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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------------------------------------
August 2, 2002 Date of Report (Date of earliest
event reported):
ELECTRIC FUEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 0-23336 95-4302784
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
632 Broadway, Suite 301, New York, New York 10012
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 529-9200
(Former name or former address, if changed since last report)
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Page 1 of 43
On August 12, 2002, Electric Fuel Corporation (the "Registrant") filed
a Current Report on Form 8-K relating to, inter alia, its acquisition of I.E.S.
Electronics Industries U.S.A., Inc., in which the Registrant indicated its
intention to submit the financial statements and pro forma financial information
prescribed by Rule 3-05 of Regulation S-X and Article 11 of Regulation S-X,
respectively, not later than 60 days from the date thereof in accordance with
Subsection (a)(4) of Item 7 of the General Instructions for the Current Report
on Form 8-K.
The Registrant hereby amends its Current Report on Form 8-K filed with
the SEC on August 12, 2002, as amended on October 11, 2002, by deleting Item 7
in its entirety, and substituting in place and stead thereof a new Item 7, as
follows:
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Businesses Acquired
(i) Balance sheet of I.E.S. Electronics Industries U.S.A., Inc. as of
December 31, 2001 and December 31, 2000 and the related statements
of profit, changes in shareholders' equity and cash flows for the
years ended December 31, 2001 and December 31, 2000.
(ii) Unaudited condensed interim balance sheet of I.E.S. Electronics
Industries U.S.A., Inc. at June 30, 2002 and the related unaudited
condensed interim statements of profit, changes in shareholders'
equity and cash flows for the six months ended June 30, 2002 and
June 30, 2001.
(b) Pro Forma Condensed Combined Financial Information
(i) Unaudited pro forma condensed combined balance sheets as of June
30, 2002.
(ii) Unaudited pro forma condensed combined statement of operation
for the six months ended June 30, 2002.
(iii) Unaudited pro forma condensed combined statement of operation for
the year ended December 31, 2001.
(c) Exhibits - The following documents are filed as exhibits to this
report:
Exhibit
Number Description
------ -----------
2*......Asset Purchase Agreement dated August 2, 2002
23.1.......Consent of Cornelius, Stegent & Price, LLP
23.2.......Consent of Levine, Hughes & Mithuen, Inc.
99.1*......Press release dated August 5, 2002
99.2*......Share Purchase Agreement dated August 2, 2002 [English summary]
------------------------------------
*Previously filed
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned hereunto duly authorized.
ELECTRIC FUEL CORPORATION
(Registrant)
By: /s/ Robert S. Ehrlich
----------------------------------------
Name: Robert S. Ehrlich
Title: Chairman of the Board. President
and Chief Executive Officer
Dated: May 8, 2003
3
Item 7(a)(i)
------------
I. E. S. ELECTRONICS INDUSTRIES
U.S.A., INC.
(A Wholly-owned Subsidiary of
Interactive Millennium, Ltd.)
FINANCIAL REPORT
December 31, 2001 and 2000
C O N T E N T S
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of changes in stockholder's equity 4
Statements of cash flows 5
Notes to financial statements 6-14
4
CORNELIUS, STEGENT & PRICE, LLP
------------------------------------------------------------------------------
4 E. Greenway Plaza, Suite 515 CERTIFIED PUBLIC ACCOUNTANTS
Houston, Texas 77046-2406
Tel (713) 840-9300
Fax (713) 840-0012
Board of Directors
I. E. S. Electronics Industries U. S. A., Inc. Littleton, Colorado
Independent Auditors' Report
We have audited the balance sheet of I. E. S. Electronics Industries U. S. A.,
Inc. as of December 31, 2001 and the related statements of operations, changes
in stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of I. E. S. Electronics Industries U. S. A.,
Inc. as of December 31, 2000 were audited by other auditors whose report dated
February 19, 2001, expressed an unqualified opinion of those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion
In our opinion, the 2001 financial statements referred to above present fairly,
in all material respects, the financial position of I. E. S. Electronics
Industries U. S. A., Inc. as of December 31, 2001 and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America
/s/ Cornelius, Stegent & Price, LLP
Houston, Texas
February 6, 2002
5
LEVINE HUGHES & MITHUEN INC. LOGO
CERTIFIED PUBLIC ACCOUNTANTS
Report of Independent Certified Public Accountants
To the Board of Directors
IES Electronics Industries U.S.A. Inc.
