ELECTRIC FUEL CORP, DEF 14A, 1998-07-07

ELECTRIC FUEL CORP
DEF 14A, 1998-07-07
PATENT OWNERS & LESSORS

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<PAGE>

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

ELECTRIC FUEL CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE>

June 29, 1998

Dear Stockholder:

It is our pleasure to invite you to the Annual Meeting of Stockholders of
Electric Fuel Corporation, a Delaware corporation (the "Company"), to be held
-------
on August 6, 1998 at 4:00 PM at the Company's R & D and Manufacturing Facility,
Western Industrial Park, Bet Shemesh, Israel. In addition you are also welcome
to attend a shareholders informational meeting to be held on September 14, 1998
at 3:00 PM at the offices of Lehman Brothers Inc., 200 Vesey St., New York, New
York.

Whether or not you plan to attend, and regardless of the number of shares
you own, it is important that your shares be represented at the meeting. You
are accordingly urged to carefully review the enclosed proxy materials, and
sign, date and return your proxy promptly in the enclosed envelope, which
requires no postage if mailed in the United States. Your return of a proxy in
advance will not affect your right to vote in person at the meeting.

We ask for your support in approving the election of the Class I directors,
and the ratification of the appointment of Kesselman & Kesselman, a member of
Coopers & Lybrand (International), as the Company's independent accountants.

Sincerely,

/s/ Robert S. Ehrlich

Robert S. Ehrlich
Chairman of the Board of Directors

<PAGE>

ELECTRIC FUEL CORPORATION

885 Third Avenue

New York, New York 10022

-------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To be held August 6, 1998

------------------

The Annual Meeting of Stockholders of Electric Fuel Corporation (the
"Company") will be held at the Company's R & D and Manufacturing Facility,
- --------
Western Industrial Park, Bet Shemesh, Israel on Thursday, August 6, 1998 at 4:00
PM for the following purposes:

1. To fix the number of Class I directors at three and to elect three
Class I directors for a three-year term ending in 2001 and until
successors are elected and qualified.

2. To consider and act upon a proposal to ratify the appointment of
Kesselman & Kesselman, a member of Coopers & Lybrand (International),
as independent accountants of the Company.

3. To transact such other business as may properly come before the
meeting and any adjournments thereof.

The Board of Directors (the "Board") has fixed the close of business on
-----
June 29, 1998 as the record date for determination of stockholders entitled to
notice of and to vote at the meeting and any adjournments thereof.

IF YOU ARE UNABLE TO BE PRESENT PERSONALLY, PLEASE SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.

BY ORDER OF THE BOARD OF DIRECTORS,

/s/ Robert S. Ehrlich

Robert S. Ehrlich
Chairman of the Board of Directors

June 29, 1998
<PAGE>

ELECTRIC FUEL CORPORATION

885 Third Avenue

New York, New York 10022

---------------------

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

---------------------

The accompanying proxy is solicited by and on behalf of the Board of
Directors (the "Board") of Electric Fuel Corporation, a Delaware corporation,
-----
(the "Company"), for use at the Annual Meeting of Stockholders (the "Annual
------- ------
Meeting") to be held on Thursday, August 6, 1998 at 4:00 PM and any adjournments
- -------
thereof for the purposes set forth in the Notice of Annual Meeting of
Stockholders.

Stockholders of record at the close of business on June 29, 1998 will be
entitled to vote at the Annual Meeting. As of June 1, 1998, there were
14,229,003 shares of Common Stock, par value $.01 per share (the "Common
------
Stock"), of the Company outstanding, the holders of which are entitled to one
- -----
vote per share on each matter to come before the Annual Meeting. Proxies
properly executed and returned will be voted at the Annual Meeting in accordance
with any directions noted thereon or, if no direction is indicated, proxies will
be voted FOR the election of the nominees for director set forth below, FOR the
fixing of the number of Class I directors at three, and FOR the ratification of
the appointment of Kesselman & Kesselman, a member of Coopers & Lybrand
(International) ("Kesselman"), as independent accountants of the Company.
---------
Proxies will be voted in the discretion of the holders of the proxy with respect
to any other business that may properly come before the Annual Meeting and all
matters incidental to the conduct of the Annual Meeting. Any stockholder
signing and delivering a proxy may revoke it at any time before it is voted by
delivering to the Secretary of the Company a written revocation or a duly
executed proxy bearing a later date than the date of the proxy being revoked.
Any record stockholder attending the Annual Meeting in person may revoke his or
her proxy and vote his or her shares at the Annual Meeting.

It is expected that this Proxy Statement and the enclosed form of proxy are
being mailed to stockholders on or about July 2, 1998.

Expenses in connection with the solicitation of proxies will be paid by the
Company.

The Company is not aware of any matters other than those described in this
Proxy Statement that will be acted upon at the Annual Meeting. In the event
that any other matters properly come before the Annual Meeting for a vote of
stockholders, the persons named as proxies in the enclosed form of proxy will
vote in accordance with their best judgment on such other matters.

<PAGE>

The annual report of the Company for the fiscal year ended December 31,
1997 is being mailed to the Company's stockholders with this Proxy Statement.

At least 10 days before the Annual Meeting, the Company shall make a
complete list of the Stockholders entitled to vote at the meeting open to the
examination of any stockholder for any purpose germane to the Annual Meeting at
its principal executive offices at 885 Third Avenue, Suite 2900, New York, New
York 10022. The list shall also be made available to stockholders present at
the Annual Meeting.

Voting

Consistent with Delaware corporate law and under the Company's By-laws, a
majority of the shares outstanding and entitled to vote, present in person or
represented by proxy, constitutes a quorum for the transaction of business at
the Annual Meeting. Votes cast by proxy or in person at the Annual Meeting will
be counted by persons appointed by the Company to act as election inspectors at
the Annual Meeting.

The three nominees for election as Class I directors at the Annual Meeting
who receive the greatest number of votes for the election of the directors shall
be elected the Class I directors. A majority vote of the number of shares
present in person or represented by proxy at the Annual Meeting entitled to vote
thereon is necessary to approve the action proposed in Item 2 as well as any
other matter which comes before the Annual Meeting, except where law, the
Company's Amended and Restated Certificate of Incorporation or By-laws require
otherwise.

The total number of votes cast FOR approval of proposals, other than the
election of directors, will be counted for purposes of determining whether
sufficient affirmative votes have been cast. Shares represented by proxies that
withhold authority to vote for a nominee for election as a director or that
reflect abstentions and "broker non-votes" (i.e., shares represented at the
Annual Meeting held by brokers or nominees as to which (a) instructions have not
been received from the beneficial owners or persons entitled to vote, and (b)
the broker or nominee does not have the discretionary voting power on a
particular matter) will be counted as shares that are present and entitled to
vote on the matter for purposes of determining the presence of a quorum.
Directions to withhold authority on a particular matter and broker non-votes
will have the effect of a vote AGAINST a matter.

