9) Messrs. Ehrlich, Harats and Korall are parties to a Stockholders Voting
Agreement pursuant to which each of the parties agrees to vote the
shares of the Company's Common Stock held by that person in favor of
the election of Messrs. Ehrlich and Harats (or their designees) as
directors of the Company.
(10) Includes 5,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days.
(11) Includes 5,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days.
(12) Messrs. Gross, Ehrlich and Harats are parties to a Voting Rights
Agreement pursuant to which each of the parties agrees to vote the
shares of the Company's Common Stock held by that person in favor of
the election of Messrs. Ehrlich, Harats and Miller for five years
following October 1996.
* Less than one percent
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1993, each of Messrs. Ehrlich, Harats and Korall exercised
options to purchase 423,116, 719,304 and 343,785 shares of the Company's Common
Stock, respectively, at an exercise price of $0.35 per share. In payment for the
option exercise, each of Messrs. Ehrlich, Harats and Korall issued non-recourse
promissory notes (the "Promissory Notes") secured by the shares of Common Stock
purchased, bearing interest at one point over the applicable United States
federal funds rate. In December 1994, the Promissory Notes were amended to
change the interest rate to the higher of a United States dollar rate of 7% or
the percentage increase in the Israeli CPI between the date of the Promissory
Notes and the date interest is calculated, based on the original principal
amount of the loan expressed in NIS. Interest is payable at maturity. As of
December 31, 1996, the aggregate amount outstanding pursuant to the Promissory
Notes for each of Messrs. Ehrlich, Harats and Korall was $192,943, $331,186 and
$151,219, respectively (including an aggregate of $162,144 in accrued interest
receivable), which are also the largest aggregate amounts outstanding since the
issuance of the Promissory Notes. The Promissory Notes mature on January 3,
1998.
In August 1996, each of Messrs. Ehrlich and Harats exercised options to
purchase 80,000, and 170,000 shares of the Company's Common Stock, respectively,
at an exercise price of $5.75 per share. In payment for the option exercise,
each of Messrs. Ehrlich and Harats issued new non-recourse promissory notes (the
"New Promissory Notes") secured by the shares of Common Stock purchased, bearing
interest at the rate of 6.2% per annum. The income taxes due on the option
exercise were also added to the loan balance. Interest accrues at the higher of
the abovementioned rate or the percentage increase in the Israeli CPI between
the date of the New Promissory Notes and the date interest is calculated, based
on the original principal amount of the loan expressed in NIS. Israel Value
Added Tax ("VAT") is being added to the interest. Both Interest and the related
VAT are payable at maturity. As of December 31, 1996, the aggregate amount
outstanding pursuant to the New Promissory Notes for each of Messrs. Ehrlich and
Harats was $499,538 and $1,061,627, respectively (including an aggregate of
$48,978 in accrued interest and VAT receivable), which are also the largest
aggregate amounts outstanding since the issuance of the Promissory Notes. The
Promissory Notes mature on August 20, 2001.
In September 1996, Mr. Edelman exercised options to purchase 5,333
shares of the Company's Common Stock, at an average exercise price of $5.83 per
share. In payment for the option exercise, Mr. Edelman issued a non-recourse
promissory note (the "Promissory Note") secured by the shares of Common Stock
purchased, bearing interest at the rate of 6.2% per annum. The income taxes due
on the option exercise were also added to the loan balance. Interest accrues at
the higher of the abovementioned rate or the percentage increase in the Israeli
CPI between the date of the Promissory Note and the date interest is calculated,
based on the original principal amount of the loan expressed in NIS. VAT is
being added to the interest and is paid currently. Interest is payable at
maturity. As of December 31, 1996, the aggregate amount outstanding pursuant to
the Promissory Note was $33,708 (including an aggregate of $888 in accrued
interest and VAT receivable), which is also the largest aggregate amount
outstanding since the issuance of the Promissory Note. The Promissory Note
matures on September 10, 2001.
Pursuant to a Stock Purchase Agreement dated September 30, 1996 between
the Company and Mr. Leon Gross, one of the Company's existing shareholders (the
"Purchase Agreement"), on October 2, 1996, the Company issued 1,538,462 shares
of the Company's common stock, $.01 par value per share to Mr. Gross at a price
of $6.50 per share, for a total purchase price of $10.0 million.
Pursuant to the terms of the Purchase Agreement, Mr. Gross agreed that
for a period of five (5) years from the Closing Date, neither Mr. Gross nor his
Affiliates, as defined in the Securities Act, directly or indirectly or in
conjunction with or through any Associate (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), will (i)
solicit proxies with respect to any capital stock or other voting securities of
the Company under any circumstances, or become a "participant" in any "election
contest" relating to the election of directors of the Company (as such terms are
used in Rule 14a-11 of Regulation 14A of the Exchange Act) or (ii) make an offer
for the acquisition of substantially all of the assets or capital stock of the
Company or induce or assist any other person to make such an offer or (iii) form
or join any "group" within the meaning of Section 13(d)(3) of the Exchange Act
with respect to any capital stock or other voting securities of the Company for
the purpose of accomplishing the actions referred to in clauses (i) and (ii)
above other than pursuant to the Voting Rights Agreement described below.
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<PAGE>
In connection with the Purchase Agreement, the Company and Mr. Gross
also entered into a Registration Rights Agreement dated September 30, 1996,
setting forth the Purchaser's registration rights with respect to the shares of
Common Stock issued in connection with the offering. These rights include the
right to make two (2) demands for a shelf registration statement on Form S-3
("Shelf Registration Statement") for the sale of the Common Stock which may,
subject to certain customary limitations and requirements, be underwritten. In
addition, the Purchaser was granted the right to "piggyback" on registrations of
the Company's securities in an unlimited number of registrations. Also under the
Registration Rights Agreement, the Purchaser is subject to customary
underwriting lock-up requirements with respect to public offerings of the
Company's securities.
Pursuant to a Voting Rights Agreement dated September 30, 1996 (the
"Voting Rights Agreement"), between the Company, Mr. Gross and certain
management shareholders, Robert S. Ehrlich (the Company's Chairman of the Board
and Chief Financial Officer) and Yehuda Harats (the Company's President and
Chief Executive Officer (the "Management Stockholders")), Lawrence M. Miller,
Mr. Gross's advisor, will be entitled to be nominated to serve on the Company's
Board of Directors, so long as Mr. Gross, his heirs or assigns retains at least
1,375,000 shares of Common Stock. As a result, the Company's Board of Directors
was increased to a total of six members. In addition, under the Voting Rights
Agreement, Mr. Gross and Messrs. Ehrlich and Harats agreed to vote and take all
necessary action so that Messrs. Ehrlich, Harats, and Miller shall serve as
members of the Board of Directors for a period of five (5) years covering the
next five (5) Meetings of Stockholders. In addition, so long as Mr. Miller
serves as a director, Mr. Gross, who shall succeed Mr. Miller should he cease to
serve on the Board, shall be entitled to attend and receive notice of Board
meetings. Mr. Gross further agreed to vote, at the Company's next Annual Meeting
of Stockholders, and take any further necessary action, in favor of an increase
in shares authorized to be issued upon exercise of options under the Company's
1993 Stock Option and Restricted Stock Purchase Plan.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - See Index to Financial Statements
attached hereto, page 32.
2. Financial Statements Schedules - See Index to Financial
Statements attached hereto, page 32.
3. Exhibits - The following is a list of exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2 Merger Agreement dated as of March 2, 1994 between the Company and Advanced Materials Technology, Inc.(1)
3.1 Amended and Restated Certificate of Incorporation of the Registrant.(1)
3.2 Amended and Restated By-Laws of the Company.(4)
4 Specimen Certificate for shares of Common Stock, $.01 par value of the Registrant.(1)
10.1 Option Agreement dated October 29, 1992 between Electric Fuel B.V. ("EFBV") and Electric Storage Advanced
Technologies, Sr ("ESAT").(1)
10.2 Sublicense Agreement dated May 20, 1993 between EFBV and ESAT.(1)
10.3 Letter Agreement dated May 20, 1993 between EFBV and ESAT.(1)
10.4 Notice of Edison's assumption of ESAT's obligations under the Sublicense Agreement with EFBV.(1)
10.5 Agreement dated December 16, 1992 between EFL and Technischer Uberwachungsverein Bayern Sachsen e.V. ("TUV").(1)
10.6 Agreement dated July 29, 1992 between EFL and TUV.(1)
10.7 Letter of Intent between the Company and Deutsche Post AG dated November 18, 1993.(1)
10.8 1993 Stock Option and Restricted Stock Purchase Plan.(1)+
10.9.1 Form of Management Employment Agreements. (1)+
10.9.2 General Employee Agreements.(1)*+
10.10 Office of Chief Scientist documents.(1)*
10.10.1 Letter from the Office of Chief Scientist to the Company dated January 4, 1995.(4)
10.11 Lease Agreement dated December 2, 1992 between the Company and Har Hotzvim Properties Ltd.(1)*
10.12 Letter of Approval by the Investment Center of the Ministry of Trade.(1)*
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.13 Execution Copy of Purchase Agreement dated as of June 9, 1993 among the Company, EFL, Advanced Materials
Technology, Inc. and the Trustee of the Chapter 7 Bankruptcy Estate of Luz International Ltd.(1)
10.14 Agreement between EFL and Dr. Walter Trux dated as of March 1, 1993.(1)
10.15 Cooperation Agreement between EFL and Hoechst GmbH dated as of August 22, 1994.(2)
10.16 Agreement between Deutsche Post AG and EFL dated as of September 19, 1994.(2)
10.17 Agreement between Deutsche Post AG and EFL dated as of October 21, 1994.(2)
10.18 Framework Agreement between Vattenfall AB and EFL dated March 27, 1995.(3)
10.19 Summary of the terms of the Lease Agreements dated as of November 11, 1994, November 11, 1994 and
April 3, 1995 between EFL and Industries Building Company, Ltd.(4)*
10.20 Amended and Restated 1995 Non-Employee Director Stock Option Plan.(5)+
10.21 Framework Contract between the Company and Stadtwerke Bremen AG ("Stadtwerke") dated July, 1995.(4)
10.22 Assignment Agreement dated December 31, 1995 between EFL, Hoechst GmbH and Uhde GmbH ("Uhde").(4)
10.23 Lease between EFL and Stadtwerke dated __________, 1995.(5)*
10.24 Framework Agreement for Cooperation in Marketing and Establishment of Regeneration Plants between EFL and Uhde
dated February 11, 1996.(5)
10.25 Letters of Approval of Lines of Credit from First International Bank of Israel Ltd. dated March 14, 1996 and
March 18, 1996.(5)
10.26 Stock Purchase Agreement between the Company and Leon S. Gross ("Gross") dated September 30, 1996.(6)
10.27 Registration Rights Agreement between the Company and Gross dated September 30, 1996.(6)
10.28 Voting Rights Agreement between the Company, Gross, Robert Ehrlich and Yehuda Harats dated September 30, 1996. (6)
10.29 Agreement between the Company and Walter Trux dated December 18, 1996.
10.30 Cooperation Agreement between The Israel Electric Corporation and EFL dated as of October 31, 1996.(7)
10.31 Amended and Restated Employment Agreement, dated as of October 1, 1996 between the Company, EFL and Yehuda Harats+
10.32 Amended and Restated Employment Agreement dated as of October 1, 1996 between the Company, EFL and Robert S. Ehrlich+
10.33 Lease Agreement between Mori Investments Ltd. and EFL dated March 18, 1996.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
10.34 Agreement dated February 20, 1997 between STN ATLAS Elektronik GmbH and EFL.(7)
21 Subsidiaries.(4)
23.1 Consent of Kesselman & Kesselman (a member of Coopers & Lybrand International), independent certified public
accountants in Israel.
27 Financial Data Schedule.
99.1 Important factors regarding forward-looking statements.
</TABLE>
- ----------------
* English translation or summary from original.
+ Includes management contracts and compensation plans and arrangements.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-73256), which became effective on February 23,1994.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, as amended.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-1(Registration No. 33-97944), which became effective on February 5, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(6) Incorporated by reference to the Company's Report on Form 8-K dated October
4, 1996.
(7) To be filed by amendment.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, the State of New York, on this 31st day of March, 1997.
ELECTRIC FUEL CORPORATION
By /s/ Robert S. Ehrlich
----------------------
Robert S. Ehrlich, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board,
/s/ Robert S. Ehrlich Director and March 31, 1997
--------------------- Chief Financial Officer
Robert S. Ehrlich (Principal Financial Officer)
President,
/s/ Yehuda Harats Chief Executive Officer and March 31, 1997
----------------- Director
Yehuda Harats (Principal Executive Officer)
/s/ Jay M. Eastman
------------------ Director March 31, 1997
Jay M. Eastman
/s/ Jack E. Rosenfeld Director March 31, 1997
---------------------
Jack E. Rosenfeld
/s/ Harvey M. Krueger Director March 31, 1997
---------------------
Harvey M. Krueger
/s/ Lawrence M. Miller Director March 31, 1997
----------------------
Lawrence M. Miller
/s/ Stewart Edelman Treasurer
---------------------
Stewart Edelman (Principal Accounting Officer) March 31, 1997
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.29 Agreement between the Company and Walter Trux dated
December 18, 1996
10.31 Amended and Restated Employment Agreement, dated
as of October 1, 1996 between the Company, EFL and
Yehuda Harats
10.32 Amended and Restated Employment Agreement dated
as of October 1, 1996 between the Company, EFL
and Robert S. Ehrlich
10.33 Lease Agreement between Mori Investments Ltd. and EFL dated March 18, 1996.
23.1 Consent of Kesselman & Kesselman (a member of
Coopers & Lybrand International), independent certified
public accounts in Israel
99.1 Important factors regarding forward-looking statements.
</TABLE>
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<PAGE>
EXHIBIT 10.29
AGREEMENT
---------
Made by and between Electric Fuel (E.F.L.) Limited, having a place of
business at 5 Kiryat Mada Street, Har Hotzvim, Jerusalem, Israel (hereinafter
"the Company"), Electric Fuel Corporation, having a place of business at 885
Third Avenue, New York, NY (hereinafter "EFC") and Dr. Walter Trux, having a
place of business at Altenessener Strasse 44, 4300 Essen 1, Germany (hereinafter
"Dr. Trux"), as of December 18, 1996.
WHEREAS The Company and Dr. Trux have entered into an agreement in March 1993
(hereinafter "the 1993 Agreement"), while Dr. Trux served as the
Chairman of the Supervisory Board of Deutsche Post Postdienst
(hereinafter "Deutsche Post"); and
WHEREAS Dr. Trux resigned from his position as Chairman of the Supervisory
Board of Deutsche Post in August 1994 (hereinafter "the Resignation");
and
WHEREAS In 1994 EFC extended a loan of $720,000 to Dr. Trux (hereinafter "the
Loan") collateralized by a pledge of 72,300 shares of common stock of
EFC owned by Dr. Trux (hereinafter the "Trux Shares in Collateral");
and
WHEREAS The Company and Dr. Trux have jointly established a German corporation
registered in the name Erbato GmbH (hereinafter "Erbato"); and
WHEREAS Dr. Trux has made certain claims against the Company; and
WHEREAS The parties wish to resolve these claims and any and all open issues,
disputes of claims between Dr. Trux, EFC and the Company.