Littleton, Colorado
CAROL A. CAPPS, CPA We have audited the accompanying balance sheets of
JOHN M. HUGHES JR., CPA I.E.S. Electronics Industries U.S.A., Inc. (a
LEE H. JOHNSON, CPA wholly-owned subsidiary of Interactive Millennium,
STEVEN E. MITHUEN, CPA Ltd.) as of December 31, 2000 and the related
RAYMOND A. SAITA, CPA statements of operations and accumulated deficit
R. STEPHEN VAN METER, CPA and cash flows for the year then ended. These
financial statements are the responsibility
of the Company's management. Our
MAIN OFFICE responsibility is to express and opinion on these
6025 S. QUEBEC ST, #375 financial statements based on our audit.
ENGLEWOOD, CO 80111
303-694-1400 We conducted our audit in accordance with auditing
303-694-1462 FAX standards generally accepted in the United
www.lhmcpas.com 303-674-8707 States of America. Those standards
require that we plan and perform the audits in order
to obtain reasonable assurance about whether the
financial statements are free of material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and
SATELLITE OFFICES disclosures in the financial statements. An audit
PINE JUNCTION also includes assess the accounting principles used
STRASBURG and significant estimates made by management, as well
303-622-4228 as evaluating the overall financial statement
LIMON presentation. We believe that our audit provides a
719-775-0503 reasonable basis for our opinion.
In our opinion, the financial statements referred to
above presently fairly, in all material respects,
the financial position of I.E.S. Electronics
Industries U.S.A., Inc (a wholly-owned subsidiary
of Interactive Millennium, Ltd.) as of December
31, 2000 and the results of its operations and
cash flows for the year then ended, in conformity
with accepted accounting principles generally
accepted in the United States of America.
/s/ Levine, Hughes & Mithuen, Inc.
Denver, Colorado
February 19, 2001
A member of Summit International Associates, Inc.,
an association of accounting firms with offices throughout the world
BEYOND THE NUMBERS LOGO
I. E. S. ELECTRONICS INDUSTRIES U. S.
A., INC. (a Wholly-owned Subsidiary of
Interactive Millennium, Ltd.)
BALANCE SHEETS
December 31, 2001 and 2000
ASSETS 2001 2000
CURRENT ASSETS
Cash $ 346,945 $ 390,657
Certificates of deposit due within one year, including 231,905 8,605
$222,930 restricted collateral deposits in 2001
Accounts receivable, net of allowance for doubtful
accounts 2001 - $19,000; 2000 - $146,015 452,842 1,965,477
Inventories, net of reserves (Note 4) 701,940 170,038
Prepaid expenses and other assets 85,313 66,137
--------------- -----------------
Total current assets 1,818,945 2,600,914
PROPERTY AND EQUIPMENT, net (Note 5) 154,967 172,213
OTHER ASSETS
Restricted collateral deposits 107,815 -
Demo inventory, net of reserves 221,865 148,300
--------------- -----------------
Total assets $ 2,303,592 $ 2,921,427
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligation (Note 6) $ 9,130 $ 7,741
Accounts payable and accrued expenses 335,162 295,076
Advances payable to Israeli parent company (Note 3) - 3,250,014
Current portion of note payable to Israeli parent
company, including accrued interest (Note 3) - 345,326
Deferred warranty revenue 409,840 327,777
--------------- -----------------
Total liabilities 754,132 4,225,934
--------------- -----------------
LONG-TERM CAPITAL LEASE OBLIGATION, net
of current portion (Note 6) 10,772 19,902
--------------- -----------------
LONG TERM DEBT, net of current portion (Note 3) - 886,077
--------------- -----------------
SUBORDINATED DEBT to Israeli parent (Note 3) 1,262,592 -
--------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 1, 3, and 8)
Common stock, $.01 par value; authorized 1,700,000 shares ,
issued and outstanding 1,500,000 shares 15,000 15,000
Additional paid-in capital 261,096 15,000
Retained earnings (deficit) - (2,240,486)
--------------- -----------------
Total stockholders' equity 276,096 (2,210,486)
--------------- -----------------
Total liabilities and stockholders' equity $ 2,303,592 $ 2,921,427
=============== =================
See accompanying notes and accountants' report
7
I. E. S. ELECTRONICS INDUSTRIES U. S. A.,
INC. (a Wholly-owned Subsidiary of Interactive
Millennium, Ltd.)