2
<PAGE>

PROPOSAL NUMBER 1
ELECTION OF DIRECTORS

Three Class I directors are to be elected at the Annual Meeting for a
three-year term that expires in 2001. Four other directors have been elected or
appointed to terms that end in either 1999 or 2000, as indicated below. Unless
instructions are given to the contrary, it is the intention of the persons named
as proxies to vote the shares to which each proxy relates FOR the election of
the nominee listed below for a term of three years expiring at the Annual
Meeting of Stockholders to be held in 2001 and until the nominee's successor is
elected and qualified or until the nominee's earlier death, removal or
resignation. The nominees named below are presently serving as directors of the
Company and are anticipated to be available for election and able to serve.
However, if the nominees should become unavailable, such proxy will be voted for
substitute nominees designated by the Board. The three nominees for election as
directors at the Annual Meeting who receive the greatest number of votes
properly cast for the election of directors shall be elected.

The Company's By-laws provide for a Board of one or more directors, and the
number of directors is currently fixed at seven. Under the terms of the
Company's Amended and Restated Certificate of Incorporation, the Board is
composed of three classes of similar size, each elected in a different year, so
that only one-third of the Board is elected in any single year. Mr. Harats, Dr.
Eastman and Mr. Gross are designated Class I directors and have been elected for
a term expiring in 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
Messrs. Ehrlich and Krueger are designated as Class III directors elected for a
term expiring in 2000 and until their successors are elected and qualified.

Set forth below is certain information concerning the nominees and the
other incumbent directors:

Board of Directors
------------------
<TABLE>
<CAPTION>
Director
Name Age Position Class Since
- --------------------------- --- ---------------------- ----- -------------
<S> <C> <C> <C> <C>

Yehuda Harats 46 President, Chief I May 1991
Executive Officer
and Director
Jack E. Rosenfeld(1)(2) 59 Director II October 1993
Dr. Jay M. Eastman(1)(2) 49 Director I October 1993
Robert S. Ehrlich 60 Chairman of the Board, III May 1991
Chief Financial Officer
and Director
Harvey M. Krueger(1) 68 Director III February 1996
Lawrence M. Miller (1)(2) 51 Director II November 1996
Leon S. Gross 91 Director I March 1997
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

3
<PAGE>

Nominees for Election as Class I Directors at the Annual Meeting

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.

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 has served as a
director of PSC, Inc.("PSCX"), a New York Corporation, a manufacturer and
marketer of hand-held laser diode bar code scanners, since April 1996 and served
as Senior Vice President of Strategic Planning from December 1995 through
October 1997. From December 1987 through December 1995, Dr. 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, Dimension Technologies, Inc., a developer
and manufacturer of 3D displays for computer and video displays, and Centennial
Technologies Inc., a manufacturer of PCMCIA cards. From 1981 until January
1983, Dr. Eastman was Director of the University of Rochester's Laboratory for
Laser Energetics, where he was a member of the staff from September 1975 to
1981.

Leon S. Gross was elected to the Board in March 1997. Mr. Gross' principal
occupation for the past five years has been as a private investor in various
publicly-held corporations, including the Company. He is also majority owner
and an officer of Micro TV, Inc., a business which owns communications towers.

Class II Directors

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.
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 of Maurice
Corporation and a director of PSCX. Since April 1998 Mr. Rosenfeld is President
and Chief Executive Officer of Potpourri Collection Inc., a specialty catalog
direct marketer.

4
<PAGE>

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.

Class III Directors

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
and again since April 1997, Mr. Ehrlich was Chairman of the Board of PSCX. He
has served as a director of PSCX since 1987. Mr. Ehrlich received a B.S. and
J.D. from Columbia University in New York, New York.

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.

Information Concerning the Board and Its Committees

In fiscal 1997, the Board held five meetings and acted by unanimous written
consent on one occasion. The Board has three committees: the Audit Committee,
the Compensation Committee and a Special Committee.

The Audit Committee was established in December 1993 and held one meeting
during fiscal 1997. The duties of the Audit Committee are to (i) review with
management and the independent auditors the scope and results of the annual
audit, the nature of any other services provided by the independent auditors,
changes in the accounting principles applied to the presentation of the
Company's financial statements, and any comments by the independent auditors on
the Company's policies and procedures with respect to internal accounting,

5
<PAGE>

auditing and financial controls, and (ii) make recommendations to the Board on
the engagement of the independent auditors. Messrs. Rosenfeld, Miller and
Krueger and Dr. Eastman are members of the Audit Committee.

The Compensation Committee was established in December 1993. The Committee
held two meetings during fiscal 1997 and acted by unanimous written consent on
three occasions. The duties of the Compensation Committee are to recommend
compensation arrangements for the Chief Executive Officer and the Chief
Financial Officer and review annual compensation arrangements for all other
officers and significant employees. Messrs. Rosenfeld and Miller and Dr.
Eastman are members of the Compensation Committee. All Committee members are
"disinterested persons" as that term is used in Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
------------

In December 1996, a Special Committee of the Board was established to work
with the Company's legal, financial and accounting advisers, as well as the
Company's management, in overseeing various negotiations between the Company and
the Deutsche Post AG and certain other strategic issues. The Special Committee
reports its recommendations to the Board for ultimate consideration and approval
of such issues. Messrs. Ehrlich, Harats, Miller and Krueger are members of the
Special Committee, which met once during 1997.

Non-employee members of the Board are paid $1,000 (plus expenses) for each
Board meeting attended and $500 (plus expenses) for each meeting of a committee
of the Board attended. In addition, on September 28, 1995, the Board adopted
(and later amended on March 25, 1996), and on June 24, 1996 the Company's
stockholders approved, 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 for each
year of service on the Board. All such options will be granted at fair market
value and vest ratably over three years from the date of grant.

THE BOARD OF DIRECTORS RECOMMENDS
ELECTION OF THE NOMINEES
DESCRIBED ABOVE

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<PAGE>

EXECUTIVE COMPENSATION; CERTAIN ARRANGEMENTS;
SECURITY OWNERSHIP

Summary Compensation Table

The following table shows the compensation paid and accrued by the
Company for services rendered for 1995, 1996 and 1997 to the Chief Executive
Officer and the three highest paid executive officers who received more than
$100,000 in salary and bonuses during the year ended December 31, 1997
(collectively the "Named Executive Officers").
------------------------

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation Long-Term
------------------- Compensation
Awards

Name and Principal Position

Securities
Underlying
Other Annual Options All other
At December 31, 1997 Year Salary Bonus Compensation (Number) Compensation
- -------------------- ---- ------ ----- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Yehuda Harats/(1)/ 1997 $154,968 $0/(2)/ $10,691/(3)/ 0 $280,748/(4)/
President, Chief 1996 145,220 47,000 127,558 150,000 372,875
Executive Officer and 1995 140,684 40,364 1,742 0 175,309
Director

Robert S. Ehrlich/(1)/ 1997 $154,968 $0/(2)/ $14,193/(3)/ 0 $264,601/(5)/
Chairman and Chief 1996 145,238 47,000 75,890 150,000 166,628
Financial Officer 1995 140,684 40,364 6,148 0 123,657

Menachem Korall /(1)(6)/ 1997 $117,264 $(5,000)/(7)/ $ 7,863/(3)/ 0 135,182/(8)/
Vice President of 1996 110,002 35,000 9,635 0 169,956
Technology 1995 106,491 30,328 1,744 0 102,703