NOW THEREFORE the parties hereto agree as follows:
1. The 1993 Agreement.
-------------------
1.1 The 1993 Agreement is the only Agreement governing the relationship between
the parties.
1.2 The 1993 Agreement is hereby canceled.
2. Grant of Option to Dr. Trux.
----------------------------
2.1 The Company hereby issues to Dr. Trux a 5-year stock Option to purchase
20,000 shares of common stock of EFC at a fixed price of $6.25 per share.
The aforementioned issuance is contingent upon Dr. Trux signing the option
letter attached as Schedule 1.
<PAGE>
2.2 EFC shall provide to Dr. Trux EFC's quarterly and annual reports, after
they are filed with the Securities and Exchange Commission.
3. Release of the Loan. The Company and EFC do hereby, for themselves, their
--------------------
agents, successors and assigns, forever release, remise, acquit and forever
discharge Dr. Trux and his heirs, successors, personal representatives and
assigns, of and from all, and all manner of, action and actions, cause and
causes of action, suits, damages, judgments, executions and claims
whatever, in law or equity, which either ever had, has now or which any
heir, successor, personal representative or assign of the Company or EFC
can, shall or may have against Dr. Trux with respect to the Loan plus all
interest. The aforementioned release is contingent upon Dr. Trux signing
the share transfer deed for the Trux Shares in Collateral, attached as
Schedule 2.
4. The Trux Shares in Collateral.
------------------------------
4.1 Dr. Trux hereby conveys to the Company the Trux Shares in Collateral, and
the Company accepts the transfer to it of the Trux Shares in Collateral.
4.2 Dr. Trux represents and warrants to the Company and EFC that he is the sole
record and beneficial owner of, and is transferring to the Company the Trux
Shares in Collateral free and clear of all claims, encumbrances and
restrictions.
4.3 Dr. Trux hereby releases all his right, title and interest in the Trux
Shares in Collateral. Dr. Trux shall execute all stock powers, assignment
documents, and any other documents necessary to transfer Trux Shares in
Collateral to the Company.
5. Release. In consideration of the issuance of EFC stock options described
--------
in paragraph 2 above and the extinguishing of the Loan in paragraph 3
above, Dr. Trux does hereby, for himself, his agents, successors and
assigns, forever release, remise, acquit and forever discharge the Company
and EFC, their respective stockholders, directors, officers, employees and
affiliates and parents or subsidiaries thereof (together with the
stockholders, officers, directors, employees and affiliates of such
affiliates, parents or subsidiaries) and each of their respective heirs,
successors, personal representatives and assigns, of and from all, and all
manner of, action and actions, cause and causes of action, suits, damages,
judgments, executions and claims whatever, in law or equity, which either
ever had, has now or which any heir, successor, personal representative or
assign of Dr. Trux can, shall or may have against the Company or EFC with
respect to the 1993 Agreement and with respect to any other right or
obligation. For the avoidance of doubt, the parties confirm that neither
the Company nor EFC will make a cash payment in consideration of this
Agreement or the release by Dr. Trux.
2
<PAGE>
6. Erbato Shares. In further consideration of DM 1, the Company hereby agrees
--------------
to sell all its Erbato capital shares (constituting its 80% equity
ownership) to Dr. Trux, and Dr. Trux hereby agrees to purchase all of the
Company's Erbato capital shares (constituting its 80% equity ownership).
The closing of the purchase and sale of the Company's Erbato capital shares
(the "Closing") shall take place one week after Dr. Trux submits to the
Company documentation, in a form satisfactory to the Company, that
evidences that Erbato's Charter provides that Erbato has no rights, license
or interest in anything to do with the Company or EFC. At the Closing, the
Company shall cause the transfer to Dr. Trux of the Erbato Capital shares,
and Dr. Trux shall transfer DM 1 to the Company and shall present the
executed share transfer deed attached as Schedule 3.
7. Miscellaneous.
--------------
7.1 Each of the parties represents and warrants to the others that he or it has
not sold, assigned, conveyed, or otherwise transferred or encumbered prior
to the date of this Agreement any claim or demand which he or it is now
releasing.
7.2 This Agreement is and shall be binding upon the parties, their respective
agents, heirs, successors, assigns, trustees, and any committee or other
arrangement of creditors organized with respect to the affairs of any
party.
7.3 If any provision of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective while this Agreement
remains in effect, the legality, validity and enforceability of the
remaining provisions shall not be affected thereby, and in lieu of each
such illegal, invalid or unenforceable provision the parties shall
negotiate in good faith to add a provision that is legal, valid, and
enforceable and as similar in terms to such illegal, invalid or
unenforceable provision as may be possible while giving effect to the
benefits and burdens for which the parties have bargained hereunder.
7.4 This Agreement shall be governed by and construed in accordance with the
laws of the State of Israel, without giving effect to the rules respecting
conflict of law. The parties irrevocably submit to the exclusive
jurisdiction of the courts of Israel in respect to any dispute or matter
arising out of or connected with this Agreement.
7.5 This Agreement may and shall be pleaded as a full and complete defense to,
and may be used as a basis for an injunction against, any action, suit, or
other proceeding which may be instituted, prosecuted, or maintained in
breach of this Agreement.
7.6 This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original but all of which together shall constitute one
and the same instrument.
3
<PAGE>
[The remainder of the page intentionally left blank]
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first set forth above.
ELECTRIC FUEL (E.F.L.) Limited _____________________________
Dr. Walter Trux
By: ____________________________
Name: __________________________
Title: _________________________
ELECTRIC FUEL CORPORATION
By: ____________________________
Name: __________________________
Title: _________________________
5
<PAGE>
SCHEDULE 1
----------
ELECTRIC FUEL CORPORATION
December 18, 1996
Dr. Walter Trux
Altenessener Strasse 44
4300 Essen 1
Germany
Re: Stock Options
-------------
Dear Dr. Trux:
1. Electric Fuel Corporation (the "Company") hereby issues to you options (the
"Options") to purchase 20,000 shares of Common Stock of EFC (the "Shares")
for a purchase price of $6.25 per share (the "Exercise Price"), subject to
the provisions contained herein.
2. The Option is exercisable during the period from the date hereof until 5:00
p.m. Eastern Standard Time on December 18, 2001 (the "Option Period"). The
Options and the rights conferred hereby shall terminate at the
aforementioned time on the last day of the Option Period.
3. The Options shall be exercised by presentation and surrender hereof to the
Company at the principal office of the Company, accompanied by (i) a
written notice of exercise and (ii) payment to the Company, for the account
of the Company, of the Exercise Price for the number of shares of Ordinary
Stock specified in such notice. The Exercise Price for the number of
shares of Common Stock specified in the notice shall be payable in
immediately available U.S. dollars. The Options may be exercised on one
occasion at any time during the Option Period.
4. The aggregate number of Shares shall be appropriately adjusted for any
increase or decrease in the number of outstanding shares of Ordinary Stock
resulting from a stock split or other subdivision or consolidation of the
Ordinary Stock.
5. Any tax consequences arising from the issuance, sale or other transfer of
the Shares or from any other event or act with respect to the Options or
the Shares, shall be borne solely by Dr. Trux.
6
<PAGE>
6. This Letter Agreement shall be governed by, and interpreted in accordance
with, the laws of the State of New York, without giving effect to the rules
respecting conflict of law.
Kindly indicate your acceptance of the terms and conditions of this Letter
Agreement by executing it at the space provided below.
Sincerely,
Electric Fuel Corporation
The undersigned hereby agrees to
the above terms and conditions:
Dr. Walter Trux
Dated: As of December 18, 1996
7
<PAGE>
SCHEDULE 2
----------
SHARE TRANSFER DEED
-------------------
The undersigned, Dr. Walter Trux (the "Transferor") hereby transfers to Electric
Fuel (E.F.L.) Limited (the "Transferee"), 72,300 shares of common stock of
Electric Fuel Corporation, par value $.01 per share, (the "Shares"), and the
said Transferee does hereby agree to take the Shares.
TRANSFEROR: TRANSFEREE:
DR. WALTER TRUX ELECTRIC FUEL (E.F.L.) LIMITED
_____________________________ BY: ________________________________
NAME: ______________________________
Dated: December 18, 1996
8
<PAGE>
SCHEDULE 3
----------
SHARE TRANSFER DEED
-------------------
The undersigned, Electric Fuel (E.F.L.) Limited (the "Transferor") hereby
transfers to Dr. Walter Trux (the "Transferee"), ___ shares of stock of Erbato
GmbH (the "Shares"), and the said Transferee does hereby agree to take the
Shares.
TRANSFEROR: TRANSFEREE:
ELECTRIC FUEL (E.F.L.) LIMITED DR. WALTER TRUX
______________________________ BY: _____________________________
NAME: ___________________________
Dated: December 18, 1996
9
<PAGE>
EXHIBIT 10.31
EXECUTION COPY
--------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 1st day of October, 1996, by and
among Electric Fuel Corporation, a Delaware corporation ("EFC"), and Electric
Fuel Limited, an Israeli company ("EFL" and together with EFC, the "Companies"),
and Mr. Yehuda Harats, Israel I.D. Number 05051616 (the "Executive").
WHEREAS, the Companies and the Executive entered into an Employment
Agreement dated as of December 15, 1993 (the "Original Agreement") formalizing
the terms of the Executive's employment with the Companies;
WHEREAS, the Companies and the Executive now wish to amend and restate
certain provisions of the Original Agreement in accordance with the terms of
this Agreement;
NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, the parties agree as follows:
1. Term.
----
The term of the Executive's employment under this Agreement shall be for the
period commencing on the date hereof and ending on December 15, 2000 (the
"Initial Term"); provided, however, that the term of this Agreement shall be
-------- -------
automatically extended for additional terms of two (2) years each (each, an
"Additional Term") upon the end of each of the Initial Term and each Additional
Term, unless either the Executive or both Companies shall have given written
notice to the other at least one hundred eighty days (180) days prior thereto
that the term of this Agreement shall not be so extended.
2. Employment.
----------
(a) The Executive shall be employed as the President and Chief Executive Officer
of each Company. The Executive shall perform the duties, undertake the
responsibilities and exercise the authority customarily performed,
undertaken and exercised by persons situated in a similar executive capacity
in publicly-held United States corporations and their Israeli subsidiaries.
The Executive shall exercise his authority in a reasonable manner and shall
report to the Board of Directors of each Company (each a "Board").
(b) Excluding periods of vacation and sick leave to which the Executive shall be
entitled, the Executive agrees to devote the attention and time to the
businesses and affairs of the Companies required to discharge the
responsibilities assigned to the Executive hereunder.
<PAGE>
The Companies acknowledge that the Executive is a member of the Steering
Committee of Patir Research and Development Ltd. and may become an officer
or director of this and other companies. In addition, the Companies
acknowledge that the Executive is involved in certain technical and business
development activities and may undertake other activities. The Companies
consent to these other positions and activities so long as these do not
interfere in any material manner with the Executive's performance of his
duties hereunder and do not constitute a violation of Section 8 hereof. The
Executive's duties shall be in the nature of management duties that demand a
special level of loyalty and accordingly the Israeli Law of Work Hours and
Rest -1951 shall not apply to this Agreement.
(c) While the Executive is employed by the Companies hereunder, the Companies
shall cause the Executive to be elected to, and the Executive shall serve
on, each Board as a member of such Board.
(d) Each Company will use its reasonable best efforts to obtain, and to keep in
place at all times the Executive is a director or officer of either
Company, a directors and officers liability policy covering the Executive
in an amount reasonably deemed satisfactory by the Executive and otherwise
containing terms and conditions reasonably deemed satisfactory by the
Executive.
3. Base Salary, Bonus and Options.
------------------------------
(a) The Companies agree to pay or cause to be paid to the Executive during the
term of this Agreement a base salary at the rate of US $11,736.00 per
month, payable in U.S. Dollars or in the currency of Israel (as determined
by the Representative Rate of the U.S. Dollar published by the Bank of
Israel immediately prior to the date of payment of each installment
thereof), or such larger amount as the Board may in its sole discretion
from time to time determine (hereinafter referred to as the "Base Salary").
On each anniversary of this Agreement, the Base Salary shall be adjusted
upward in an amount equal to the greater of 3% or in an amount equal to the
excess, if any, of any increase in the Israeli Consumer Price Index over
any devaluation in currency of Israel compared to the U.S. Dollar, in each
case during the year immediately preceding such anniversary. Such Base
Salary shall be payable in equal monthly installments.
(b) The Companies agree to pay or cause to be paid to the Executive on each
anniversary of this Agreement a bonus of at least 50% (but which bonus may
be in excess of 50%) of the annual Base Salary based on the attainment of
the Companies' budgeted (as mutually approved by the Executive and the
Boards) results for such period and such other goals, if any, as may be
mutually agreeable to the Executive and the Boards; provided, however, that
-------- -------
if the Companies have a positive net earnings before taxes and
extraordinary and other nonrecurring items ("Net Earnings") in any fiscal
year and such Net Earnings are at least equal to the Companies' budgeted
(as mutually approved by the Executive and the Boards)
-2-
<PAGE>
Net Earnings for such period, the Executive shall, in lieu of the bonus
otherwise payable under the preceding provisions of this Section 3(b), be
paid a bonus equal to not less than 2% of such Net Earnings if such amount
would exceed the amount of the bonus otherwise payable under the preceding
provisions of this Section 3(b). Notwithstanding the foregoing, until such
time as the Companies have Net Earnings, the Boards may award the Executive
an annual bonus based on the achievement of objectives established in
advance from time to time by the Boards in their sole discretion, provided,
--------
that any such bonus shall be no less than 25% of the annual Base Salary if
the Companies have attained at least 80% of the Companies' budgeted results
for such period.
(c) To the maximum extent permitted by law, all payments to the Executive
hereunder shall be paid in U.S. Dollars. Subject to the immediately
preceding sentence, and subject to the approval of the Executive, which
shall not be unreasonably withheld, the Companies may allocate between
themselves their obligations to make the payments and provide the benefits
specified in this Agreement. The amount paid to the Executive hereunder by
EFL shall be referred to hereinafter as the "EFL Base Salary"; provided,
--------
that in no event shall the EFL Base Salary in any year be greater than the
Base Salary for that year.
(d) In connection with his employment by the Companies and in addition to the
compensation referred to in Section 3(a)-(c), from time to time the
Executive may be granted options ("Options"), under the EFC 1993 Stock
Option and Restricted Purchase Plan or otherwise to purchase shares of
EFC's Common Stock $.01 per value per share (the "Common Stock") based on
the Executive's performance and achievements on behalf of the Company. The
Options shall be on terms and conditions to be determined from time to time
by the Boards.