STATEMENTS OF OPERATIONS
Years Ended December 31, 2001 and 2000
2001 2000
REVENUES $ 3,514,054 $ 3,400,609
COSTS OF REVENUES 1,832,272 2,096,449
------------------ --------------------
Gross profit 1,681,782 1,304,160
------------------ --------------------
RESEARCH AND DEVELOPMENT EXPENSES 78,827
73,919
SALES AND MARKETING EXPENSES 1,430,549 1,690,515
GENERAL AND ADMINISTRATIVE EXPENSES 918,324 1,049,164
------------------ --------------------
2,422,792 2,818,506
------------------ --------------------
Operating (loss) (741,010) (1,514,346)
OTHER INCOME(EXPENSE):
Interest income 12,361
13,561
Interest charged by Israeli parent company (53,430) (81,257)
Other (15,983) -
------------------ --------------------
Net loss $ (796,862) $ (1,583,242)
================== ====================
See accompanying notes and accountants' report.
8
I. E. S. ELECTRONICS INDUSTRIES U. S. A., INC. (a
Wholly-owned Subsidiary of Interactive Millennium, Ltd.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001 and 2000
Common Stock
------------------------- Additional Earnings Retained
Shares Amount Paid-in Capital (Deficit) Total
----------- ------------ --------------- ------------ ------------
BALANCE AT JANUARY 1, 2000 1,500,000 $ 15,000 $ 15,000 $ (657,244) $ (657,244)
Comprehensive income
Net loss - - - (1,583,242) (1,583,242)
----------- ------------ --------------- ------------ ------------
BALANCE AT DECEMBER 31, 2000 1,500,000 15,000 15,000 (2,240,486) (2,210,486)
Comprehensive income
Net loss - - (796,862) (796,862)
Conversion of loans from Israeli parent
into corporate stock and related
corporate readjustment - - 246,096 3,037,348 3,283,444
----------- ------------ --------------- ------------ ------------
BALANCE AT DECEMBER 31, 2001 1,500,000 $ 15,000 $ 261,09 $ - $ 276,096
=========== ============ =============== ============ ============
See accompanying notes and accountants' report.
9
I. E. S. ELECTRONICS INDUSTRIES U. S.
A., INC. (a Wholly-owned Subsidiary of
Interactive Millennium, Ltd.)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000
2001 2000
Cash Flows From Operating Activities
Net Loss $ (796,862) $ (1,583,242)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities:
Depreciation and amortization 33,179 26,906
Allowance for bad debts and sales returns (127,015) 146,015
(Increase) decrease in accounts receivable 1,639,650 815,754
(Increase) decrease in inventories, net (531,902) (70,296)
(Increase) decrease in prepaid expenses and other assets (19,546) (27,656)
Increase (decrease) in accounts payable and accrued expenses 40,086 41,449
Increase (decrease) in deferred warranty revenue 82,063 327,777
------------------ -------------------
Net cash provided by operating activities 319,653 (323,293)
------------------ -------------------
Cash Flows From Investing Activities
Restricted collateral deposits (330,745) -
Purchase of demo inventories, net (73,565) (9,800)
Property and equipment purchases, net (15,933) (38,679)
------------------ -------------------
Net cash provided by (used in) investing activities (420,243) (48,479)
------------------ -------------------
Cash Flows From Financing Activities
Payment on capital lease obligations (7,741) (5,608)
Advances and accrued interest from Israeli parent company 64,619 260,442
Net cash provided by financing activities 56,878 254,834
------------------ -------------------
Net increase in cash and cash equivalents (43,712) (116,938)
Cash and cash equivalents, beginning of year 390,657 507,595
------------------ -------------------
Cash and cash equivalents, end of year $ 346,945 $ 390,657
================== ===================
Supplemental schedule of noncash investing and financing activities:
Conversion of loans from Israeli parent into corporate stock $ 3,283,444 $ -
------------------ -------------------
Supplemental cash flow information:
Interest paid $ 53,430 $ 81,257
================== ===================
Income taxes paid $ - $ -
================== ===================
See accompanying notes and accountants' report.
10
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Operations and Basis of Presentation
Organization and Nature of Operations:
--------------------------------------
I.E.S. Electronics Industries U. S. A., Inc. ("the Company")
originally, was a wholly-owned subsidiary of I. E. S. Electronics
Industries, Ltd., an Israeli company. During calendar year 2000, I. E.
S. Electronics Industries, Ltd., formed a new wholly-owned subsidiary,
Interactive Millennium, Ltd. ("Interactive"). Subsequent to the
formation of Interactive, I.E.S. Electronics Industries, Ltd.,
transferred its ownership interest in the Company to Interactive (the
"Parent Company"). The Company, which was incorporated in Delaware on
November 9, 1995, sells and services state-of-the-art interactive
simulation training systems to law enforcement agencies that are
predominately based in the United States. The systems are manufactured
by the Parent Company and exported to the Company for resale. The
Company is economically dependent on the Parent Company to provide the
systems, which to date have comprised the majority of the Company's
sales.