Joshua Degani /(1)/ 1997 $ 59,105 $ 5,062/(9)/ $ 3,449/(3)/ 122,500 $ 51,906/(10)/
Executive Vice
President, Technical
Operations
</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) In lieu of a cash bonus for fiscal year 1997, the Compensation Committee,
in March 1998, approved a grant of options to each of Messrs. Ehrlich and
Harats, the number and terms of which were to be determined under a
valuation methodology to be performed by an independent third party based
on a

7
<PAGE>

present value of $50,000 (assuming immediate vesting). After review and
consideration of valuation criteria provided by Lehman Brothers Inc., the
Compensation Committee granted to each of Messrs. Ehrlich and Harats
performance options (which, according to the Company's advisors could be
granted at a 50% premium to immediately vested options) to acquire 66,500
shares of the Company's Common Stock, at an exercise price of $2.50 per
share, the fair market value of the Company's Common Stock on the date of
grant. The options granted become exercisable as follows: 1/3 of such
options become exercisable when the closing sale price of the Company's
Common Stock has been at least $3.25 per share for a period of 20
consecutive trading days on The Nasdaq National Market ("NASDAQ"); 1/3 of
such options become exercisable when the closing sale price of the
Company's Common Stock has been at least $4.25 per share for a period of 20
consecutive trading days on NASDAQ, and the final 1/3 of such options
become exercisable when the closing sale price of the Company's Common
Stock has been at least $5.50 per share for a period of 20 consecutive
trading days on NASDAQ; provided, that such options shall, in all events,
become exercisable seven years from the date of grant.

(3) Represents the costs of taxes paid by the Executive officer and reimbursed
by the Company.

(4) Of this amount, $29,844 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, $27,201 represents
the Company's accrual for sick leave and vacation redeemable by Mr. Harats,
$1,061 represents the Company's accrual for severance pay which would be
payable to Mr. Harats under the laws of the State of Israel upon the
termination of his employment by the Company, $35,157 consists of the
Company's payments and accruals to a pension fund which provides a savings
plan, insurance and severance pay benefits and an education fund which
provides for the on-going education of employees. Additionally, $184,486
represents the Company's accrual to fund Mr. Harats' pension and education
funds as well as provide him with certain other post-termination benefits,
and $2,999 represents the value charged for tax purposes for the use of a
car provided by the Company.

(5) Of this amount, $84,301 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, $21,519 represents
the Company's accrual for sick leave and vacation redeemable by Mr.
Ehrlich, $4,437 represents the Company's accrual for severance pay which
would be payable to Mr. Ehrlich under the laws of the State of Israel upon
the termination of his employment by the Company, and $35,157 represents
the Company's payments and accruals to pension and education funds.
Additionally, $112,650 represents the Company's accrual to fund Mr.
Ehrlich's pension fund as well as provide him with certain other post-
termination benefits, and $6,536 represents the value charged for tax
purposes for the use of a car provided by the Company.

(6) Mr. Korall's employment with the Company terminated on January 31, 1998.

(7) Represents reversal of previously accrued bonus not paid to Mr. Korall.

(8) Of this amount, $104,603 represents the Company's accrual for severance pay
and other termination benefits payable to Mr. Korall and agreed to as part
of the termination agreement with Mr. Korall, $(16,053) represents the
Company's reduction in the accrual for sick leave and vacation redeemable
by Mr. Korall, $3,443 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, $13,826 consisted of
payments to Mr. Korall in lieu of vacation, and $26,365 represents the
Company's payments and accruals to pension and education funds.
Additionally, $2,998 represents the value charged for tax purposes for use
of a car provided by the Company.

(9) In lieu of cash for part of his bonus for fiscal year 1997, the
Compensation Committee, in March 1998, approved a grant of options to Dr.
Degani, the number and terms of which were to be determined based on a
present value of $10,000 under a valuation methodology to be performed by
an independent third party. This evaluation has since been performed by
Lehman Brothers, and Dr. Degani was granted options to acquire an aggregate
of 6,826 shares of the Company's Common Stock, at an exercise price of
$2.50 per share, the fair market value of the Company's Common Stock on the
date of grant.

(10) Of this amount, $36,000 represents the Company's accrual for additional
severance pay which would be payable to Dr. Degani if terminated by the
Company, $1,052 represents the Company's accrual for vacation redeemable by
Dr. Degani, and $11,058 represents the Company's payments and accruals to

8
<PAGE>

pension and education funds. Additionally, $3,796 represents the value
charged for tax purposes for the use of a car provided by the Company.

The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 1997.

Options Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
--------------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities granted to Exercise
Underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted Year ($/SH) Date 5% ($) 10% ($)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Yehuda Harats 0/(1)/
Robert Ehrlich 0/(1)/
Joshua Degani 122,500/(2)/ 82% $5.5 5/8/07 $423,718 $1,073,784
</TABLE>

- ---------------------
(1) In lieu of a cash bonus for fiscal year 1997, the Compensation Committee,
in March 1998, approved a grant of options to each of Messrs. Ehrlich and
Harats, the number and terms of which were to be determined under a
valuation methodology to be performed by an independent third party based
on a present value of $50,000 (assuming immediate vesting). After review
and consideration of valuation criteria provided by Lehman Brothers Inc.,
the Compensation Committee granted to each of Messrs. Ehrlich and Harats
performance options (which, according to the Company's advisors could be
granted at a 50% premium to immediately vested options) to acquire 66,500
shares of the Company's Common Stock, at an exercise price of $2.50 per
share, the fair market value of the Company's Common Stock on the date of
grant. The options granted become exercisable as follows: 1/3 of such
options become exercisable when the closing sale price of the Company's
Common Stock has been at least $3.25 per share for a period of 20
consecutive trading days on NASDAQ; 1/3 of such options become exercisable
when the closing sale price of the Company's Common Stock has been at least
$4.25 per share for a period of 20 consecutive trading days on NASDAQ, and
the final 1/3 of such options become exercisable when the closing sale
price of the Company's Common Stock has been at least $5.50 per share for a
period of 20 consecutive trading days on NASDAQ; provided, that such
options shall, in all events, become exercisable seven years from the date
of grant.

(2) The options granted to Mr. Degani become exercisable as follows: 17,150
options on December 31, 1997, and 35,117 options each, on December 31,
1998, 1999 & 2000. In lieu of cash for part of his bonus for fiscal year
1997, the Compensation Committee, in March 1998, approved a grant of
options to Dr. Degani, the number and terms of which were to be determined
based on a present value of $10,000 under a valuation methodology to be
performed by an independent third party. This evaluation has since been
performed by Lehman Brothers, and Dr. Degani was granted options to acquire
an aggregate of 6,826 shares of the Company's Common Stock, at an exercise
price of $2.50 per share, the fair market value of the Company's Common
Stock on the date of grant.

9
<PAGE>

The table below sets forth information for the Named Executive Officers with
respect to fiscal 1997 year-end option values.