4. Employee Benefits.
-----------------
The Executive shall be entitled to the following benefits:
(a) Manager's Insurance. The Companies will pay to an insurance company of the
-------------------
Executive's choice, as premiums for manager's insurance for the Executive,
an amount equal to 13.33% of each monthly payment of the EFL Base Salary
together with 2.5% of the EFL Base Salary for disability, and will deduct
from each monthly payment of the EFL Base Salary and pay to such insurance
company an amount equal to 5% of each monthly payment of the EFL Base
Salary, which shall constitute the Executive's contribution to such
premiums. Upon the termination of the Executive's employment with the
Companies for whatever reason, including without limitation termination for
Cause or the resignation by the Executive, the right to receive the
manager's insurance benefits shall be automatically assigned to the
Executive.
-3-
<PAGE>
(b) Education Fund (Keren Hishtalmut). The Companies will contribute to an
---------------------------------
education fund of the Executive's choice an amount equal to 7.5% of each
monthly payment of the EFL Base Salary, and will deduct from each monthly
payment of the EFL Base Salary and contribute to such education fund an
additional amount equal to 2.5% of each such monthly payment of the EFL Base
Salary. Upon the termination of the Executive's employment with the
Companies for whatever reason, including without limitation termination for
Cause or the resignation by the Executive, the right to receive any amounts
in such fund shall be automatically assigned to the Executive. All education
fund contributions or imputed income made under this Section in excess of
the statutory exemption shall be tax-effected such that the amount of
contribution net of any taxes and withholding (including such amounts in
respect of payments pursuant to this sentence) equals the percentages
specified herein.
(c) Vacation. The Executive shall be entitled to an annual vacation at full pay
--------
equal to the number of work days specified in the table below opposite the
period for which the Executive has been employed by EFC or any of its
subsidiaries, or by Luz Industries Limited or any of its subsidiaries or by
Advanced Materials Technology, Inc. or any of its subsidiaries:
<TABLE>
<CAPTION>
Period of Employment Days of Vacation
-------------------- ----------------
<S> <C>
Less than three complete years 15
Three complete years or more, but less than six complete years 19
Six complete years or more, but less than eight complete years 21
Eight complete years or more 24
</TABLE>
Vacation days may be accumulated and may, at the Executive's option or
automatically upon termination, be converted into cash payments in an
amount equal to the proportionate part of the Base Salary for such days;
provided, however, that if the Executive accumulates more than two (2)
-------- -------
times his then current annual entitlement of vacation days, such excess
shall be automatically converted into the right to receive such a cash
payment in respect of such excess; and provided, further, that, effective
-------- -------
as of the execution of this Agreement, the Executive shall be irrevocably
deemed to have exercised his option to have all of his accumulated and
unused vacation days in excess of two (2) times his current annual
entitlement of vacation days as of such execution converted into the right
to receive such a cash payment. Payments to which the Executive is
entitled pursuant to this Section 4(c) shall be made promptly after the
Executive's request therefor.
(d) Sick Leave. The Executive shall be entitled to 30 days of fully paid sick
----------
leave; provided, however, that the Executive shall not be entitled to sick
-------- -------
leave payment to the extent he is already covered by manager's insurance.
Sick leave may be accumulated and may, at the Executive's option, be
converted into cash payments in an amount equal to the proportionate
-4-
<PAGE>
part of the Base Salary for such days. Payments to which the Executive is
entitled pursuant to this Section 4(d) shall be made promptly after the
Executive's request therefor.
(e) Automobile. The Companies shall make an automobile available to the
----------
Executive during the term of this Agreement. Such automobile shall be of a
high quality comparable to, but not less than, that of a current model
Volkswagen Caravelle, to other cars and shall be subject to the approval of
the Executive, which shall not be unreasonably withheld. The Executive shall
be entitled to use the automobile for his personal and business needs, so
long as he does not allow anyone who would not be covered by the Companies'
insurance to drive it. The Companies shall pay all expenses of maintaining
and operating the automobile. All expense reimbursements or imputed income
made under this Section shall be tax-effected such that the amount of
reimbursement received by the Executive net of any taxes and withholdings
(including such amounts in respect of payments pursuant to this sentence)
equals the expense incurred.
(f) Recuperation Payments (D'mai Havra-ah). The Executive shall be entitled to
--------------------------------------
Recuperation Payments in accordance with the Companies' policies for all of
its management employees, but no less than required by law.
(g) Benefit Plans. The Executive shall be entitled to participate in all
-------------
incentive, bonus, benefit or other similar plans offered by either of the
Companies, including without limitation EFC's 1993 Stock Option and
Restricted Stock Purchase Plan, in accordance with the terms thereof and as
determined by the Boards from time to time.
(h) Non-Renewal Payments and Benefits. Upon termination of the Executive's
---------------------------------
employment hereunder for any reason other than for Cause, including at the
conclusion of the Initial Term (or Additional Term, if this Agreement shall
be extended beyond the Initial Term), the Executive shall receive payments
and options equal to the amounts set forth in Sections 7(b)(i), (ii) and
(iv) of this Agreement and shall be entitled to the benefits specified in
Section 7(b)(iii) of this Agreement if either (i) the Companies shall have
given the notice referred to in Section 1 hereof; or (ii) the Executive has
been employed by EFC or any of its subsidiaries, or by Luz Industries
Limited or any of its subsidiaries, or by Advanced Materials Technology,
Inc. or any of its subsidiaries for a period of ten complete years or more.
The obligation to make the payments required by this Section 4(h) may, if
approved by the Compensation Committee of the Board of EFC, be funded upon
the vesting of such obligation by a rabbi trust established by the
Companies.
-5-
<PAGE>
5. Expenses.
--------
The Executive shall be entitled to receive prompt reimbursement of all expenses
reasonably incurred by him in connection with the performance of his duties
hereunder. Without limiting the generality of the foregoing, the Companies
shall pay all of the Executive's expenses in the use of telephones for the
Companies' businesses. The Executive shall be entitled to receive room, board
and travel reimbursement in connection with the performance of his duties other
than at the principal executive office of either Company, as is customary for
senior executives in publicly-held United States and Israeli companies. All
expense reimbursements made under this Section shall be tax-effected such that
the amount of reimbursement received by the Executive net of any taxes and
withholdings (including such amounts in respect of payments pursuant to this
sentence) equals the expense incurred.
6. Termination.
-----------
The Executive's employment hereunder shall and/or may be terminated under the
following circumstances:
(a) Death. This Agreement shall terminate upon the death of the Executive.
-----
(b) Disability. The Companies may terminate the Executive's employment after
----------
having established the Executive's Disability. For purposes of this
Agreement, "Disability" means a physical or mental infirmity which impairs
the Executive's ability to substantially perform his duties under this
Agreement which continues for a period of at least one hundred and eighty
(180) consecutive days.
(c) Cause. The Companies may terminate the Executive's employment for Cause. For
purposes of this Agreement, termination for "Cause" shall mean and include:
(i) conviction for fraud, crimes of moral turpitude or other conduct which
reflects on the Companies in a material and adverse manner; (ii) a willful
failure to carry out a material directive of either of the Boards, provided
that such directive concerned matters within the scope of the Executive's
duties, was in conformity with Sections 2(a) and 2(b) hereof, would not give
the Executive Good Reason to terminate this Agreement and was capable of
being reasonably and lawfully performed; (iii) conviction in a court of
competent jurisdiction for embezzlement of funds of the Companies; and (iv)
reckless or willful misconduct that is materially harmful to either of the
Companies; provided, however, that the Companies may not terminate the
-------- -------
Executive for Cause unless they have given the Executive (i) written notice
of the basis for the proposed termination given not more than thirty (30)
days after the Companies have obtained knowledge of such basis ("Companies'
Notice of Termination") and (ii) a period of at least thirty (30) days after
the Executive's receipt of such notice in which to cure such basis.
-6-
<PAGE>
(d) Good Reason. The Executive may terminate his employment under this Agreement
-----------
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean
the occurrence of any of the events or conditions described in subsections
(i) through (viii) hereof:
(i) a change in the Executive's status, title, position or
responsibilities which, in the Executive's reasonable judgment,
represents a reduction or demotion in the Executive's status, title,
position or responsibilities as in effect immediately prior thereto;
(ii) a reduction in the Executive's Base Salary or a failure by the
Companies to increase the Executive's Base Salary within any twelve
(12) month period by the average percentage increase during such
period of the greater of (a) the base salaries of other senior
executive employees or (b) the annual average increase in the
salaries of all of the employees of the Companies;
(iii) the failure by the Companies to continue in effect any material
compensation or benefit plan in which the Executive is participating;
(iv) the insolvency or the filing (by any party, including the Companies)
of a petition for the winding-up of either of the Companies;
(v) any material breach by the Companies of any provision of this
Agreement;
(vi) any purported termination of the Executive's employment for Cause by
the Companies which does not comply with the terms of Section 6(c)
of this Agreement;
(vii) any movement of either Company's principal executive offices from
the Jerusalem/Tel Aviv area of Israel; and
(viii) any movement of the location where the Executive is generally to
render his services to the Companies hereunder from the
Jerusalem/Tel Aviv area of Israel;
provided, however, that the Executive may not terminate his employment
-------- -------
under this Agreement for Good Reason unless he has given the Companies (i)
written notice of the basis for the proposed termination given not more
than thirty (30) days after the Executive has obtained knowledge of such
basis ("Executive's Notice of Termination") and (ii) a period of at least
thirty (30) days after the Companies' receipt of such notice in which to
cure such basis.
-7-
<PAGE>
(e) Change in Control. The Executive may terminate this Agreement if there is a
-----------------
"Change in Control". For purposes of this Agreement, a "Change in Control"
shall mean any of the following events:
(i) the acquisition (other than from EFC in any public offering or
private placement of equity securities) by any person or entity of
beneficial ownership of twenty (20%) or more of the combined voting
power of EFC's then outstanding voting securities; or
(ii) individuals who, as of October 1, 1993, were members of the Board of
EFC (the "Original EFC Board"), together with individuals approved by
a vote of at least two-thirds (2/3) of the individuals who were
members of the Original EFC Board and are then still members of the
Board of EFC, cease for any reason to constitute at least one-third
(1/3) of the Board of EFC; or
(iii) approval by the shareholders of either of the Companies of a complete
winding-up of such Company or an agreement for the sale or other
disposition of all or substantially all of the assets of either of
the Companies.
The Executive shall give to the Companies an Executive's Notice of
Termination if the Executive desires to terminate his employment because
there has been a change in control, such notice to specify the date of such
termination which shall be not less than thirty (30) days after such notice
is received by the Companies. Any such notice, to be effective with
respect to any Change in Control, must be sent no later than twelve (12)
months after such Change in Control.
(f) Termination Date, Etc. "Termination Date" shall mean in the case of the
---------------------
Executive's death, his date of death, or in all other cases, the date
specified in the Notice of Termination subject to the following:
(i) if the Executive's employment is terminated by the Companies for Cause
or due to Disability, the date specified in the Companies' Notice of
Termination shall be at least thirty (30) days from the date the
Notice of Termination is given to the Executive, provided that in the
--------
case of Disability the Executive shall not have returned to the full-
time performance of his duties during such period of at least thirty
(30) days; and
(ii) if the Executive's employment is terminated for Good Reason, or
because there has been a Change in Control, the Termination Date
specified in the Executive's Notice of Termination shall not be more
than sixty (60) days from the date the Notice of Termination is given
to the Companies.
-8-
<PAGE>
7. Compensation Upon Termination.
-----------------------------
Upon termination of the Executive's employment hereunder, other than because of
the expiration of the term of such employment pursuant to Section 1 hereof (in
which event the Executive shall receive the amounts and benefits specified in
Section 4(h) hereof), the Executive shall be entitled to the following benefits:
(a) If the Executive's employment is terminated by the Companies for Cause or
Disability or by the Executive (other than for Good Reason and other than
because there has been a Change in Control), the Companies shall pay the
Executive all amounts of Base Salary and the employee benefits specified in
clauses (a), (b) and (c) of Section 4 of this Agreement earned or accrued
hereunder through the Termination Date but not paid as of the Termination
Date (collectively, "Accrued Compensation"); provided, however, that unless
-------- -------
the Executive's employment is terminated by the Companies for
Cause, the Executive shall also be entitled to payment of a pro rata (based
--------
on number of days elapsed since the immediately preceding anniversary
of this Agreement) portion of the bonus due pursuant to Section 3(b) hereof
for the period ending with the anniversary of this Agreement immediately
following such termination and provided, further, that if the Executive's
-------- -------
employment is terminated by the Companies for Disability and
the Termination Date is on or after the third anniversary of the date of
this Agreement, then the Executive shall be entitled to the benefits
specified in clauses (i), (ii), (iii) and (iv) of Section 7(b) hereof.
(b) If the Executive's employment by the Companies shall be terminated (1) by
the Companies other than for Cause or (subject to the second proviso to
Section 7(a) hereof) Disability, (2) by the Executive for Good Reason, (3)
by the Executive because there has been a Change in Control, or (4) by the
Executive's death, then the Executive shall be entitled to the benefits
provided below:
(i) the Companies shall pay the Executive all Accrued Compensation and
the entire bonus due pursuant to Section 3(b) hereof for the period
ending with the anniversary of this Agreement immediately following
such termination;
(ii) the Companies shall pay the Executive as severance pay (in addition to
any amounts payable as severance under law) and in lieu of any further
salary for periods subsequent to the Termination Date, in a single
payment an amount in cash equal to thirty six (36) times the
Executive's Base Salary at the highest rate in effect at any time
within the ninety (90) day period ending on the date the Notice of
Termination is given (or if the Executive's employment is terminated
after a Change in Control, the Executive's Base Salary immediately
prior to such Change in Control, if greater) plus an amount equal to
----
the greater of (x) the average of all bonuses paid to the Executive
during the three most recent full calendar years immediately preceding
the Termination Date or (y) all bonuses paid to the
-9-
<PAGE>
Executive during the most recent full calendar year immediately
preceding the Termination Date;
(iii) for a number of months equal to the lesser of (A) thirty six (36) or
(B) the number of months remaining until the Executive's 65th
birthday, the Companies shall at their expense continue on behalf of
the Executive and his dependents and beneficiaries all of the
benefits, including without limitation manager's insurance, life
insurance, disability, medical, dental and hospitalization benefits
and use of an automobile, which were being provided to the Executive
at the time Notice of Termination is given (or, if the Executive
terminates his employment for Good Reason or because a Change in
Control has occurred, the benefits provided to the Executive at the
time immediately preceding when such Good Reason arose or such Change
in Control occurred, if greater, or if such benefits are being
provided after the Executive's death, the date of his death), provided
--------
that the Companies' obligation hereunder with respect to the foregoing
benefits shall be limited to the extent that the Executive obtains any
such benefits pursuant to a subsequent employer's benefit plans; and
(iv) all restrictions on any outstanding awards (including restricted share
option awards) granted to the Executive shall lapse and such awards
shall immediately become fully (100%) vested, and the Option and any
share options granted to the Executive shall become fully (100%)
vested and shall become immediately exercisable and the Executive
shall be entitled to exercise the Option and any other share options
held by him by delivery of a promissory note in form and substance
reasonably satisfactory to EFC.