Basis of Presentation:
----------------------
For the period from November 9, 1995 through December 31, 2001, the
Company accumulated net losses of $3,037,348. During the year ended
December 31, 2000, the Company used cash in operating activities of
approximately $323,000, and had liabilities in excess of its assets of
approximately $2,210,000. Additionally, as shown in the accompanying
financial statements, the Company has current year net losses of
$796,862 and $1,583,242 for the years ending December 31, 2001 and
2000, respectively. The absence of a demonstrated and consistent period
of profitability raises doubt about the Company's ability to generate
adequate cash flow during the year ending December 31, 2002. However,
management and the Parent Company have reorganized the Company's debt
to the Parent Company, as described in the immediately following
paragraph, and have agreed to move the manufacturing of systems from
the Parent Company to the Parent in an effort to enable the Company to
generate adequate cash flow and become profitable. As more fully
described in Note 3, the Parent Company made an election to convert
debt into common stock at a fair value which approximates book value,
and effect a quasi reorganization. Pursuant to the foregoing, the
Parent Company made an election with respect to its outstanding debt
from the Company of $4,462,592 to convert $3,200,000 of the debt (plus
the $83,444 accrued interest) into common stock, and to subordinate the
balance of the loan ($1,262,592) to any subsequent third party
financing obtained by the Company.
The accounting treatment of this quasi reorganization was such that,
effective December 31, 2001, the Company's balance sheet amounts are
carried at fair value, and the readjustment allows for an offset to
retained earnings to the full extent of the balance of retained
earnings (deficit). The single adjustment was charged first against
retained earnings to the full extent of such retained earnings; and the
balance was then charged against additional paid-in capital.
Consequently, retained earnings at year-end are zero, the additional
11
NOTES TO FINANCIAL STATEMENTS
capital injection made by the Parent Company is reflected as additional
paid-in capital, and the accounting in the future will be similar to
that appropriate for a new enterprise. Management's plans also include
generating future profitable operations through increased revenue,
resulting from the growing acceptance of the Company's products, and
decreased expenses, particularly as a result of the movement of
production to the U. S. from Israel.
Note 2. Summary of Significant Accounting and Reporting Policies
Revenue Recognition:
--------------------
In 2001, the Company adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin 101. Accordingly, revenue from
product sales to end-users is now recognized when title passes, which
for shipments to certain foreign countries is subsequent to product
shipment. Title for these shipments ordinarily passes within a week of
shipment. This accounting change did not materially impact the
Company's results of operations for 2001. The Company recognizes
extended warranty revenue under the straight-line method over the term
of the Post Contract Support (PCS) agreement based upon historical
evidence. Training revenue is recognized as services are performed.
Revenues from products are recognized when the following criteria are
met: persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price to the buyer is fixed or determinable, no
further obligation remains and collectibility is reasonably assured.
The Company does not grant a right of return to its customers.
Long-Lived Assets:
------------------
The Company evaluates the potential impairment of long-lived assets and
long-lived assets to be disposed of in accordance with Statement of
Financial Accounting Standards No. 121, (FAS 121) Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. As of December 31, 2001 and 2000, management believes
there was no impairment of the Company's long-lived assets. Use of
Estimates:
----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Differences from those
estimates are recorded in the period they become known.
12
NOTES TO FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting and Reporting Policies
(continued)
Cash and Cash Equivalents:
--------------------------
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three
months or less to be cash equivalents.
Restricted Collateral Deposits:
-------------------------------
Restricted collateral deposits are invested in certificates of deposit
and are used as security for a sales contract the Company signed with
the Royal Thai Army on September 28, 2001. One $222,930 certificate of
deposit matures in August 2002 and the other two totaling $107,815
mature in August 2003.
Concentrations of Credit Risk:
------------------------------
The Company periodically maintains cash balances at a commercial bank
in excess of the Federal Deposit Insurance Corporation insurance limit
of $100,000. The Company sells its products to various customers
consisting primarily of law enforcement agencies located throughout the
United States, in Europe and Asia. Consistent with industry practices,
the Company generally does not require collateral when it establishes
credit with its customers. Reserves are provided for estimated amounts
of accounts receivable that may not be collected.