Number of Securities Value of Unexercised
Underlying In-the-Money Options
Unexercised Options Fiscal-Year-End (1)
at Fiscal Year End
----------------------------- ------------------------------------
Exercisable Unexercisable Exercisable ($) Unexercisable ($)
Name (Number) (Number) --- ---
- ---- ------- --------
<S> <C> <C> <C> <C>
Yehuda Harats 0 150,000 --- ---
Robert S. Ehrlich 127,478 150,000 --- ---
Menachem Korall 90,000 0 --- ---
Joshua Degani 17,150 105,350 --- ---
</TABLE>

- ----------------------

(1) In-the-money options are options for which the fair market value of the
underlying securities exceeds the exercise or base price of the option. None of
the options held by Named Executive Officers were in-the-money at fiscal year
end.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors for the 1997 fiscal
year consisted of Dr. Jay Eastman, Jack Rosenfeld, and Lawrence Miller. None of
the members have served as officers of the Company.

Robert S. Ehrlich, Chairman and Chief Financial Officer of the Company
serves as Chairman and a director of PSCX, for which Dr. Eastman serves as
director and Mr. Rosenfeld serves as director and member of the Compensation
Committee.

10
<PAGE>

Ehrlich and Harats were renewed as recourse notes for a period of 10 years
through December 31, 2007. In June, 1998, the terms of the recourse notes were
amended such that the Company would have recourse only to certain compensation
due Messrs. Ehrlich and Harats upon termination, other than for cause, in which
case Messrs. Ehrlich and Harats would continue to be personally liable on the
notes. The Company's reserve for termination benefits to each of Messrs. Ehrlich
and Harats is greater than the outstanding amount due the Company under the
Promissory Notes. Additionally, the Company agreed to repurchase shares of the
Company's Common Stock, at any time, at current market prices, from either
Messrs. Ehrlich or Harats as payment in full for the Promissory Notes; and if
the shares were sold to the Company, that Messrs. Ehrlich and Harats would be
granted new options at current market prices to purchase the same amount of
shares of the Company's Common Stock that were sold.

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 above mentioned 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, 1997, the aggregate
amount outstanding pursuant to the New Promissory Notes for each of Messrs.
Ehrlich and Harats was $542,619 and $1,153,184, respectively (including an
aggregate of $182,728 in accrued interest and VAT receivable), which are also
the largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes originally matured on August 20, 2001. In June, 1998
they were extended by an additional five years until August 20, 2006.

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 was terminated on
January 31, 1998 (see below) 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 was 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. The last adjustment to Mr. Korall's base salary was on January
1, 1997 when it was adjusted to $9,423 per month. 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

11
<PAGE>

Messrs. Ehrlich, Harats and Korall is, as of January 1, 1998, $12,942, $12,942
and $9,423 per month, respectively.

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 and Harats. For the year ended December 31, 1997, the
Company exceeded its budgeted results and, based on the terms of the Employment
Agreements, each of Messrs. Ehrlich and Harats would receive a cash bonus of 50%
of base salary or $75,000. However, in order to conserve the Company's
available cash, Messrs. Ehrlich and Harats recommended to the Compensation
Committee that in lieu of any cash bonuses for 1997, they receive stock options.
In lieu of a cash bonus for fiscal year 1997, the Compensation Committee, in
March 1998, approved a grant of options to each of Messrs. Ehrlich and Harats,
the number and terms of which were to be determined under a valuation
methodology to be performed by an independent third party based on a present
value of $50,000 (assuming immediate vesting). After review and consideration
of valuation criteria provided by Lehman Brothers Inc., the Compensation
Committee granted to each of Messrs. Ehrlich and Harats performance options
(which, according to the Company's advisors could be granted at a 50% premium to
immediately vested options) to acquire 66,500 shares of the Company's Common
Stock, at an exercise price of $2.50 per share, the fair market value of the
Company's Common Stock on the date of grant. The options granted become
exercisable as follows: 1/3 of such options become exercisable when the closing
sale price of the Company's Common Stock has been at least $3.25 per share for a
period of 20 consecutive trading days on NASDAQ; 1/3 of such options become
exercisable when the closing sale price of the Company's Common Stock has been
at least $4.25 per share for a period of 20 consecutive trading days on NASDAQ,
and the final 1/3 of such options become exercisable when the closing sale price
of the Company's Common Stock has been at least $5.50 per share for a period of
20 consecutive trading days on NASDAQ; provided, that such options shall, in all
-------- ----
events, become exercisable seven years from the date of grant.

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 and Harats each have the right to terminate
their employment for "Good Reason" which is defined to include adverse changes
in employment status or compensation, insolvency of the Company, material
breaches and certain other events. Upon termination of employment, the
Employment Agreements provide for payment of all accrued and unpaid
compensation, 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

12
<PAGE>

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.

Messrs Ehrlich and Harats agreed, that for 1998, they would waive 25% of
their base salary or $38,820 for the calendar year. The Compensation Committee,
in March 1998, approved a grant of options to each of Messrs. Ehrlich and
Harats, the number and terms of which were to be determined based on a present
value of $38,820 under a valuation methodology to be performed by an independent
third party. The options vest 1/12th per month over the calendar year.
Accordingly, in April, 1998, Messrs. Ehrlich and Harats were each granted
options to acquire 26,977 shares of the Company's Common Stock, at an exercise
price of $2.50 per share, the fair market value of the Company's Common Stock on
the date of grant. Messrs. Ehrlich and Harats each have the right to cancel the
arrangement upon two weeks notification to the Company prior to the beginning of
each calendar month. Any unvested options would immediately be forfeited.
Furthermore, while their base salary was decreased, their social benefits and
1998 bonuses, will still be calculated on the full base salary that they are
entitled to by contract.

Dr. Degani entered into an employment agreement with the Company upon
joining the Company in June 1997 (the "Degani Employment Agreement"). The
---------------------------
Degani Employment Agreement has no fixed termination date, and, subject to
advance notice by either party of two months, may be terminated at will. The
Degani Employment Agreement provides for a monthly base salary of $9,000. This
was adjusted to $9,500, effective January 1998. The Degani Employment Agreement
provides for an annual bonus of not less than 1.5 times monthly base salary, in
accordance with Dr. Degani's success in the position, as well as other benefits
such as vacation, sick leave, provision of an automobile and insurance
contributions. Furthermore, Dr. Degani is entitled to a termination payment (in
addition to severance pay by law), in an amount between 2-5 months base salary,
depending on which party gives notice, and how long Dr. Degani has been employed
with the Company. The Degani Employment Agreement also contains confidentiality
and non-competition covenants. Dr. Degani agreed, that for 1998, he would waive
$500 per month of his base salary, or $6,000 for the calendar year. The
Compensation Committee, in March 1998, approved a grant of options to Dr.
Degani, the number and terms of which are to be determined based on a present
value of $6,000 under a valuation methodology to be performed by an independent
third party. Accordingly, in April, 1998, Dr. Degani was granted options to
acquire 4,170 shares of the Company's Common Stock, at an exercise price of
$2.50 per share, the fair market value of the Company's Common Stock on the date
of grant. The options vest 1/12th per month over the calendar year. Dr. Degani
may cancel the arrangement upon two weeks notification to the Company prior to
the beginning of each month. Any unvested options would immediately be
forfeited. Furthermore, while his base salary was decreased, the social benefits
and 1998 bonuses, will still be calculated on his full base salary.