As a condition to receiving the payments described in this Section 7, the
Executive shall execute and deliver to the Companies a release in the form
attached hereto as Exhibit A.
8. Confidentiality; Proprietary Rights; Competitive Activity.
---------------------------------------------------------
(a) Confidentiality. Executive recognizes and acknowledges that the technology,
----------------
developments, designs, inventions, improvements, data, methods, trade
secrets and works of authorship which the Companies own, plan or develop,
including without limitation the specifications, documentation and other
information relating to the Companies' zinc-air battery systems, and
businesses and equipment related thereto (in each case whether for their own
use or for use by their clients) are confidential and are the property of
the Companies. Executive also recognizes that the Companies' technology,
customer lists, supplier lists, proposals and procedures are confidential
and are the property of the Companies. Executive further recognizes and
acknowledges that in order to enable the Companies to perform services for
their clients, those clients may furnish to the Companies confidential
information concerning their business affairs, property, methods
-10-
<PAGE>
of operation or other data. All of these materials and information will be
referred to below as "Proprietary Information"; provided, however, that such
-------- -------
information shall not include any information known generally to the public
(other than as a result of unauthorized disclosure by the Executive).
(b) Non-Disclosure. Executive agrees that, except as directed by the Companies,
--------------
and in the ordinary course of the Companies' businesses, Executive will not
during Executive's employment with the Companies and thereafter, disclose to
any person or entity or use, directly or indirectly for Executive's own
benefit or the benefit of others, any Proprietary Information, or permit any
person to examine or make copies of any documents which may contain or be
derived from Proprietary Information; provided, however, that the
Executive's duties under this Section 8(b) shall not extend to (i) any
disclosure that may be required by law in connection with any judicial or
administrative proceeding or inquiry or (ii) any disclosure which may be
reasonably required in connection with any actions or proceedings to enforce
the Executive's rights under this Agreement. Executive agrees that the
provisions of this paragraph shall survive the termination of this Agreement
and Executive's employment by the Companies.
(c) Competitive Activity. The Executive undertakes not, directly or indirectly
--------------------
(whether as owner, partner, consultant, employee or otherwise) at any time,
during and for thirty-six (36) months following termination of his
employment with the Companies, to engage in or contribute his knowledge to
any work or activity that involves a product, process, service or
development which is then directly (in any material manner) competitive with
the Companies's zinc-air energy systems and the same as or similar to a
product, process, service or development specifically related to the
Companies' zinc-air energy system on which the Executive worked or with
respect to which the Executive had access to Proprietary Information while
with the Companies. Notwithstanding the foregoing, the Executive shall be
permitted to engage in the aforementioned proposed work or activity if the
Companies furnishes him with written consent to that effect signed by an
authorized officer of each Company.
(d) No Solicitation. During the period specified in 8(c) hereof, Executive will
---------------
not solicit or encourage any customer or supplier of either Company or of
any group, division or subsidiary of either Company, to terminate its
relationship with either Company or any such group, division or subsidiary,
and Executive will not, directly or indirectly, recruit or otherwise seek to
induce any employee of either Company or any such group, division or
subsidiary to terminate his or her employment or violate any agreement with
or duty to either Company or any such group, division or subsidiary.
(e) Equitable Relief. The Executive agrees that violations of the material
----------------
covenants in this Section 8 will cause the Companies irreparable injuries
and agrees that the Companies may enforce said covenants by seeking
injunctive or other equitable relief (in addition to any
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<PAGE>
other remedies the Companies may have at law for damages or otherwise) from
a court of competent jurisdiction. In the event such court declares these
covenants to be too broad to be specifically enforced, the covenants shall
be enforced to the largest extent as may be allowed by such court for the
Companies' protection. Executive further agrees that no breach by the
Companies of, or other failure by the Companies under this Agreement shall
relieve the Executive of any obligations under Sections 8(a) and 8(b)
hereof.
9. Successors and Assigns.
----------------------
(a) This Agreement shall be binding upon and shall inure to the benefit of each
Company, its successors and assigns and the Companies shall require any
successor or assign to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Companies would be
required to perform it if no such succession or assignment had taken place.
The term the "Companies" as used herein shall include such successors and
assigns. The term "successors and assigns" as used herein shall mean a
corporation or other entity acquiring all or substantially all the assets
and business of either Company (including this Agreement) whether by
operations of law or otherwise.
(b) Subject to Section 16 hereof, neither this Agreement nor any right or
interest hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of
descent and distribution. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal personal representative.
10. Notice.
------
For the purposes of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by registered mail, postage
prepaid, addressed to the respective addresses set forth below or last given by
each party to the other. All notices and communications shall be deemed to have
been received on the date of delivery thereof or on the eighth business day
after the mailing thereof, except that notice of change of address shall be
effective only upon receipt.
The initial addresses of the parties for purposes of this Agreement shall be as
follows:
The Companies: Electric Fuel Corporation
885 Third Avenue
Suite 2900
New York, New York 10022
Attention: Robert S. Ehrlich, Chairman
-12-
<PAGE>
The Executive: Yehuda Harats
c/o Electric Fuel Corporation
5 Kiryat Mada Street
Har Hotzvim Science Park
P.O. Box 23073
91230 Jerusalem, Israel
11. Miscellaneous.
-------------
No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing and signed by the
Executive and the Companies. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreement or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement.
12. Governing Law; Venue.
--------------------
This Agreement shall be governed by and construed and enforced in accordance
with the laws of Israel without application of any conflicts of laws principles
which would cause the application of the domestic substantive laws of any other
jurisdiction. Each of the Executive and the Companies hereby irrevocably waives
any objection it may now or hereafter have to the laying of venue in the courts
of the State of Israel for any legal suit or action instituted by any party to
the Agreement against any other with respect to the subject matter hereof.
13. Severability.
------------
The provisions of this Agreement shall be deemed severable, and the invalidity
or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
14. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties hereto and
supersedes all prior agreements, understandings and arrangements, oral or
written, between the parties hereto with respect to the subject matter hereof
including, without limitation the Original Agreement.
-13-
<PAGE>
15. Joint and Several Obligations.
-----------------------------
The obligations and liabilities of each Company hereunder shall be joint and
several with the obligations and liabilities of the other Company hereunder.
16. Registration Rights.
-------------------
(a) If EFC at any time proposes to register any of its securities under the
Securities Act of 1933, as from time to time in effect (together with the
rules and regulations thereunder, all as from time to time in effect, the
"Securities Act"), for its own account or for the account of any holder of
its securities, on a form which would permit registration of Common Stock
of EFC at the time held or obtainable upon the exercise of options,
warrants or rights, or the conversion of convertible securities, at the
time held by the Executive ("Registrable Securities"), for sale to the
public under the Securities Act, EFC will each such time give notice to the
Executive of its intention to do so. Such notice shall describe such
securities and specify the form, manner and other relevant aspects of such
proposed registration. The Executive may, by written response delivered to
EFC within 15 days after the giving of any such notice, request that all or
a specified part of the Registrable Securities be included in such
registration. EFC will thereupon use its best efforts as part of its filing
of such form to effect the registration under the Securities Act of all
Registrable Securities which EFC has been so requested to register by the
Executive, to the extent required to permit the disposition (in accordance
with the intended methods thereof as aforesaid) of the Registrable
Securities to be so registered.
(b) The Executive may, by notice to EFC specifying the intended method or
methods of disposition, given at any time and from time to time after EFC
has registered any shares of its Common Stock under the Securities Act,
request that EFC effect the registration under the Securities Act of all or
a specified part of the Registrable Securities; provided, however, that EFC
-------- -------
shall not be required to effect a registration pursuant to this Section
16(b) unless such registration may be effected on a Form S-3 (or any
successor or similar Form); and provided, further, that each registration
-------- -------
pursuant to this Section 16(b) shall cover a number of Registrable Shares
equal to not less than 2% of the aggregate number of shares of EFC Common
Stock then outstanding. EFC will then use its best efforts to effect the
registration as promptly as practicable under the Securities Act of the
Registrable Securities which EFC has been requested to register by the
Executive pursuant to the Section 16(b).
(c) EFC shall not be obligated to effect any registration of Registrable
Securities under Section 16(a) hereof incidental to the registration of any
of its securities in connection with mergers, acquisitions, exchange
offers, dividend reinvestment plans or stock option or other employee
benefit plans.
-14-
<PAGE>
(d) EFC hereby agrees to pay, or cause to be paid, all legal, accounting,
printing and other expenses (other than the fees and expenses of the
Executive's own counsel and other than underwriting discounts and
commissions attributable to the Registrable Securities) in connection with
each registration of Registrable Securities pursuant to this Section 16.
(e) In connection with each registration of Registrable Securities pursuant to
this Section 16, EFC and the Executive will enter into such agreements,
containing such terms and conditions, as are customary in connection with
public offerings, such agreements to contain, without limitation, customary
indemnification provisions, representations and warranties and opinions and
other documents to be delivered in connection therewith, and to be, if
requested, with underwriters.
(f) The provisions of this Section 16 shall be subject to any agreement entered
into by EFC, in good faith, with any underwriter of EFC's securities or any
person or entity providing financing to EFC, in each case containing
reasonable limitations on the Executive's rights and EFC's obligations
hereunder.
(g) The provisions of this Section 16 shall survive the termination of the
other provisions of this Agreement. The rights of the Executive under this
Section 16 are assignable, in whole or in part, by the Executive to any
person or other entity acquiring securities of EFC from the Executive.
IN WITNESS WHEREOF, the Companies have caused this Agreement to be executed
by its duly authorized officer and the Executive has executed this Agreement as
of the day and year first above written.
ELECTRIC FUEL CORPORATION
By:______________________
Its:
ELECTRIC FUEL LIMITED
By: __________________________ _____________________________
Its: Executive
-15-
<PAGE>
Exhibit A
---------
FORM OF MUTUAL RELEASE
----------------------
This mutual release is executed and delivered by and between the
undersigned employee of Electric Fuel Corporation, a Delaware corporation
("EFC") and Electric Fuel Limited ("EFL") and the undersigned's successors,
assigns, executors, estates and personal representatives (collectively, the
"Executive"), on the one hand, and EFC and EFL and each of their respective
affiliates, agents, successors and assigns (collectively, the "Companies"), on
the other hand. For and in consideration of the Executive receiving the
compensation referred to in Section 7 of the Amended and Restated Employment
Agreement dated as of ___________, 1996 and other good and valuable
consideration, the adequacy and receipt of which are hereby acknowledged by the
Executive and the Companies, the Executive hereby remises, releases and forever
discharges the Companies, and the Companies hereby remise, release and forever
discharge the Executive, of and from any and all manner of action and actions,
cause and causes of actions, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, covenants, contracts, controversies, executions,
claims and demands of any kind and nature whatsoever in law or in equity, known
or unknown, against the other party which ever existed prior to the date hereof,
or may ever have on and after the date hereof with respect to matters arising,
and dealings with the other party occurring, prior to the date hereof; provided,
however, that nothing contained herein shall be construed to release the
Executive from any obligations to the Companies pursuant to the
-16-
<PAGE>
Employment Agreement nor to release the Companies from any of their obligations
to the Executive pursuant to the Employment Agreement.
IN WITNESS WHEREOF, the Executive and the Companies have each caused this
Release to be executed as of __________________.
EXECUTIVE
______________________________
Name:
ELECTRIC FUEL CORPORATION
By:___________________________
Title:
ELECTRIC FUEL LTD.
By:___________________________
Title:
-17-
<PAGE>
EXHIBIT 10.32
EXECUTION COPY
--------------
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of the 1st day of October, 1996, by
and among Electric Fuel Corporation, a Delaware corporation ("EFC"), and
Electric Fuel Limited, an Israeli company ("EFL" and together with EFC, the
"Companies"), and Mr. Robert S. Ehrlich, Israel I.D. Number 303673487 (the
"Executive").
WHEREAS, the Companies and the Executive entered into an Employment
Agreement dated as of December 15, 1993 (the "Original Agreement") formalizing
the terms of the Executive's employment with the Companies;
WHEREAS, the Companies and the Executive now wish to amend and restate
certain provisions of the Original Agreement in accordance with the terms of
this Agreement;
NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, the parties agree as follows:
1. Term.
----
The term of the Executive's employment under this Agreement shall be for the
period commencing on the date hereof and ending on December 15, 2000 (the
"Initial Term"); provided, however, that the term of this Agreement shall be
-------- -------
automatically extended for additional terms of two (2) years each (each, an
"Additional Term") upon the end of each of the Initial Term and each Additional
Term, unless either the Executive or both Companies shall have given written
notice to the other at least one hundred eighty days (180) days prior thereto
that the term of this Agreement shall not be so extended.
2. Employment.
----------
(a) The Executive shall be employed as the Chairman of the Board and Chief
Financial Officer of each Company. The Executive shall perform the duties,
undertake the responsibilities and exercise the authority customarily
performed, undertaken and exercised by persons situated in a similar
executive capacity in publicly-held United States corporations and their
Israeli subsidiaries. The Executive shall exercise his authority in a
reasonable manner and shall report to the Board of Directors of each Company
(each a "Board").
(b) Excluding periods of vacation and sick leave to which the Executive shall be
entitled, the Executive agrees to devote the attention and time to the
businesses and affairs of the Companies required to discharge the
responsibilities assigned to the Executive hereunder.
<PAGE>
The Companies acknowledge that the Executive is a director of PSC Inc., of
Fresenius USA, Inc. and Coatec and may be or become an officer or director
of these or other companies. In addition, the Companies acknowledge that the
Executive is involved in certain investment banking activities which,
together with the above mentioned positions, will consume a portion of his
time and require him to travel. The Companies consent to these other
positions and activities so long as these do not interfere in any material
manner with the Executive's performance of his duties hereunder and do not
constitute a violation of Section 8 hereof. The Executive's duties shall be
in the nature of management duties that demand a special level of loyalty
and accordingly the Israeli Law of Work Hours and Rest- 1951 shall not apply
to this Agreement.
(c) While the Executive is employed by the Companies hereunder, the Companies
shall cause the Executive to be elected to, and the Executive shall serve
on, each Board as a member of such Board.
(d) Each Company will use its reasonable best efforts to obtain, and to keep in
place at all times the Executive is a director or officer of either
Company, a directors and officers liability policy covering the Executive
in an amount reasonably deemed satisfactory by the Executive and otherwise
containing terms and conditions reasonably deemed satisfactory by the
Executive.
3. Base Salary, Bonus and Options.
------------------------------
(a) The Companies agree to pay or cause to be paid to the Executive during the
term of this Agreement a base salary at the rate of US $11,736.00 per
month, payable in U.S. Dollars or in the currency of Israel (as determined
by the Representative Rate of the U.S. Dollar published by the Bank of
Israel immediately prior to the date of payment of each installment
thereof), or such larger amount as the Board may in its sole discretion
from time to time determine (hereinafter referred to as the "Base Salary").
On each anniversary of this Agreement, the Base Salary shall be adjusted
upward in an amount equal to the greater of 3% or in an amount equal to the
excess, if any, of any increase in the Israeli Consumer Price Index over
any devaluation in currency of Israel compared to the U.S. Dollar, in each
case during the year immediately preceding such anniversary. Such Base
Salary shall be payable in equal monthly installments.
(b) The Companies agree to pay or cause to be paid to the Executive on each
anniversary of this Agreement a bonus of at least 50% (but which bonus may
be in excess of 50%) of the annual Base Salary based on the attainment of
the Companies' budgeted (as mutually approved by the Executive and the
Boards) results for such period and such other goals, if any, as may be
mutually agreeable to the Executive and the Boards; provided, however, that
-------- -------
if the Companies have a positive net earnings before taxes and
extraordinary and other nonrecurring items ("Net Earnings") in any fiscal
year and such Net Earnings are at least equal to the Companies' budgeted
(as mutually approved by the Executive and the Boards)
-2-
<PAGE>
Net Earnings for such period, the Executive shall, in lieu of the bonus
otherwise payable under the preceding provisions of this Section 3(b), be
paid a bonus equal to not less than 2% of such Net Earnings if such amount
would exceed the amount of the bonus otherwise payable under the preceding
provisions of this Section 3(b). Notwithstanding the foregoing, until such
time as the Companies have Net Earnings, the Boards may award the Executive
an annual bonus based on the achievement of objectives established in
advance from time to time by the Boards in their sole discretion, provided,
--------
that any such bonus shall be no less than 25% of the annual Base
Salary if the Companies have attained at least 80% of the Companies'
budgeted results for such period.
(c) To the maximum extent permitted by law, all payments to the Executive
hereunder shall be paid in U.S. Dollars. Subject to the immediately
preceding sentence, and subject to the approval of the Executive, which
shall not be unreasonably withheld, the Companies may allocate between
themselves their obligations to make the payments and provide the benefits
specified in this Agreement. The amount paid to the Executive hereunder by
EFL shall be referred to hereinafter as the "EFL Base Salary"; provided,
--------
that in no event shall the EFL Base Salary in any year be greater than the
Base Salary for that year.
(d) In connection with his employment by the Companies and in addition to the
compensation referred to in Section 3(a)-(c), from time to time the
Executive may be granted options ("Options"), under the EFC 1993 Stock
Option and Restricted Purchase Plan or otherwise to purchase shares of
EFC's Common Stock $.01 per value per share (the "Common Stock") based on
the Executive's performance and achievements on behalf of the Company. The
Options shall be on terms and conditions to be determined from time to time
by the Boards.
4. Employee Benefits.
-----------------
The Executive shall be entitled to the following benefits:
(a) Manager's Insurance. The Companies will pay to an insurance company of the
-------------------
Executive's choice, as premiums for manager's insurance for the Executive,
an amount equal to 13.33% of each monthly payment of the EFL Base Salary
together with 2.5% of the EFL Base Salary for disability, and will deduct
from each monthly payment of the EFL Base Salary and pay to such insurance
company an amount equal to 5% of each monthly payment of the EFL Base
Salary, which shall constitute the Executive's contribution to such
premiums. Upon the termination of the Executive's employment with the
Companies for whatever reason, including without limitation termination for
Cause or the resignation by the Executive, the right to receive the
manager's insurance benefits shall be automatically assigned to the
Executive.
-3-
<PAGE>
(b) Education Fund (Keren Hishtalmut). The Companies will contribute to an
---------------------------------
education fund of the Executive's choice an amount equal to 7.5% of each
monthly payment of the EFL Base Salary, and will deduct from each monthly
payment of the EFL Base Salary and contribute to such education fund an
additional amount equal to 2.5% of each such monthly payment of the EFL
Base Salary. Upon the termination of the Executive's employment with the
Companies for whatever reason, including without limitation termination for
Cause or the resignation by the Executive, the right to receive any amounts
in such fund shall be automatically assigned to the Executive. All
education fund contributions or imputed income made under this Section in
excess of the statutory exemption shall be tax-effected such that the
amount of contribution net of any taxes and withholding (including such
amounts in respect of payments pursuant to this sentence) equals the
percentages specified herein.
(c) Vacation. The Executive shall be entitled to an annual vacation at full pay
--------
equal to the number of work days specified in the table below opposite the
period for which the Executive has been employed by EFC or any of its
subsidiaries, or by Luz Industries Limited or any of its subsidiaries or by
Advanced Materials Technology, Inc. or any of its subsidiaries:
<TABLE>
<CAPTION>
Period of Employment Days of Vacation
--------------------- ----------------
<S> <C>
Less than three complete years 15
Three complete years or more, but less than six complete years 19
Six complete years or more, but less than eight complete years 21
Eight complete years or more 24
</TABLE>
Vacation days may be accumulated and may, at the Executive's option or
automatically upon termination, be converted into cash payments in an
amount equal to the proportionate part of the Base Salary for such days;
provided, however, that if the Executive accumulates more than two (2)
-------- -------
times his then current annual entitlement of vacation days, such excess
shall be automatically converted into the right to receive such a cash
payment in respect of such excess; and provided, further, that, effective
-------- -------
as of the execution of this Agreement, the Executive shall be irrevocably
deemed to have exercised his option to have all of his accumulated and
unused vacation days in excess of two (2) times his current annual
entitlement of vacation days as of such execution converted into the right
to receive such a cash payment. Payments to which the Executive is
entitled pursuant to this Section 4(c) shall be made promptly after the
Executive's request therefor.
(d) Sick Leave. The Executive shall be entitled to 30 days of fully paid sick
----------
leave; provided, however, that the Executive shall not be entitled to sick
-----------------
leave payment to the extent he is already covered by manager's insurance.
Sick leave may be accumulated and may, at the Executive's option, be
converted into cash payments in an amount equal to the proportionate
-4-
<PAGE>
part of the Base Salary for such days. Payments to which the Executive is
entitled pursuant to this Section 4(d) shall be made promptly after the
Executive's request therefor.
(e) Automobile. The Companies shall make an automobile available to the
Executive during the term of this Agreement. Such automobile shall be of a
high quality comparable to, but not less than, that of a current model
Volkswagen Caravelle, to other cars and shall be subject to the approval of
the Executive, which shall not be unreasonably withheld. The Executive
shall be entitled to use the automobile for his personal and business
needs, so long as he does not allow anyone who would not be covered by the
Companies' insurance to drive it. The Companies shall pay all expenses of
maintaining and operating the automobile. All expense reimbursements or
imputed income made under this Section shall be tax-effected such that the
amount of reimbursement received by the Executive net of any taxes and
withholdings (including such amounts in respect of payments pursuant to
this sentence) equals the expense incurred.
(f) Recuperation Payments (D'mai Havra-ah). The Executive shall be entitled to
--------------------------------------
Recuperation Payments in accordance with the Companies' policies for all of
its management employees, but no less than required by law.
(g) Benefit Plans. The Executive shall be entitled to participate in all
-------------
incentive, bonus, benefit or other similar plans offered by either of the
Companies, including without limitation EFC's 1993 Stock Option and
Restricted Stock Purchase Plan, in accordance with the terms thereof and as
determined by the Boards from time to time.
(h) Non-Renewal Payments and Benefits. Upon termination of the Executive's
---------------------------------
employment hereunder for any reason other than for Cause, including at the
conclusion of the Initial Term (or Additional Term, if this Agreement shall
be extended beyond the Initial Term), the Executive shall receive payments
and options equal to the amounts set forth in Sections 7(b)(i), (ii) and
(iv) of this Agreement and shall be entitled to the benefits specified in
Section 7(b)(iii) of this Agreement if either (i) the Companies shall have
given the notice referred to in Section 1 hereof; or (ii) the Executive has
been employed by EFC or any of its subsidiaries, or by Luz Industries
Limited or any of its subsidiaries, or by Advanced Materials Technology,
Inc. or any of its subsidiaries for a period of ten complete years or more
with respect to the amounts set forth in Sections 7(b)(i) and (ii) and the
options set forth in Section 7(b)(iv); and nine complete years or more with
respect to the benefits specified in Section 7(b)(iii). The obligation to
make the payments required by this Section 4(h) may, if approved by the
Compensation Committee of the Board of EFC, be funded upon the vesting of
such obligation by a rabbi trust established by the Companies.
-5-
<PAGE>
5. Expenses.
--------
The Executive shall be entitled to receive prompt reimbursement of all expenses
reasonably incurred by him in connection with the performance of his duties
hereunder. Without limiting the generality of the foregoing, the Companies
shall pay all of the Executive's expenses in the use of telephones for the
Companies' businesses. The Executive shall be entitled to receive room, board
and travel reimbursement in connection with the performance of his duties other
than at the principal executive office of either Company, as is customary for
senior executives in publicly-held United States and Israeli companies. All
expense reimbursements made under this Section shall be tax-effected such that
the amount of reimbursement received by the Executive net of any taxes and
withholdings (including such amounts in respect of payments pursuant to this
sentence) equals the expense incurred.
6. Termination.
-----------
The Executive's employment hereunder shall and/or may be terminated under the
following circumstances:
(a) Death. This Agreement shall terminate upon the death of the Executive.
-----
(b) Disability. The Companies may terminate the Executive's employment after
----------
having established the Executive's Disability. For purposes of this Agreement,
"Disability" means a physical or mental infirmity which impairs the Executive's
ability to substantially perform his duties under this Agreement which continues
for a period of at least one hundred and eighty (180) consecutive days.
(c) Cause. The Companies may terminate the Executive's employment for Cause. For
-----
purposes of this Agreement, termination for "Cause" shall mean and include:
(i) conviction for fraud, crimes of moral turpitude or other conduct which
reflects on the Companies in a material and adverse manner; (ii) a willful
failure to carry out a material directive of either of the Boards, provided
that such directive concerned matters within the scope of the Executive's
duties, was in conformity with Sections 2(a) and 2(b) hereof, would not give
the Executive Good Reason to terminate this Agreement and was capable of
being reasonably and lawfully performed; (iii) conviction in a court of
competent jurisdiction for embezzlement of funds of the Companies; and (iv)
reckless or willful misconduct that is materially harmful to either of the
Companies; provided, however, that the Companies may not terminate the
-------- -------
Executive for Cause unless they have given the Executive (i) written notice
of the basis for the proposed termination given not more than thirty (30)
days after the Companies have obtained knowledge of such basis ("Companies'
Notice of Termination") and (ii) a period of at least thirty (30) days after
the Executive's receipt of such notice in which to cure such basis.
-6-
<PAGE>
(d) Good Reason. The Executive may terminate his employment under this Agreement
-----------
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean
the occurrence of any of the events or conditions described in subsections
(i) through (viii) hereof:
(i) a change in the Executive's status, title, position or
responsibilities which, in the Executive's reasonable judgment,
represents a reduction or demotion in the Executive's status, title,
position or responsibilities as in effect immediately prior thereto;
(ii) a reduction in the Executive's Base Salary or a failure by the
Companies to increase the Executive's Base Salary within any twelve
(12) month period by the average percentage increase during such
period of the greater of (a) the base salaries of other senior
executive employees or (b) the annual average increase in the
salaries of all of the employees of the Companies;
(iii) the failure by the Companies to continue in effect any material
compensation or benefit plan in which the Executive is participating;
(iv) the insolvency or the filing (by any party, including the Companies)
of a petition for the winding-up of either of the Companies;
(v) any material breach by the Companies of any provision of this
Agreement;
(vi) any purported termination of the Executive's employment for Cause by
the Companies which does not comply with the terms of Section 6(c) of
this Agreement;
(vii) any movement of either Company's principal executive offices from
the Jerusalem/Tel Aviv area of Israel; and
(viii) any movement of the location where the Executive is generally to
render his services to the Companies hereunder from the Jerusalem/Tel
Aviv area of Israel;
provided, however, that the Executive may not terminate his employment
-------- -------
under this Agreement for Good Reason unless he has given the Companies (i)
written notice of the basis for the proposed termination given not more than
thirty (30) days after the Executive has obtained knowledge of such basis
("Executive's Notice of Termination") and (ii) a period of at least thirty
(30) days after the Companies' receipt of such notice in which to cure such
basis.
-7-
<PAGE>
(e) Change in Control. The Executive may terminate this Agreement if there is a
-----------------
"Change in Control". For purposes of this Agreement, a "Change in Control"
shall mean any of the following events:
(i) the acquisition (other than from EFC in any public offering or private
placement of equity securities) by any person or entity of beneficial
ownership of twenty (20%) or more of the combined voting power of
EFC's then outstanding voting securities; or
(ii) individuals who, as of October 1, 1993, were members of the Board of
EFC (the "Original EFC Board"), together with individuals approved by
a vote of at least two-thirds (2/3) of the individuals who were
members of the Original EFC Board and are then still members of the
Board of EFC, cease for any reason to constitute at least one-third
(1/3) of the Board of EFC; or
(iii) approval by the shareholders of either of the Companies of a
complete winding-up of such Company or an agreement for the sale or
other disposition of all or substantially all of the assets of either
of the Companies.
The Executive shall give to the Companies an Executive's Notice of
Termination if the Executive desires to terminate his employment because
there has been a change in control, such notice to specify the date of such
termination which shall be not less than thirty (30) days after such notice
is received by the Companies. Any such notice, to be effective with respect
to any Change in Control, must be sent no later than twelve (12) months
after such Change in Control.
(f) Termination Date, Etc. "Termination Date" shall mean in the case of the
---------------------
Executive's death, his date of death, or in all other cases, the date
specified in the Notice of Termination subject to the following:
(i) if the Executive's employment is terminated by the Companies for Cause
or due to Disability, the date specified in the Companies' Notice of
Termination shall be at least thirty (30) days from the date the
Notice of Termination is given to the Executive, provided that in the
--------
case of Disability the Executive shall not have returned to the full-
time performance of his duties during such period of at least thirty
(30) days; and
(ii) if the Executive's employment is terminated for Good Reason, or because
there has been a Change in Control, the Termination Date specified in
the Executive's Notice of Termination shall not be more than sixty (60)
days from the date the Notice of Termination is given to the Companies.
-8-
<PAGE>
7. Compensation Upon Termination.
-----------------------------
Upon termination of the Executive's employment hereunder, other than because of
the expiration of the term of such employment pursuant to Section 1 hereof (in
which event the Executive shall receive the amounts and benefits specified in
Section 4(h) hereof), the Executive shall be entitled to the following benefits:
(a) If the Executive's employment is terminated by the Companies for Cause or
Disability or by the Executive (other than for Good Reason and other than
because there has been a Change in Control), the Companies shall pay the
Executive all amounts of Base Salary and the employee benefits specified in
clauses (a), (b) and (c) of Section 4 of this Agreement earned or accrued
hereunder through the Termination Date but not paid as of the Termination
Date (collectively, "Accrued Compensation"); provided, however, that unless
-------- -------
the Executive's employment is terminated by the Companies for Cause, the
Executive shall also be entitled to payment of a pro rata (based on number
--- ----
of days elapsed since the immediately preceding anniversary of this
Agreement) portion of the bonus due pursuant to Section 3(b) hereof for the
period ending with the anniversary of this Agreement immediately following
such termination and provided, further, that if the Executive's employment
-------- -------
is terminated by the companies for Disability and the Termination Date is on
or after the third anniversary of the date of this Agreement, then the
Executive shall be entitled to the benefits specified in clauses (i), (ii),
(iii) and (iv) of Section 7(b) hereof.