13
<PAGE>

On March 12, 1998, the Company and Mr. Korall entered into an agreement
(the "Termination Agreement") to terminate Mr. Korall's Employment Agreement,
---------------------
and all of each of the Company's and Mr. Korall's right and obligations
thereunder effective as of January 31, 1998. Pursuant to the Termination
Agreement, the Company paid Mr. Korall all salary, other benefits and legally
mandated severance pay due to him through that date. In addition, the Company
agreed to pay to Mr. Korall additional severance pay in the amount of $120,000,
payable in 24 equal monthly installments of $5,000 each, and to extend the date
by which options held by Mr. Korall to purchase 90,000 Shares of the Company may
be exercised to February 28, 2000. The Termination Agreement also contains
mutual general releases between the Company and Mr. Korall. Simultaneously, the
Company entered into a consulting agreement (the "Consulting Agreement") with
--------------------
Shampi Ltd., a consulting company with which Mr. Korall is affiliated. Pursuant
to the terms of the Consulting Agreement, Mr. Korall will prepare several
reports for the Company dealing with the Company's existing vehicle battery
product and with a proposal for a new battery project. The Consulting Agreement
terminates on April 10, 2000 unless renewed by mutual agreement of the parties.
In consideration of these consulting services, the Company will make 24 equal
monthly payments of $6,000 each to Shampi Ltd., in addition to two lump sum
payments of $31,500 each at the beginning and end of the contract period.
Furthermore, the Company agreed to provide to it a motor vehicle during such
period for the use of Mr. Korall. Pursuant to the Consulting Agreement, Shampi
Ltd. and Mr. Korall have agreed to a five-year confidentiality provision and an
agreement not to compete with the Company nor to solicit customers, suppliers or
employees of the Company during the term of the Consulting Agreement and for a
period of twelve months thereafter.

Other employees have entered into individual employment agreements with the
Company. These agreements govern the basic terms of the individual's employment,
such as salary, vacation, overtime pay, severance arrangements and pension
plans. Subject to Israeli law, which restricts a company's right to relocate an
employee to a work site further than sixty kilometers from his or her regular
work site, the Company has retained the right to transfer certain employees to
other locations and/or positions provided that such transfers do not result in a
decrease in salary or benefits. In addition, all of these agreements contain
provisions governing the confidentiality of information and ownership of
intellectual property learned or created during the course of the employee's
tenure with the Company. Under the terms of these provisions, employees must
keep confidential all information regarding the Company's operations (other than
information which is already publicly available) received or learned by the
employee during the course of employment. This provision remains in force for
five years after the employee has left the service of the Company. Further,
intellectual property created during the course of the employment relationship
belongs to the Company.

A number of the individual employment agreements, but not all, contain non-
competition provisions which restrict the employee's rights to compete against
the Company, or work for an enterprise which competes against the Company, for a
period of two years after the employee has left the service of the Company.

Under the laws of Israel, an employee of the Company who has been dismissed
from service, died in service, retired from service upon attaining retirement
age, or left due to poor health, maternity or certain other reasons, is entitled
to severance pay at the rate of one month's salary for each year of service. The
Company funds this obligation currently by making

14
<PAGE>

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 Report

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended (the "Securities
----------
Act"), or the Exchange Act, that might incorporate future filings, including
- ---
this Proxy Statement, in whole or in part, the following report and the
Performance Graph on page 14 shall not be incorporated by reference into any
such filings.

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee of the Board of Directors of the Company for
1997 consisted of Dr. Eastman, Mr. Rosenfeld and Mr. Miller. The Committee's
responsibilities include recommending the annual compensation arrangements for
the Chief Executive Officer and the Chief Financial Officer of the Company and
reviewing the annual compensation arrangements for all other officers and
significant employees of the Company, all by reference to the parameters set by
any agreements the Company may have with such persons. No member of this
Committee was an officer or employee of the Company during 1997. The members of
the Committee are familiar with various forms and types of remuneration from
reports of other public corporations and their own business experience.

The Company maintains compensation and incentive programs designed to
motivate, retain and attract management and utilize various combinations of base
salary, bonus payable upon the achievement of specified goals, discretionary
bonus and stock options. It is the Company's current policy to establish,
structure and administer compensation plans and arrangements so that the
deductibility to the Company of such compensation will not be limited under
Section 162(m) of the Internal Revenue Code. The Chief Executive Officer,
Yehuda Harats, and the Chief Financial Officer, Robert S. Ehrlich, are parties
to employment agreements with the Company (collectively, the "Employment
Agreements"). The Executive Vice President of Technology, Dr. Joshua Degani, is
also party to an employment agreement (the "Degani Employment Agreement"). For
details regarding the various Employment Agreements, see "Employment Contracts
and Termination of Employment Arrangements" on page 11 of this Proxy Statement.

Each of the Employment Agreements require that bonuses be paid in an amount
equal to the greater of (a) 50% of annual Base Salary or (b) 2%, 2% and 1%,
respectively, of annual Net Earnings (defined as net income before taxes and
extraordinary and other nonrecurring items) (the "Bonus"), provided that 100% of
-------- ----
budgeted results and other goals are attained. In addition, the Board of
Directors may award the Executive a discretionary bonus based on the achievement
of objectives established by the Board of Directors in its sole discretion if
the Company has attained at least 80% of the Company's budgeted results for such
period. The Committee has also determined, given the stage of the Company's
development, 1997 compensation for executive officers should not be related
primarily to the annual profit performance of the Company. A primary
consideration for executive officer's compensation is

15
<PAGE>

leadership effort in the development of the Company's proprietary technology and
its applications and in planning for future growth and profitability through
commercialization of the Company's products. This Committee also considers
qualitative achievements occurring during each fiscal year as a basis for paying
the bonus to each of Messrs. Ehrlich and Harats.

Among the qualitative achievements considered by the Committee for 1997
were: (i) creation of three focused operating divisions to pursue opportunities
for exploiting the Company's technology in the market of Electric Vehicles,
Consumer Electronics and Defense and Safety; (ii) the Electric Vehicles
division's new programs with New York Power Authority, the Center for
Sustainable Technology and the Tomen Corporation; (iii) the extension of the
Deutshe Post field test; (iv) the development of a prototype cellphone battery
based on the Company's proprietary zinc-air technology; (v) the receipt of an
increase in R&D funding by the Office of the Chief Scientist in Israel; (vi) the
Defense and Safety Division CECOM contract for development of a prototype zinc-
air battery for field applications; and (vii) the increase in market share for
the Company's water activated battery.

For the year ended December 31, 1997, the Company exceeded its budgeted
results and, based on the terms of the Employment Agreements, each of Messrs.
Ehrlich and Harats would receive a cash bonus of 50% of base salary or $75,000.
However, in order to conserve the Company's available cash, Messrs. Ehrlich and
Harats recommended to the Compensation Committee that in lieu of any cash
bonuses for 1997, they receive stock options. In lieu of a cash bonus for fiscal
year 1997, the Compensation Committee, in March 1998, approved a grant of
options to each of Messrs. Ehrlich and Harats, the number and terms of which
were to be determined under a valuation methodology to be performed by an
independent third party based on a present value of $50,000 (assuming immediate
vesting). After review and consideration of valuation criteria provided by
Lehman Brothers Inc., the Compensation Committee granted to each of Messrs.
Ehrlich and Harats performance options (which, according to the Company's
advisors could be granted at a 50% premium to immediately vested options) to
acquire 66,500 shares of the Company's Common Stock, at an exercise price of
$2.50 per share, the fair market value of the Company's Common Stock on the date
of grant. The options granted become exercisable as follows: 1/3 of such options
become exercisable when the closing sale price of the Company's Common Stock has
been at least $3.25 per share for a period of 20 consecutive trading days on
NASDAQ; 1/3 of such options become exercisable when the closing sale price of
the Company's Common Stock has been at least $4.25 per share for a period of 20
consecutive trading days on NASDAQ, and the final 1/3 of such options become
exercisable when the closing sale price of the Company's Common Stock has been
at least $5.50 per share for a period of 20 consecutive trading days on NASDAQ;
provided, that such options shall, in all events, become exercisable seven years
- -------- ----
from the date of grant.

The Compensation Committee believes the grant of these options provides
appropriate incentives to these Named Executive Officers by making a significant
amount of their future remuneration contingent upon either a significant
increase in the price of the Common Stock or a long period of future service to
the Company.

The Degani Employment Agreement provides for an annual bonus of not less
than 1.5 times monthly base salary. Accordingly, Dr. Degani was entitled to a
cash bonus of $15,000

16
<PAGE>

for 1997. Dr. Degani received a cash bonus of approximately $5,000, and in lieu
of cash for the remainder of his bonus for fiscal year 1997, the Compensation
Committee, in March 1998, approved a grant of options to Dr. Degani, the number
and terms of which were to be determined based on a present value of $10,000
under a valuation methodology to be performed by an independent third party.
This evaluation has since been performed by Lehman Brothers, and Dr. Degani was
granted options to acquire an aggregate of 6,826 shares of the Company's Common
Stock, at an exercise price of $2.50 per share, the fair market value of the
Company's Common Stock on the date of grant.

As of December 31, 1997, Messrs. Harats' and Ehrlich's total options
represented approximately 0.95%, and 1.75% of the fully-diluted outstanding
stock of the Company, respectively, which the Compensation Committee believes
are appropriate levels of options for Messrs. Ehrlich and Harats, in view of
their equity position (including options) in the Company which, as of December
31, 1997, represented approximately 9.7% and 6.9% of the fully-diluted
outstanding stock of the Company. As of December 31, 1997, Dr. Degani's options
represented approximately 0.77% of the fully-diluted outstanding stock of the
Company, which the Compensation Committee believes are appropriate levels of
options considering his position in the Company.

With respect to employees other than the Named Executive Officers,
compensation is determined not by formula, but based on the achievement of
qualitative and/or quantitative objectives established in advance of each year
by the Chief Executive Officer and Chief Financial Officer, who then, pursuant
to authority delegated by the Compensation Committee, determine remuneration of
the Company's employees based on such objectives.

The Company seeks to promote, including through its compensation plans, an
environment which encourages employees to focus on the continuing long-term
growth of the Company. Employee compensation is generally comprised of a
combination of both cash compensation and grants of options under the Company's
stock option plans. Stock options are awarded annually in connection with
annual bonuses and, occasionally, during the year on a discretionary basis.
Stock options are intended to offer an incentive for superior performance while
basing employee compensation on the achievement of higher share value, and to
foster the retention of key personnel through the use of schedules which vest
options over time if the person remains employed by the Company. There is no
set formula for the award of options to individual employees. Factors
considered in making option awards to the employees other than the Named
Executive Officers in 1997, and during the first quarter of 1998 on account of
1997, included prior grants to the employees, the importance of retaining the
employees services, the amount of cash bonuses received by the employees, the
employees potential to contribute to the success of the Company and the
employees' past contributions to the Company.

Dated: June 22, 1998 COMPENSATION COMMITTEE

Dr. Jay M. Eastman
Lawrence M. Miller
Jack E. Rosenfeld

17
<PAGE>

Performance Graph

The following graph compares the yearly percentage change in the Company's
cumulative total shareholder return on its Common Stock with the cumulative
total return on the NASDAQ Market Index (Broad Market Index) and a self-
constructed peer group index from February 24, 1994, the date of the Company's
initial public offering, through December 31, 1997. The cumulative total
shareholder return is based on $100 invested in Common Stock of the Company and
in the respective indices on February 24, 1994 (including reinvestment of
dividends). The stock prices on the Performance Graph are not necessarily
indicative of future price performance.

CUMULATIVE TOTAL RETURN THROUGH DECEMBER 31, 1997
AMONG ELECTRIC FUEL CORPORATION,
NASDAQ MARKET INDEX AND PEER GROUP INDEX

[LINE GRAPH APPEARS HERE]

<TABLE>
<CAPTION>
2/94 12/94 12/95 12/96 12/97
---- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
ELECTRIC FUEL 100 48.54 65.53 54.37 28.16
PEER GROUP 100 44.15 50.53 30.36 37.14
BROAD MARKET 100 97.21 126.09 156.68 191.66
</TABLE>

ASSUMES $100 INVESTED ON FEBRUARY 24, 1994 (THE DAY THE COMPANY'S COMMON STOCK
BEGAN TRADING ON THE NASDAQ NATIONAL MARKET) ASSUMES DIVIDENDS REINVESTED YEAR
ENDING DECEMBER 31, 1994

- ------------------------

* The Peer Group Index is comprised of the following companies: AER Energy
Resources, Battery Tech Inc., Electrosource, Inc., Ultralife Batteries, Inc.
and Valence Technology, Inc. The returns of each company have been weighted
according to their respective stock market capitalization for purposes of
arriving at a peer group average.

18
<PAGE>

OWNERSHIP OF COMMON STOCK

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 June 1,
1998, each of the Company's Named Executive Officers and directors, and the
shares of Common Stock held by all directors and Named 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

Named Executive Officers & Directors
--------------------------------------

Leon S. Gross 3,575,004/(4)(13)/ 25.1%

Robert S. Ehrlich 1,176,216/(5)(9)(13)/ 8.1%
Yehuda Harats 1,618,444/(6)(9)(13)/ 11.2%
Joshua Degani 26,409/(7)/ *
Menachem Korall 273,132/(8)(9)/ 1.9%
Dr. Jay M. Eastman 11,667/(10)/ *
Jack E. Rosenfeld 11,667/(10)/ *
Harvey M. Krueger 14,667/(11)/ *
Lawrence Miller 14,914/(12)/ *

All Directors and Executive Officers
of the Company as a group 6,739,953/(4)(5)(6)(7)(8)(10)(11)(12)/ 44.95%
(10 persons)
</TABLE>

* Less than one percent

- --------------------------

(1) Unless otherwise indicated in these footnotes, each of the persons or
entities named in the table has sole voting and sole investment power with
respect to all shares shown as beneficially owned by that person, subject
to applicable community property laws.