(b) If the Executive's employment by the Companies shall be terminated (1) by
the Companies other than for Cause or (subject to the second proviso to
Section 7(a) hereof) Disability, (2) by the Executive for Good Reason, (3)
by the Executive because there has been a Change in Control, or (4) by the
Executive's death, then the Executive shall be entitled to the benefits
provided below:
(i) the Companies shall pay the Executive all Accrued Compensation and the
entire bonus due pursuant to Section 3(b) hereof for the period ending
with the anniversary of this Agreement immediately following such
termination;
(ii) the Companies shall pay the Executive as severance pay (in addition to
any amounts payable as severance under law) and in lieu of any further
salary for periods subsequent to the Termination Date, in a single
payment an amount in cash equal to thirty six (36) times the
Executive's Base Salary at the highest rate in effect at any time
within the ninety (90) day period ending on the date the Notice of
Termination is given (or if the Executive's employment is terminated
after a Change in Control, the Executive's Base Salary immediately
prior to such Change in Control, if greater) plus an amount equal to
the greater of (x) the average of all bonuses paid to the Executive
during the three most recent full calendar years immediately preceding
the Termination Date or (y) all bonuses paid to the
-9-
<PAGE>
Executive during the most recent full calendar year immediately
preceding the Termination Date;
(iii) for a number of months equal to the lesser of (A) thirty six (36) or
(B) the number of months remaining until the Executive's 65th
birthday, the Companies shall at their expense continue on behalf of
the Executive and his dependents and beneficiaries all of the
benefits, including without limitation manager's insurance, life
insurance, disability, medical, dental and hospitalization benefits
and use of an automobile, which were being provided to the Executive
at the time Notice of Termination is given (or, if the Executive
terminates his employment for Good Reason or because a Change in
Control has occurred, the benefits provided to the Executive at the
time immediately preceding when such Good Reason arose or such Change
in Control occurred, if greater, or if such benefits are being
provided after the Executive's death, the date of his death), provided
--------
that the Companies' obligation hereunder with respect to the foregoing
benefits shall be limited to the extent that the Executive obtains any
such benefits pursuant to a subsequent employer's benefit plans; and
(iv) all restrictions on any outstanding awards (including restricted share
option awards) granted to the Executive shall lapse and such awards
shall immediately become fully (100%) vested, and the Option and any
share options granted to the Executive shall become fully (100%)
vested and shall become immediately exercisable and the Executive
shall be entitled to exercise the Option and any other share options
held by him by delivery of a promissory note in form and substance
reasonably satisfactory to EFC.
As a condition to receiving the payments described in this Section 7, the
Executive shall execute and deliver to the Companies a release in the form
attached hereto as Exhibit A.
8. Confidentiality; Proprietary Rights; Competitive Activity.
---------------------------------------------------------
(a) Confidentiality. Executive recognizes and acknowledges that the technology,
----------------
developments, designs, inventions, improvements, data, methods, trade
secrets and works of authorship which the Companies own, plan or develop,
including without limitation the specifications, documentation and other
information relating to the Companies' zinc-air battery systems, and
businesses and equipment related thereto (in each case whether for their own
use or for use by their clients) are confidential and are the property of
the Companies. Executive also recognizes that the Companies' technology,
customer lists, supplier lists, proposals and procedures are confidential
and are the property of the Companies. Executive further recognizes and
acknowledges that in order to enable the Companies to perform services for
their clients, those clients may furnish to the Companies confidential
information concerning their business affairs, property, methods
-10-
<PAGE>
of operation or other data. All of these materials and information will be
referred to below as "Proprietary Information"; provided, however, that such
-------- -------
information shall not include any information known generally to the public
(other than as a result of unauthorized disclosure by the Executive).
(b) Non-Disclosure. Executive agrees that, except as directed by the Companies,
--------------
and in the ordinary course of the Companies' businesses, Executive will not
during Executive's employment with the Companies and thereafter, disclose to
any person or entity or use, directly or indirectly for Executive's own
benefit or the benefit of others, any Proprietary Information, or permit any
person to examine or make copies of any documents which may contain or be
derived from Proprietary Information; provided, however, that the
-------- -------
Executive's duties under this Section 8(b) shall not extend to (i) any
disclosure that may be required by law in connection with any judicial or
administrative proceeding or inquiry or (ii) any disclosure which may be
reasonably required in connection with any actions or proceedings to enforce
the Executive's rights under this Agreement. Executive agrees that the
provisions of this paragraph shall survive the termination of this Agreement
and Executive's employment by the Companies.
(c) Competitive Activity. The Executive undertakes not, directly or indirectly
--------------------
(whether as owner, partner, consultant, employee or otherwise) at any time,
during and for thirty-six (36) months following termination of his
employment with the Companies, to engage in or contribute his knowledge to
any work or activity that involves a product, process, service or
development which is then directly (in any material manner) competitive with
the Companies's zinc-air energy systems and the same as or similar to a
product, process, service or development specifically related to the
Companies' zinc-air energy system on which the Executive worked or with
respect to which the Executive had access to Proprietary Information while
with the Companies. Notwithstanding the foregoing, the Executive shall be
permitted to engage in the aforementioned proposed work or activity if the
Companies furnishes him with written consent to that effect signed by an
authorized officer of each Company.
(d) No Solicitation. During the period specified in 8(c) hereof, Executive will
---------------
not solicit or encourage any customer or supplier of either Company or of
any group, division or subsidiary of either Company, to terminate its
relationship with either Company or any such group, division or subsidiary,
and Executive will not, directly or indirectly, recruit or otherwise seek to
induce any employee of either Company or any such group, division or
subsidiary to terminate his or her employment or violate any agreement with
or duty to either Company or any such group, division or subsidiary.
(e) Equitable Relief. The Executive agrees that violations of the material
----------------
covenants in this Section 8 will cause the Companies irreparable injuries
and agrees that the Companies may enforce said covenants by seeking
injunctive or other equitable relief (in addition to any
-11-
<PAGE>
other remedies the Companies may have at law for damages or otherwise) from
a court of competent jurisdiction. In the event such court declares these
covenants to be too broad to be specifically enforced, the covenants shall
be enforced to the largest extent as may be allowed by such court for the
Companies' protection. Executive further agrees that no breach by the
Companies of, or other failure by the Companies under this Agreement shall
relieve the Executive of any obligations under Sections 8(a) and 8(b)
hereof.
9. Successors and Assigns.
----------------------
(a) This Agreement shall be binding upon and shall inure to the benefit of each
Company, its successors and assigns and the Companies shall require any
successor or assign to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Companies would be
required to perform it if no such succession or assignment had taken place.
The term the "Companies" as used herein shall include such successors and
assigns. The term "successors and assigns" as used herein shall mean a
corporation or other entity acquiring all or substantially all the assets
and business of either Company (including this Agreement) whether by
operations of law or otherwise.
(b) Subject to Section 16 hereof, neither this Agreement nor any right or
interest hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of
descent and distribution. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal personal representative.
10. Notice.
------
For the purposes of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by registered mail, postage
prepaid, addressed to the respective addresses set forth below or last given by
each party to the other. All notices and communications shall be deemed to have
been received on the date of delivery thereof or on the eighth business day
after the mailing thereof, except that notice of change of address shall be
effective only upon receipt.
The initial addresses of the parties for purposes of this Agreement shall be as
follows:
The Companies: Electric Fuel Corporation
885 Third Avenue
Suite 2900
New York, New York 10022
Attention: Yehuda Harats, President
-12-
<PAGE>
The Executive: Robert S. Ehrlich
c/o Electric Fuel Corporation
5 Kiryat Mada Street
Har Hotzvim Science Park
P.O. Box 23073
91230 Jerusalem, Israel
11. Miscellaneous.
-------------
No provision of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing and signed by the
Executive and the Companies. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreement or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement.
12. Governing Law; Venue.
--------------------
This Agreement shall be governed by and construed and enforced in accordance
with the laws of Israel without application of any conflicts of laws principles
which would cause the application of the domestic substantive laws of any other
jurisdiction. Each of the Executive and the Companies hereby irrevocably waives
any objection it may now or hereafter have to the laying of venue in the courts
of the State of Israel for any legal suit or action instituted by any party to
the Agreement against any other with respect to the subject matter hereof.
13. Severability.
------------
The provisions of this Agreement shall be deemed severable, and the invalidity
or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
14. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties hereto and
supersedes all prior agreements, understandings and arrangements, oral or
written, between the parties hereto with respect to the subject matter hereof
including, without limitation the Original Agreement.
-13-
<PAGE>
15. Joint and Several Obligations.
-----------------------------
The obligations and liabilities of each Company hereunder shall be joint and
several with the obligations and liabilities of the other Company hereunder.
16. Registration Rights.
-------------------
(a) If EFC at any time proposes to register any of its securities under the
Securities Act of 1933, as from time to time in effect (together with the
rules and regulations thereunder, all as from time to time in effect, the
"Securities Act"), for its own account or for the account of any holder of
its securities, on a form which would permit registration of Common Stock
of EFC at the time held or obtainable upon the exercise of options,
warrants or rights, or the conversion of convertible securities, at the
time held by the Executive ("Registrable Securities"), for sale to the
public under the Securities Act, EFC will each such time give notice to the
Executive of its intention to do so. Such notice shall describe such
securities and specify the form, manner and other relevant aspects of such
proposed registration. The Executive may, by written response delivered to
EFC within 15 days after the giving of any such notice, request that all or
a specified part of the Registrable Securities be included in such
registration. EFC will thereupon use its best efforts as part of its filing
of such form to effect the registration under the Securities Act of all
Registrable Securities which EFC has been so requested to register by the
Executive, to the extent required to permit the disposition (in accordance
with the intended methods thereof as aforesaid) of the Registrable
Securities to be so registered.
(b) The Executive may, by notice to EFC specifying the intended method or
methods of disposition, given at any time and from time to time after EFC
has registered any shares of its Common Stock under the Securities Act,
request that EFC effect the registration under the Securities Act of all or
a specified part of the Registrable Securities; provided, however, that EFC
-------- -------
shall not be required to effect a registration pursuant to this Section
16(b) unless such registration may be effected on a Form S-3 (or any
successor or similar Form); and provided, further, that each registration
-------- -------
pursuant to this Section 16(b) shall cover a number of Registrable Shares
equal to not less than 2% of the aggregate number of shares of EFC Common
Stock then outstanding. EFC will then use its best efforts to effect the
registration as promptly as practicable under the Securities Act of the
Registrable Securities which EFC has been requested to register by the
Executive pursuant to the Section 16(b).
(c) EFC shall not be obligated to effect any registration of Registrable
Securities under Section 16(a) hereof incidental to the registration of any
of its securities in connection with mergers, acquisitions, exchange
offers, dividend reinvestment plans or stock option or other employee
benefit plans.
-14-
<PAGE>
(d) EFC hereby agrees to pay, or cause to be paid, all legal, accounting,
printing and other expenses (other than the fees and expenses of the
Executive's own counsel and other than underwriting discounts and
commissions attributable to the Registrable Securities) in connection with
each registration of Registrable Securities pursuant to this Section 16.
(e) In connection with each registration of Registrable Securities pursuant to
this Section 16, EFC and the Executive will enter into such agreements,
containing such terms and conditions, as are customary in connection with
public offerings, such agreements to contain, without limitation, customary
indemnification provisions, representations and warranties and opinions and
other documents to be delivered in connection therewith, and to be, if
requested, with underwriters.
(f) The provisions of this Section 16 shall be subject to any agreement entered
into by EFC, in good faith, with any underwriter of EFC's securities or any
person or entity providing financing to EFC, in each case containing
reasonable limitations on the Executive's rights and EFC's obligations
hereunder.
(g) The provisions of this Section 16 shall survive the termination of the
other provisions of this Agreement. The rights of the Executive under this
Section 16 are assignable, in whole or in part, by the Executive to any
person or other entity acquiring securities of EFC from the Executive.
IN WITNESS WHEREOF, the Companies have caused this Agreement to be executed
by its duly authorized officer and the Executive has executed this Agreement as
of the day and year first above written.
ELECTRIC FUEL CORPORATION
By:______________________
Its:
ELECTRIC FUEL LIMITED
By: __________________________ _____________________________
Its: Executive
-15-
<PAGE>
Exhibit A
---------
FORM OF MUTUAL RELEASE
----------------------
This mutual release is executed and delivered by and between the
undersigned employee of Electric Fuel Corporation, a Delaware corporation
("EFC") and Electric Fuel Limited ("EFL") and the undersigned's successors,
assigns, executors, estates and personal representatives (collectively, the
"Executive"), on the one hand, and EFC and EFL and each of their respective
affiliates, agents, successors and assigns (collectively, the "Companies"), on
the other hand. For and in consideration of the Executive receiving the
compensation referred to in Section 7 of the Amended and Restated Employment
Agreement dated as of ___________, 1996 and other good and valuable
consideration, the adequacy and receipt of which are hereby acknowledged by the
Executive and the Companies, the Executive hereby remises, releases and forever
discharges the Companies, and the Companies hereby remise, release and forever
discharge the Executive, of and from any and all manner of action and actions,
cause and causes of actions, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, covenants, contracts, controversies, executions,
claims and demands of any kind and nature whatsoever in law or in equity, known
or unknown, against the other party which ever existed prior to the date hereof,
or may ever have on and after the date hereof with respect to matters arising,
and dealings with the other party occurring, prior to the date hereof; provided,
however, that nothing contained herein shall be construed to release the
Executive from any obligations to the Companies pursuant to the
-16-
<PAGE>
Employment Agreement nor to release the Companies from any of their obligations
to the Executive pursuant to the Employment Agreement.
IN WITNESS WHEREOF, the Executive and the Companies have each caused this
Release to be executed as of __________________.
EXECUTIVE
______________________________
Name:
ELECTRIC FUEL CORPORATION
By:___________________________
Title:
ELECTRIC FUEL LTD.
By:___________________________
Title:
-17-
<PAGE>
EXHIBIT 10.33
-------------
SUMMARY OF THE TERMS OF THE LEASE AGREEMENT
CONCERNING THE COMPANY'S NEW FACILITY IN BEIT SHEMESH
Leased area in square
- ---------------------
meters (gross): 1770
- -------------- ----
Date of the agreement:
March 18, 1996
--------------
Between:Mori Investments Ltd.
-----------------------------
64 Sokolov Street
-----------------
Ramat HaSharon
--------------
(hereinafter "the Company")
---------------------------
and : Electric Fuel (E.F.L.) Ltd.