(2) For purposes of determining beneficial ownership of the Company's Common
Stock, owners of options exercisable within sixty days are considered to be
the beneficial owners of the shares of Common Stock for which such
securities are exercisable. The percentage ownership of the outstanding
Common Stock reported herein is 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.

19
<PAGE>

(3) All shares are held in the name of the Becker Family Trust of which Mr.
Becker is the trustee and sole beneficiary during his lifetime. Excludes
633,350 shares held by the Newton Becker Irrevocable Trust No. 1, as to
which Mr. Becker disclaims beneficial ownership. Shares held by the
Irrevocable Trust are held for the benefit of members of Mr. Becker's
family. David E. Becker and Bryan Gordon, Mr. Becker's son and stepson,
respectively, are co-trustees of the Irrevocable Trust.

(4) Based upon a Form 4 dated February 9, 1998. Includes 5,000 shares of Common
Stock issuable upon exercise of options exercisable within 60 days, and
160,000 shares held by Leon Gross and Lawrence Miller as Co-Trustees of the
Rose Gross Charitable Foundation.

(5) Includes 359,715 shares of Common Stock issuable upon exercise of options
exercisable, or potentially exercisable, within 60 days.

(6) Includes 232,237 shares of Common Stock issuable upon exercise of options
exercisable, or potentially exercisable, within 60 days.

(7) Includes 26,409 shares of Common Stock issuable upon exercise of options
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 11,667 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.

(11) Includes 11,667 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.

(12) Includes 5,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.

(13) 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.

20
<PAGE>

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 such reports have been established and the
Company is required to report any failure to file by such dates during 1997.
All filing requirements were satisfied by its directors and officers and, to the
knowledge of the Company, ten percent holders, except as follows: Mr. Korall
was required to file a Form 4 on or prior to November 10, 1997, for his sale of
5,000 shares of Common Stock in October 1997, and reported this transaction on a
Form 5 filed February 16, 1998; and (ii) Mr. Miller was required to file a Form
4 on or prior to November 10, 1997, for his purchase of 1,200 shares of Common
Stock in October 1997, and reported this transaction on a Form 4 filed November
19, 1997.

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, 1997, the aggregate amount outstanding pursuant to the Promissory
Notes for each of Messrs. Ehrlich, Harats and Korall was $206,686, $354,774 and
$147,301, respectively (including an aggregate of $206,057 in accrued interest
receivable), which, in the case of Messrs. Ehrlich and Harats, are also the
largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes matured on January 3, 1998. Mr. Korall's note was
not renewed. As part of his termination agreement, Mr. Korall agreed to sell
shares sufficient to pay the remaining balance of the loan. The loan balance has
since been fully paid. The Promissory Notes of Messrs. Ehrlich and Harats were
renewed as recourse notes for a period of 10 years through December 31, 2007. In
June, 1998, the terms of the recourse notes were amended such that the Company
would have recourse only to certain compensation due Messrs. Ehrlich and Harats
upon termination, other than for cause, in which case Messrs. Ehrlich and Harats
would continue to be personally liable on the notes. The Company's reserve for
termination benefits to each of Messrs. Ehrlich and Harats is greater than the
outstanding amount due the Company under the Promissory Notes. Additionally, the
Company agreed to repurchase shares of the Company's Common Stock, at any time,
at current market prices, from either Messrs. Ehrlich or Harats as payment in
full for the Promissory Notes; and if the shares were sold to the Company, that
Messrs. Ehrlich and Harats would be granted new options at current market prices
to purchase the same amount of shares of the Company's Common Stock that were
sold.

21
<PAGE>

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, 1997, the aggregate
amount outstanding pursuant to the New Promissory Notes for each of Messrs.
Ehrlich and Harats was $542,619 and $1,153,184, respectively (including an
aggregate of $182,728 in accrued interest and VAT receivable), which are also
the largest aggregate amounts outstanding since the issuance of the Promissory
Notes. The Promissory Notes originally matured on August 20, 2001. In June, 1998
they were extended by an additional five years until August 20, 2006.

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 "Edelman 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 Edelman 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, 1997, the aggregate amount outstanding pursuant to
the Edelman Promissory Note was $36,330 (including an aggregate of $3,512 in
accrued interest and VAT receivable), which is also the largest aggregate amount
outstanding since the issuance of the Edelman Promissory Note. The Edelman
Promissory Note matures on September 10, 2001.

Pursuant to a Stock Purchase Agreement dated September 30, 1996, between
the Company and Mr. Gross, (the "Purchase Agreement"), on October 2, 1996, the
------------------
Company issued 1,538,462 shares of Common Stock to Mr. Gross at a price of
$6.50 per share, for a total purchase price of $10.0 million.

Pursuant to the terms of the Purchase Agreement, Mr. Gross agreed that for
a period of five (5) years from the date of the Purchase Agreement, neither Mr.
Gross nor his Affiliates, as defined in the Securities Act, directly or
indirectly or in conjunction with or through any Associate (as defined in Rule
12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
------------
will (i) solicit proxies with respect to any capital stock or other voting
securities of the Company under any circumstances, or become a "participant" in
any "election contest" relating to the election of directors of the Company (as
such terms are used in Rule 14a-11 of Regulation 14A of the Exchange Act) or
(ii) make an offer for the acquisition of substantially all of the assets or
capital stock of the Company or induce or assist any other person to make such
an offer or (iii) form or join any "group" within the meaning of Section
13(d)(3) of the Exchange Act with respect to any capital stock or other voting
securities of the

22
<PAGE>

Company for the purpose of accomplishing the actions referred to in clauses (i)
and (ii) above other than pursuant to the Voting Rights Agreement described
below.

In connection with the Purchase Agreement, the Company and Mr. Gross also
entered into a Registration Rights Agreement dated September 30, 1996, setting
forth registration rights with respect to the shares of Common Stock issued to
Mr. Gross in connection with the offering. These rights include the right to
make two (2) demands for a shelf registration statement on Form S-3 for the sale
of the Common Stock which may, subject to certain customary limitations and
requirements, be underwritten. In addition, Mr. Gross was granted the right to
"piggyback" on registrations of Common Stock in an unlimited number of
registrations. Also under the Registration Rights Agreement, Mr. Gross is
subject to customary underwriting lock-up requirements with respect to public
offerings of the Company's securities.

Pursuant to a Voting Rights Agreement dated September 30, 1996 and as
amended December 10, 1997 (the "Voting Rights Agreement"), between the Company,
Mr. Gross and certain management shareholders, Robert S. Ehrlich (the Company's
Chairman of the Board and Chief Financial Officer) and Yehuda Harats (the
Company's President and Chief Executive Officer (the "Management
Stockholders")), Lawrence M. Miller, Mr. Gross's advisor, will be entitled to be
nominated to serve on the Company's Board of Directors, so long as Mr. Gross,
his heirs or assigns retains at least 1,375,000 shares of Common Stock. As a
result, the Company's Board of Directors was increased to a total of six
members. In addition, under the Voting Rights Agreement, Mr. Gross and Messrs.
Ehrlich and Harats agreed to vote and take all necessary action so that Messrs.
Ehrlich, Harats, and Miller shall serve as members of the Board of Directors
until the earlier of December 10, 2002 or the 5th Annual Meeting after
December 10, 1997. In addition, so long as Mr. Miller serves as a director, Mr.
Gross, who shall succeed Mr. Miller should he cease to serve on the Board
(unless Mr. Gross is then serving on the Board, in which case Mr. Gross may
designate a Director), shall be entitled to attend and receive notice of Board
meetings. Mr. Gross further agreed to vote, at the Company's next Annual Meeting
of Stockholders occurring after September 30, 1996, 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.

23
<PAGE>

PROPOSAL NUMBER 2

RATIFICATION OF THE SELECTION
OF INDEPENDENT ACCOUNTANTS

The Board recommends the ratification by the Stockholders of the
appointment by the Board of Kesselman & Kesselman, a member of Coopers & Lybrand
(International) ("Kesselman"), as the Company's independent accountants for the
---------
fiscal year ending December 31, 1998. Kesselman has served as the Company's
independent accountants since December 1990. Unless instructions are given to
the contrary, it is the intention of the persons named as proxies to vote the
shares to which the proxy is related FOR the ratification of the appointment of
Kesselman. The affirmative vote of the holders of a majority of shares properly
cast on the proposal, in person or by proxy, will be required to ratify the
selection of Kesselman. In the event that the Stockholders do not ratify the
selection of Kesselman as an independent accounting firm, the Board will
consider the selection of another firm of independent accountants.
Representatives of Kesselman are not expected to be present at the Annual
Meeting of Stockholders.

The affirmative vote of at least a majority of all outstanding shares of
Common Stock of the Company entitled to vote is required to authorize the
proposed amendment.

THE BOARD OF DIRECTORS RECOMMENDS RATIFICATION OF THE
SELECTION OF INDEPENDENT ACCOUNTANTS DESCRIBED ABOVE

24
<PAGE>

QUORUM REQUIREMENT AND METHOD OF TABULATION

Consistent with Delaware corporate law and under the Company's By-Laws, a
majority of the shares entitled to be cast on a particular matter, present in
person or represented by proxy, constitutes a quorum as to such matter. Votes
cast by proxy or in person at the Annual Meeting of Stockholders will be counted
by persons appointed by the Company to act as election inspectors for the
meeting. The election inspectors will count shares represented by proxies that
withhold authority to vote for a nominee for election as a director or that
reflect abstentions and "broker non-votes" (i.e., shares represented at the
meeting held by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or persons entitled to vote, and (ii) the
broker or nominee does not have the discretionary voting power on a particular
matter) only as shares that are present and entitled to vote on the matter for
purposes of determining the presence of a quorum, but neither abstentions nor
broker non-votes have any effect on the outcome of voting on the matter.

COMMON STOCKHOLDER PROPOSALS

Pursuant to Rule 14a-8 promulgated by the SEC, Common Stockholder proposals
intended to be included in the Company's proxy material for the Annual Meeting
of Stockholders must be received by the Company on or before February 28, 1999
at its principal executive offices, 885 Third Avenue, Suite 2900, New York, New
York 10022 Attention: Corporate Secretary.

OTHER MATTERS

The management has no knowledge of any other matter that may come before
the Annual Meeting of Stockholders and does not, itself, currently intend to
present any such other matter. However, if any such other matters properly come
before the meeting or any adjournment thereof, the persons named as proxies will
have discretionary authority to vote the shares represented by the accompanying
proxy in accordance with their own judgment.

PROXY SOLICITATION

The cost of soliciting proxies will be paid by the Company. Proxies may be
solicited without extra compensation by certain directors, officers and regular
employees of the Company by mail, telegram or in person.

Stockholders are encouraged to send their proxies without delay. Your
cooperation is appreciated.

FINANCIAL STATEMENTS

The Company's audited financial statements for the fiscal year ended
December 31, 1997 and certain other related financial and business information
of the Company are contained in the Company's 1997 Annual Report furnished to
the Stockholders along with this Proxy Statement.

25
<PAGE>

ELECTRIC FUEL CORPORATION
Proxy Solicited on behalf of the Board of Directors of Electric Fuel Corporation
for Annual Meeting of Stockholders to be held August 6, 1998

The undersigned, having received the Notice of the Annual Meeting of
Stockholders and the Proxy Statement on behalf of the Board of Directors of
Electric Fuel Corporation (the "Company"), hereby appoint(s) Robert S. Ehrlich
and Yehuda Harats, and each of them, proxies of the undersigned (with full power
of substitution) to attend the Annual Meeting of the Company to be held on
Thursday, August 6, 1998 at 4:00 PM at the Company's R & D and Manufacturing
Facility, Western Industrial Park, Bet Shemesh, Israel and all adjournments
thereof (the "Meeting") and there to vote all shares of Common Stock of the
Company that the undersigned would be entitled to vote, if personally present,
in regard to all matters which may come before the Meeting, and without limiting
the general authorization hereby given, the undersigned directs that his vote
be cast as specified in this proxy.

This Proxy when properly executed will be voted in the manner specified
herein. If no specification is made, the proxies intend to vote for the nominees
and for the other proposals set forth herein and described in the Board of
Directors' Proxy Statement. If either of the nominees is not available to serve,
this Proxy may be voted for a substitute. This proxy delegates discretionary
authority with respect to matters not known or determined at the time of
solicitation of this proxy. The undersigned hereby revokes any other proxy
previously granted to vote the same shares of stock for said meeting.

SEE REVERSE SIDE. If you wish to vote in accordance with the
recommendations of the Board of Directors, just sign on the reverse side. You
need not mark any boxes.

CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE
<PAGE>

Please Detach and Mail in the Envelope Provided
- --------------------------------------------------------------------------------

Please date, sign and mail your
proxy card back as soon as possible!

Annual Meeting of Stockholders
ELECTRIC FUEL CORPORATION

August 6, 1998

A [X] Please mark your votes as in this example.

The Board of Directors recommends a vote FOR each of the following matters:

FOR WITHHELD
1. The election of [_] [_] Nominees: Yehuda Harats
three Class 1 Jay M. Eastman
directors, each Leon S. Gross
for a term ending in 2001 and until their
successors are elected and qualified.
INSTRUCTION: To withhold authority to vote for
any individual nominee, write that nominee's
name in the space provided below.

- ----------------------------------------------

Signature Date
----------------------------- ---------------------

FOR AGAINST ABSTAIN
2. To fix the numbers of Class 1 directors
at three. [_] [_] [_]

3. To ratify the appointment of Kesselman & [_] [_] [_]
Kesselman, a member of Coopers & Lybrand
(International), as independent
accountants of the Company.

PLEASE DATE AND RETURN THIS PROXY FORM PROMPTLY USING THE ENCLOSED ENVELOPE.

I do plan [_]
to attend
the meeting.

I do not plan to attend the meeting. [_]

Date
- ----------------------------------------- -----------------
Signature If Held Jointly

Note: Please sign exactly as name appears on this proxy. When shares are held
by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full name as such. If a
corporation, please sign as full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.