---------------------------------
Company No.. 51-1532637
-----------------------
Kiryat Hamada 5, Har Hotzvim
----------------------------
P.O. Box 23073
--------------
Jerusalem
---------
Tel: 02-5890890
---------------
Facsimile: 02-5322252
---------------------
(hereinafter "the Lessee")
--------------------------
<PAGE>
TERM OF THE LEASE
- -----------------
The lease period shall begin on March 20, 1996 and end on March 19, 1999.
The Lessee may extend the term of the lease for an additional two year period.
RENT
- ----
The Lessee shall pay the Company on the 1st of each month the amount of NIS
21,240, plus linkage differentials as specified below. The rent will increase by
3% per annum in addition to the linkage differentials.
Index: the Consumer Price Index published by the Central Bureau of
Statistics.
The Basic Index: the index published on February 15, 1996
New Index: the last index published before a payment date
specified in this Agreement.
Linkage differentials: the difference between the New Index and the
Basic Index, divided by the Basic Index and multiplied by the amount
of the rent under this Agreement.
The Lessee will give the Company an advance equal to four (4) monthly rent
payments.
It is agreed between the parties that, without derogating from the Company's
rights, if the Lessee does not pay rent on time and continues not to pay after
receiving written notice of the delinquency, then, after 30 days, the Company
shall be entitled to demand six (6) months payment of rent.
-2-
<PAGE>
If the Lessee cancels the lease prior to the end of the lease period, the
Lessee will still be obligated to pay the entire amounts according to this
agreement. If the Company succeeds in leasing the building to a new tenant, then
the Lessee is charged
three (3) months rent plus
the difference between the lessee's rent and the new rent if the new
rent is less than the lessee's rent.
ADEQUACY
---------
The Lessee confirms that it has seen and examined the Premises
and found no inadequacies.
PERMITS
--------
The Lessee shall be responsible for obtaining all the permits
necessary under the law to manage its business.
MAINTENANCE OF THE PREMISES
----------------------------
The Lessee shall be responsible for the maintenance of the
Premises and shall pay for any defects or damages caused to the
Premises.
Any changes in the leased building must receive Company's
written approval.
-3-
<PAGE>
ASSIGNMENT OF RIGHTS
---------------------
The Lessee shall not be entitled to assign the rights granted to
it under this Agreement without written permission of the Company,
which may be withheld, but for reasonable reasons only.
The Company shall be entitled to assign its rights and duties,
subject to the condition that the Lessee's rights shall not be
prejudiced.
VACATION OF THE PREMISES
-------------------------
The Lessee shall vacate the Premises at the end of the lease
period. Without derogating from the above, in the event that the
Lessee does not vacate the Premises, the lessee will pay the Company
a fixed and pre-determined amount of $200 for each day of the delay.
TERMINATION OF THE AGREEMENT
-----------------------------
(a) The parties agree that this Agreement may be considered
terminated by the Company in the event of any of the following:
1. The Lessee's debts to the Company were not paid within 30
days.
2. The Lessee's right in the Premises were assigned to another.
3. The Lessee loses its status as an industrial company according
to the Law for Encouragement of Capital Investments 1959.
4. Changes to the building without permission.
-4-
<PAGE>
5. The Lessee declares bankruptcy.
6. The public premises were used in a manner that breached this
Agreement.
7. Liens were placed on the Lessee's rights in the building and
the Lessee did not have them removed within 45 days of the
attachment.
(b) In the event that this Agreement has been terminated, the
Premises shall be vacated within 30 days of the receipt of
notification.
(c) This clause does not derogate from the Company's rights in
accordance with this Agreement or law.
(d) If the Lessee vacates the Premises, the lessee shall not be
entitled to any compensation and/or payment from the Company.
PAYMENT ON BEHALF OF THE LESSEE
--------------------------------
(a) The Company shall be entitled to make any payment on behalf of the
Lessee.
(b) The Lessee shall pay the Company back immediately for any payment
as above.
TAXES
------
The Lessee shall pay all taxes and government fees relating to the
Lessee's business and/or applicable to the Lessee or to the Premises
during the term of the Lease.
-5-
<PAGE>
PROTECTED TENANT
----------------
The parties declare that the Lessee is not a Protected Tenant
according to the Law for the Protection of Tenants, 1972.
LEGAL EXPENSES
--------------
In event that the tenant does not vacate the Premises in accordance
with this Agreement, the Lessee shall, in addition to all the other
remedies under this Agreement and law, pay all of the Company's legal
expenses regarding the vacation of the Premises.
INTEREST AND LINKAGE
--------------------
The Parties agree that for each late payment, the Lessee shall also
pay the Company interest in regard to the late payment at double the
interest rate paid on overdrafts in Bank Leumi, from the date the
debt was created until the date of repayment.
VALUE ADDED TAX
----------------
Any sum to be paid by the Lessee shall obligate the Lessee to pay
V.A.T. in accordance with its legal rate on the date of payment or
its deposit.
SECURITY AND GUARANTEES
-----------------------
The Lessee hereby gives the Company a promissory note for the
amount of NIS 100,000, signed by the Lessee and by Electric Fuel
Corporation ("EFC"). The Lessee empowers the Company irrevocably to
fill in the date of payments of the promissory note.
-6-
<PAGE>
The Company shall be entitled to present this promissory note in the
event that the Lessee does not fulfill its obligations under this
Agreement or does not vacate the Premises on time.
NOTES
------
For the removal of any doubt, any note given by the Lessee to the
Company in accordance with this Agreement shall be linked to the
Consumer Price Index.
-7-
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors and Stockholders
Electric Fuel Corporation
We consent to the incorporation by reference in the registration statements
(No's 33-80144 and 333-19753) on Form S-8 of Electric Fuel Corporation of our
report dated March 25,1997, relating to the consolidated balance sheets of
Electric Fuel Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of loss, changes in stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996, which
report appears in the December 31, 1996 annual report on Form 10-K of Electric
Fuel Corporation.
Kesselman & Kesselman
Certified Public Accountants (Israel)
Jerusalem, Israel
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,662,776
<SECURITIES> 11,296,382
<RECEIVABLES> 369,442
<ALLOWANCES> 0
<INVENTORY> 915,032
<CURRENT-ASSETS> 27,159,260
<PP&E> 8,754,771
<DEPRECIATION> 1,451,095
<TOTAL-ASSETS> 34,522,118
<CURRENT-LIABILITIES> 5,511,477
<BONDS> 0
0
0
<COMMON> 142,575
<OTHER-SE> 27,727,036
<TOTAL-LIABILITY-AND-EQUITY> 34,522,118
<SALES> 0
<TOTAL-REVENUES> 5,405,303
<CGS> 0
<TOTAL-COSTS> 11,299,335<F1>
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (793,853)
<INCOME-PRETAX> (10,055,879)
<INCOME-TAX> (38,261)
<INCOME-CONTINUING> (10,017,618)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,017,618)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> (0.81)
<FN>
<F1>Total costs include research and development expenses and cost of revenues.
Because of the nature of the company's operations, management is of the opinion
that it is not meaningful to segregate these costs.
</FN>
</TABLE>
<PAGE>
Exhibit 99.1
------------
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
Report and presented elsewhere by management from time to time. Reference is
also made to the "Risk Factors" described in the Company's Prospectus dated
February 1, 1996.
COMPANY'S PARTICIPATION IN FIELD TEST
While the Company had originally anticipated the Field Test to expand to a
total of 64 vehicles for the Deutsche Post during 1996 (20 Mercedes-Benz vans
and 44 GM-Opel light pick-up trucks), at recent meetings the Company has
discussed with certain Field Test partners modifications of the Field Test
program. For 1997, Deutsche Post proposes to modify the Field Test program to
include 20 Mercedes-Benz MB410 vans (of which 10 have been delivered), 20 new
Mercedes-Benz Vito vans (a newly designed 2.6 ton van which Mercedes-Benz plans
to convert to an electric drivetrain), and five GM-Opel Corsa Combo pickup
trucks for the Field Test (none of which have been delivered). The number of
additional Opels that will be requested or delivered to the Field Test is
currently uncertain as the Deutsche Post is proposing to use the Vito vans
instead of the Opel trucks. The Company and Deutsche Post are currently
discussing potential modifications to the Field Test and an expanded
relationship with Deutsche Post for continued development and commercialization
of the Electric Fuel System. There can be no assurance, however, that any
agreement will be reached with the Deutsche Post, or that if no such agreement
is reached, the Field Test will continue.
The Company believes that acceptance of the Electric Fuel System by
Deutsche Post AG ("Deutsche Post") as a powering system for its fleet is a key
factor with respect to the Company's efforts to commercialize the Electric Fuel
System. As a result, the Company has made and will continue to make a
significant investment in the Field Test. Deutsche Post will decide, on the
basis of its own requirements and at its discretion, whether it deems the Field
Test successful. There can be no assurance that Deutsche Post will deem the
Field Test to have been successful or that Deutsche Post, or any other
participant in the Field Test, will accept the Electric Fuel System as a
powering system for a portion of its fleet. If the Field Test is not successful
or if Deutsche Post does not accept the Electric Fuel System as a powering
system for a substantial portion of its fleet, the Company would be materially
adversely affected.
<PAGE>
COMPANY IS INCURRING OPERATING LOSSES
The Company was incorporated in 1990 and began its operations in 1991. The
Company has funded its operations principally from licensing arrangements with
Edison Termoelettrica, evaluation, licensing and supply contracts with Deutsche
Post, funds received under research and development grants from the Government
of Israel and funds raised in each of the initial public offering of the
Company's Common Stock in February 1994, the offering of the Company's Common
Stock in February 1996 and a private placement of the Company's Common Stock in
October 1996. The Company incurred significant operating losses for the years
ended December 31, 1994, 1995 and 1996, and expects to continue to incur
significant operating losses in the near term. These losses may increase as the
Company expands its research and development activities and establishes
production and regeneration facilities, and such losses may fluctuate from
quarter to quarter. There can be no assurance that the Company will ever achieve
profitability.
COMPANY IS AT AN EARLY STAGE OF DEVELOPMENT
Other than a signal light powered by water activated batteries for use in
life jackets and other rescue apparatus, the Company currently has no commercial
products available for sale. Moreover, the Company does not expect to generate
sales in commercial quantities in the near term. Significant additional
development will be necessary in order to commercialize the Company's technology
and each of the components of the Electric Fuel System must be fully engineered
in order for the complete Electric Fuel System to be technically and
commercially viable. No assurance can be given that the Company will be able to
complete such development, engineering or commercialization successfully, or
that the Company will be able to develop products for commercial sale or that,
if developed, they can be produced in commercial quantities or at acceptable
costs or be successfully marketed. The likelihood of the Company's future
success must be considered in light of the risks, expenses, difficulties and
delays frequently encountered in connection with the operation and development
of a relatively early stage business and development activities generally.
COMPANY'S MANUFACTURING EXPERIENCE IS LIMITED
The Company currently has no capacity for, or experience in, manufacturing
the Electric Fuel System in commercial quantities and has, to date, produced
only limited quantities of components of the Electric Fuel System for the Field
Test and Edison. In order for the Company to be successful in the commercial
market, its products must be manufactured to meet high quality standards in
commercial quantities at competitive prices. The development of such
manufacturing technology and processes will require extensive lead times and the
commitment of significant financial and engineering resources of the Company and
others. There can be no assurance that the Company will successfully develop
this technology or these processes or obtain access to these resources.
Moreover, there can be no assurance that the Company will be able to
successfully implement the quality control
-2-
<PAGE>
measures necessary for commercial manufacturing. In addition, further
engineering is required in order to establish the refueling and regeneration
infrastructure required for commercial viability of the Electric Fuel System.
There can be no assurance that the Company will succeed in developing commercial
scale refueling systems. The Company has constructed two prototype 10 kg/hour
regeneration facilities and, in connection with the Field Test, a 100 kg/hour
regeneration facility (which is not yet fully operational). However, the Company
believes that a regeneration facility of at least 10,000 kg/hour or larger will
be required if, after the Field Test, Deutsche Post utilizes the Electric Fuel
System for a substantial portion of its fleet. There can be no assurance that a
commercial regeneration facility of this size can be engineered, constructed and
operated; the failure to do so would have a material adverse effect on the
commercial application of the Electric Fuel System and, accordingly, on the
results of operations and financial condition of the Company.
ELECTRIC VEHICLE MARKET AND ACCEPTANCE OF THE ELECTRIC FUEL SYSTEM IS UNCERTAIN
Because vehicles powered by internal combustion engines cause pollution,
public pressure has begun to result in legislative and other mandates in Europe,
and enacted or pending legislation in the United States, to promote or mandate
the use of vehicles with no tailpipe emissions ("zero emission vehicles") or
reduced tailpipe emissions ("low emission vehicles"). The Company believes that
in order to create a significant commercial market for electric vehicles in
Europe it will be necessary for such public pressure to continue. In addition,
the Company believes that in the United States government initiatives are
important factors in creating an electric vehicle market. There can be no
assurance that such public pressure will continue or that further legislation or
other governmental initiatives will be enacted, or that current legislation will
not be repealed, amended, or have its implementation delayed, as has recently
been the case in California, or that a different form of zero emission or low
emission vehicle, or other solutions to the problem of containing emissions
created by internal combustion engines, will not be invented, developed and
produced, and achieve greater market acceptance than electric vehicles. The lack
of a significant market for electric vehicles would have a material adverse
effect on the ability of the Company to commercialize its technology. Even if a
significant market for electric vehicles develops, there can be no assurance
that the Company's technology will be commercially competitive within such a
market.
COMPANY HAS SIGNIFICANT FUTURE CAPITAL REQUIREMENTS
The Company will require substantial funds to conduct the necessary
research and development and testing of its products, to establish commercial
scale manufacturing facilities and to market its products. The Company believes
that the Company's funds available as of the date hereof should be sufficient to
fund the Company's currently planned activities through the second quarter of
1998. However, costs related to the Field Test have exceeded, and may continue
to exceed, budgeted amounts. While the Company is negotiating with the Deutsche
Post for additional funding to support the Field Test there can be no assurance
that the
-3-
<PAGE>
Company will be able to obtain any such funding. Moreover, if the Field Test is
successful and Deutsche Post, or any other participant in the Field Test, begins
to convert all or a portion of their fleets, to the Electric Fuel System, the
Company could be required to produce batteries in increased quantities as well
as to construct new regeneration and refueling facilities or expand its existing
facility to commercial capacity. Additional strategic alliances may also require
the establishment or expansion of facilities in Israel or elsewhere. As a
result, the Company might have to reduce, or defer, its anticipated future
commitments. In addition the Company may have to obtain additional funding
through other financings during this period, particularly if it determines that
it should invest in certain programs, such as additional electric vehicle
demonstration programs, which it believes will advance the development and
commercialization of the Electric Fuel System. Additionally, it is likely that
the Company will have to obtain additional financing at the end of this period.
There can be no assurance that additional financing will be available when
needed or on terms acceptable to the Company. If additional funds are raised by
issuing equity securities, stockholders may incur further dilution. If adequate
funds are not available, the Company may be required to delay, scale back or
eliminate one or more of its development programs or otherwise impede the
development, manufacture or sale of the Electric Fuel System. Under certain
circumstances, the inability of the Company to secure additional funding could
cause the Company to cease operations altogether.
COMPANY IS RELIANT ON OTHERS
To introduce the Electric Fuel System into the marketplace, the Company
intends to strengthen existing and develop new networks of strategic alliances
with fleet operators, companies engaged in energy production and transportation,
automobile manufacturers and others in order to establish the infrastructure
necessary for further development and commercialization of the Electric Fuel
System. To date, the Company has entered into an agreement with Deutsche Post
with regard to licensing the Electric Fuel System to Deutsche Post for both its
internal use and during the Field Test. The Company has also entered into
preliminary agreements granting certain rights to other participants in the
Field Test. Early in the Company's development, the Company entered into an
exclusive licensing arrangement with Edison to manufacture, use and sell the
Electric Fuel System in Italy, France, Spain and Portugal and a non-exclusive
license for the sale of the Electric Fuel System to Deutsche Post and Deutsche
Telekom. No assurance can be given that these arrangements will continue, or
that the Company will be able to enter into any additional necessary alliances,
including alliances in the United States. The success of any strategic alliance
is dependent upon, among other things, the general business condition of the
partner, its commitment to the strategic alliance and the skills and experience
of its employees responsible for the strategic alliance. Even if the Company
successfully initiates alliances, there can be no assurance that any alliance
will be successful.
Prior to obtaining market acceptance, in order to engineer and establish
the refueling and regeneration infrastructure necessary for commercial viability
of the Electric Fuel System,
-4-
<PAGE>
the commitment of significant additional investment and other resources,
including capital, will be required of the Company and other parties. There can
be no assurance that the investment necessary to create such an infrastructure
will be made or, if established, that such an infrastructure will provide
adequate support for the sale of the Company's products.
COMPANY'S FIELD OF BUSINESS IS HIGHLY COMPETITIVE
The competition to develop electric vehicle battery systems and to obtain
funding for the development of electric vehicle battery systems is, and is
expected to remain, intense. The Company's technology competes with other
battery technologies, as well as other zinc-air technologies. The competition
consists of development stage companies including major international companies
and consortia of such companies, including automobile manufacturers, battery
manufacturers, and energy production and transportation companies, many of which
have financial, technical, marketing, sales, manufacturing, distribution and
other resources significantly greater than those of the Company. Many entities,
including governmental, quasi-governmental, non-profit and private
organizations, are involved in advancing research and development of electric
vehicle and low emission vehicle technologies. In addition, several consortia
have been formed to fund research on electric vehicle battery technologies which
compete with the Company's battery technology, including the United States
Advanced Battery Consortium, an organization which has committed to funding a
total of $260 million by 1998, and which is financed by the United States
Department of Energy, General Motors Corporation, Ford Motor Company, Chrysler
Corporation, and the Electric Power Research Institute; the Advanced Lead-Acid
Battery Consortium, funded by North American lead manufacturers; and the New
Energy Development Organization, a Japanese consortium funded by the Japanese
government and certain Japanese battery manufacturers. Even if a significant
market for zero emission vehicles and low emission vehicles develops, the
Company will be required to compete against these entities and others and there
can be no assurance it will be successful.
Various battery technologies are being considered for use in electric
vehicles by other manufacturers and developers, including the following: lead-
acid, nickel-cadmium, nickel-iron, nickel-metal hydride, sodium-sulfur, sodium-
nickel chloride, zinc-bromine, lithium-ion, lithium-polymer, lithium-iron
sulfide and zinc-air.
In addition, competing battery technologies are currently being used in
electric vehicle demonstration programs in the cities of Gothenburg and Malmo,
Sweden, and on the Isle of Rugen, Germany. The success of these demonstration
programs could have an adverse impact on acceptance of the Electric Fuel System.
SAFETY RISKS; DEMANDS OF REGULATORY COMPLIANCE IN THE ELECTRIC VEHICLE INDUSTRY
Components of the Electric Fuel System contain certain elements which are
known to pose safety risks. Also, because electric vehicle batteries contain
large amounts of electrical
-5-
<PAGE>
energy, they may cause injuries if not handled properly. In addition to risks
posed by the Electric Fuel System, and although the Company incorporates safety
procedures in its research, development and manufacturing processes designed to
minimize safety risks, there can be no assurance that accidents in its
facilities will not occur. Any accident, whether occasioned by the use of all or
any part of the Electric Fuel System or the Company's manufacturing operations,
could adversely affect commercial acceptance of the Company's products and could
result in significant production delays or claims for damages resulting from
injuries, all of which would materially adversely affect the Company's
operations and financial condition.
In November 1996 Field Test drives were temporarily suspended following a
fire in a Mercedes-Benz MB410 in Sweden. The vehicle suffered only moderate
damage to its undersection. To investigate the incident, the Deutsche Post
commissioned the TUV, the German testing and standards institute. The TUV report
stated that the cause of the fire was due to an external short circuit outside
the battery blocks. Even though the battery blocks were exposed to severe
temperature conditions for a prolonged period of time during the incident, they
did not catch fire or explode. Subsequently the TUV required design changes,
primarily in the materials used in the battery casings and the electric
connector to the battery casings. These changes have now been incorporated into
the Electric Fuel battery by the Company, and existing batteries are being
upgraded. An upgraded battery was tested by the TUV in Israel and has been
approved for use in limited drives in Germany. Upon completion of the TUV
certification process, which is expected to occur during the second quarter of
1997, Field Test drives are scheduled to resume.
Regulations in Europe, Israel and the United States impose various controls
and requirements relating to potassium hydroxide and zinc metal, as well as
other components of the Electric Fuel System. The Company believes that its
current and contemplated operations conform to those regulations. The Company
has applied for, but has not yet received, the necessary permits under the
Israeli Dangerous Substances Law, 1993, required for the use of potassium
hydroxide and zinc metal. The Company believes that the permits will be granted,
but there can be no assurance that such permits will be granted or that changes
in regulations will not impose costly compliance requirements on the Company or
otherwise subject it to future liabilities. Seeking these approvals could
require significant time and resources from the Company's technical staff and,
if redesign were necessary, could result in delays in the introduction of the
Company's products.
COMPANY IS DEPENDENT ON PATENTS AND PROPRIETARY RIGHTS
The Company's ability to compete effectively will depend on its ability to
maintain the proprietary nature of its technology and manufacturing processes
through a combination of patent and trade secret protection, non-disclosure
agreements and licensing arrangements. The Company holds patents, or patent
applications, covering elements of its technology in the United States and in
Europe. In addition, the Company has patent applications pending in the United
States and in foreign countries, including the European Community, Israel and
Japan.
-6-
<PAGE>
The Company intends to continue to file patent applications covering important
features of its technology. There can be no assurance, however, that patents
will issue from any of these pending applications or, if patents issue, that the
claims allowed will be sufficiently broad to protect the Company's technology,
or that issued patents will not be challenged or invalidated or that any of its
issued patents will afford protection against a competitor. Litigation, or
participation in administrative proceedings, may be necessary to protect the
Company's patent position. Such litigation can be costly and time consuming and
there can be no assurance that the Company would be successful if such
litigation were instituted. The invalidation of patents owned by or licensed to
the Company could have a material adverse effect on the Company. In addition,
patent applications filed in foreign countries are subject to laws, rules and
procedures that differ from those of the United States. Thus, there can be no
assurance that foreign patent applications related to patents issued in the
United States will be granted. Furthermore, even if these patent applications
are granted, some foreign countries provide significantly less patent protection
than the United States. In the absence of patent protection, and despite the
Company's reliance upon its proprietary confidential information, competitors of
the Company may be able to use innovations similar to those used by the Company
to design and manufacture products directly competitive with the Electric Fuel
System. In addition, no assurance can be given that patents issued to the
Company will not be infringed upon or designed around by others or that others
will not obtain patents that the Company will need to license or design around.
Moreover, to the extent any of the Company's products are covered by third party
patents, development and marketing of such products by the Company could require
a license under such patents.
Despite the Company's efforts to safeguard and maintain its proprietary
rights, there can be no assurance that the Company will be successful in doing
so. In addition, competition in electric vehicle battery research and
development is intense, and there can be no assurance that the Company's
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to the Company's technology. Moreover, if
the issues were to be placed before a court, the Company cannot be certain that
such a court would determine that the Company was the first creator of
inventions covered by its issued patents or pending patent applications or that
it was the first to file patent applications for such inventions. If existing or
future third party patents containing broad claims are upheld by the courts or
if the Company is found to infringe third party patents, there can be no
assurance that it will be able to obtain the required licenses from the holders
of such patents on acceptable terms, if at all. Failure of the Company to obtain
necessary licenses could result in delays in the introduction of the Electric
Fuel System and in costly attempts to design around such patents, or could
foreclose the development, manufacture or sale of the Company's products. The
Company could also incur substantial costs in defending itself in patent
infringement suits brought by others and in prosecuting patent infringement
suits against infringers.
The Company also relies on trade secrets and proprietary know-how that it
seeks to protect, in part, through non-disclosure and confidentiality agreements
with its customers, employees, consultants, strategic partners and potential
strategic partners. There can be no
-7-
<PAGE>
assurance that these agreements will not be breached, that the Company would
have adequate remedies for any breach or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.
COMPANY IS DEPENDENT ON KEY PERSONNEL; COMPANY MUST MANAGE GROWTH AND EXPANSION
The Company is highly dependent on certain members of its management and
engineering staff, the loss of the services of one or more of whom could
adversely affect the Company. The Company is especially dependent on the
services of its President and Chief Executive Officer, Yehuda Harats; its Senior
Vice President of Technology, Menachem Korall; and its Chairman of the Board of
Directors and Chief Financial Officer, Robert S. Ehrlich, the loss of any of
whom could have a material adverse effect on the Company. The Company is party
to employment agreements with Messrs. Harats, Korall and Ehrlich, each for an
initial term of three years commencing in 1993, subject to further extensions.
In 1994, each of the employment agreements was extended for a period of two
years ending December 1998, and in 1996 each of Messrs. Harats and Ehrlich's
agreements were extended until 2000. The Company has no key-man life insurance.
In addition, the Company is currently experiencing a period of rapid growth
and expansion which could place a significant strain on the Company's personnel
and resources. The Company's growth has resulted in increased levels of
responsibility for both existing and new management personnel. Many of the
Company's management personnel have had limited or no experience in managing
companies the size of the Company. The Company has sought to manage its current
and anticipated growth through the recruitment of additional management and
technical personnel and the implementation of internal systems and controls.
However, the failure to manage growth effectively could adversely affect the
Company's results of operations.
POTENTIAL INCREASED UNITED STATES TAXATION
The Company believes that EFC and EFL will continue to be treated as
personal holding companies for purposes of the personal holding company rules of
the Internal Revenue Code of 1986, as amended, due to their satisfaction of the
stock ownership test, which is met when five or fewer individuals hold more than
50% of a company's stock, and their satisfaction of the personal holding company
income requirement. Approximately 48% of the stock of the Company's Israeli-
based subsidiary, EFL, was owned (directly, indirectly or by application of
certain attribution rules) as of March 17, 1997 by three United States citizens.
If 50% of the shares of the Company is ever acquired or deemed to be acquired by
five or fewer individuals (including, if applicable, those individuals who
currently own an aggregate of 48% of the Company) who are United States citizens
or residents, EFL would satisfy the foreign personal holding company ("FPHC")
stock ownership test under the Internal Revenue Code and the Company could be
subject to additional U.S. taxes on any undistributed FPHC
-8-
<PAGE>
income of EFL. EFC believes that it satisfied such stock ownership test for
earlier periods, but that it had no material undistributed personal holding
company income during such periods. For 1996, EFL has not had income which would
qualify as undistributed FPHC income. However, no assurance can be given that in
the future EFL will not have income which qualifies as undistributed FPHC
income. EFC does not expect to have any material source of taxable income, apart
from its investment in EFL, and EFC, therefore, does not expect to have any
material amount of undistributed personal holding company income; however, no
assurance can be given in this regard. It is possible that EFC could be deemed
under United States federal income tax rules to have taxable income as a result
of such investment in EFL. In this event, EFC's taxable income would be subject
to regular United States federal income tax at rates currently ranging up to 35%
and could, if the personal holding company stock ownership test were met, be
subject to United States personal holding company tax at a current rate of
39.6%, resulting in a combined United States maximum tax rate of approximately
60.7%.
LOCATION IN ISRAEL
The offices and facilities of the Company's principal subsidiary are
located in Israel. Although the Company expects that substantially all its sales
will be made to customers outside Israel, the Company is nonetheless directly
affected by economic, political and military conditions in that country.
Accordingly, any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could have
a material adverse effect on the Company's operations. Since the establishment
of the State of Israel in 1948, a state of hostility has existed, varying in
degree and intensity, between Israel and the Arab countries. Historically, Arab
states have boycotted any direct trade with Israel and to varying degrees have
imposed a secondary boycott on any company carrying on trade with or doing
business in Israel. Although in October 1994, the states comprising the Gulf
Cooperation Council (Saudi Arabia, the United Arab Emirates, Kuwait, Dubai,
Bahrain and Oman) announced that they would no longer adhere to the secondary
boycott against Israel, and Israel has entered into certain agreements with
Egypt, Jordan and the Palestine Liberation Organization, no prediction can be
made as to whether a full resolution of these problems will be achieved or as to
the nature of any such resolution.
Many of the Company's officers and employees are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. No assessment can be made of
the full impact of such requirements on the Company in the future, particularly
if emergency circumstances occur, and no prediction can be made as to the effect
on the Company of any expansion of these obligations.
The Company benefits from certain Israeli government programs, grants and
tax benefits, particularly as a result of the "Approved Enterprise" status of a
substantial portion of
-9-
<PAGE>
the Company's existing facilities and the receipt of grants from the Office of
the Chief Scientist of the Israeli Ministry of Industry and Trade (the "Chief
Scientist"). To be eligible for certain of these programs, grants and tax
benefits, the Company must continue to meet certain conditions, including making
certain specified investments in fixed assets. If the Company fails to meet such
conditions in the future, it could be required to refund grants already
received. There can be no assurance that such programs and tax benefits will be
continued in the future at their current levels or otherwise, and the Government
of Israel has announced that programs receiving "Approved Enterprise" status in
1996 and thereafter will be entitled to a lower level of government grants than
was previously available. The termination or reduction of certain programs and
tax benefits (particularly benefits available to the Company as a result of the
"Approved Enterprise" status of a substantial portion of its existing facilities
and approved programs and as a recipient of grants from the Chief Scientist)
would have a material adverse effect on the Company's business, results of
operations and financial condition. EFL has granted a floating charge over all
of its assets as security to the State of Israel to secure its obligations under
the "Approved Enterprise" programs.
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