During 2000, one customer accounted for approximately 19% of the
Company's gross sales revenue. Summary geographic sales information
follows:
2001 2000
North America $ 3,232,376 $ 3,030,061
Europe 213,678 370,548
China 68,000 -
---------------------- ------------------------
$ 3,514,054 $ 3,400,609
---------------------- ========================
Concentrations of Other Risks:
The Company's financial results are affected by a wide variety of
factors, including rapid technological change, competitive pricing
pressures and general economic conditions. The Company is exposed to
the risk of obsolescence of its inventory depending on the mix of
future business. Advertising Costs:
The Company expenses advertising costs as incurred. Advertising and
promotional costs charged to operations for the years ended December
31, 2001 and 2000 were $148,133 and $190,992, respectively.
13
NOTES TO FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting and Reporting Policies
(continued)
Inventories:
------------
Inventory for resale is stated at the lower of cost or market based on
the specific identification method. At December 31, 2001 and 2000,
there was no reserve for potentially slow-moving and obsolete
inventory; the net carrying value of its resale inventory was $701,940
and $170,038 respectively. The reason for the significant increase in
inventories is a single large sale to a customer that accounted for
approximately 19% of the Company's gross sales revenue, as noted in
"Concentrations of Credit Risks," above, resulting in a transfer of
substantial inventories from the Parent (at 55% of retail sales price)
prior to year end. There was also a significant decrease in receivables
during the same period because the inventories were not shipped prior
to year end and hence could not be reflected in accounts receivable.
Demo Inventory:
---------------
Demo inventory, which is stated at cost based on the specific
identification method, is utilized by the Company to solicit new
business through site demonstrations and equipment loans to prospective
customers. These assets are not depreciated or amortized. Management
believes the net carrying value of such assets is fully recoverable,
principally through exchanges with the Parent Company or sales to
independent third parties. At December 31, 2001 and 2000, the Company
recognized a reserve of $39,000 and $20,000 resulting in a net carrying
value of its demo inventory at $221,865 and $148,300, respectively.
Property and Equipment:
-----------------------
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
underlying assets. Costs of repairs and maintenance are expensed as
incurred. Leasehold improvements are generally amortized on a
straight-line basis over the life of the lease. Depreciation and
amortization expense for the years ended December 31, 2001 and 2000 was
$33,179 and $26,906, respectively.
Research and Development Costs:
-------------------------------
The Company expenses research and development costs as incurred. Income
Taxes: The Company provides for income taxes pursuant to the liability
method as prescribed in SFAS No. 109, Accounting for Income Taxes. The
liability method requires recognition of deferred income taxes based on
temporary differences between the financial reporting and income tax
bases of assets and liabilities, using the enacted rates in effect in
the years in which the differences are expected to reverse. Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
only significant component of the Company's deferred tax assets and
liabilities is the deferred tax asset attributable to its net operating
losses. The Company's net operating
14
NOTES TO FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting and Reporting Policies
(continued)
Income Taxes (continued):
-------------------------
losses of approximately $2,500,000 for income tax purposes, will expire
in years 2011 through 2014.
A full valuation allowance has been recognized by the Company at
December 31, 2001 and 2000. Currently there is no objective measurement
of the Company's ability to generate sufficient future taxable income
of the appropriate nature and character to provide reasonable assurance
that the net deferred tax asset will be recoverable in a timely
fashion.
Fair Value of Financial Instruments:
------------------------------------
The carrying amounts of cash and cash equivalents, and other long-term
liabilities approximates fair value at December 31, 2001 and 2000.The
carrying value of all other financial instruments potentially subject
to valuation risk, principally consisting of accounts receivable, were
used to estimate the fair value of financial instruments.
New Accounting Standards:
-------------------------
In August 2001 the Company adopted Securities and Exchange Commission
Staff Accounting Bulletin 101, (SAB 101), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the application of generally
accepted accounting principles to revenue recognition in financial
statements. The adoption of this standard did not have a material
effect on the Company's financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, (FAS 144),
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial accounting and reporting for the impairment of
long-lived assets. This statement supersedes Statement of Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions for the disposal of a segment of a business of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The
Company does not believe that the required adoption of FAS 144 in 2002
will have a material effect on its financial position or results of
operations.
Note 3. Related Party
Transactions At December 31, 2000, the Company had uncollateralized
advances payable of $3,250,014 to the Parent Company, which did not
bear interest.
15
NOTES TO FINANCIAL STATEMENTS
Note 3. Related Party Transactions (continued)
The Company also had a promissory note for $1,394,700 payable to the
Parent Company, the terms of which provided for payments of principal
and 6% interest, payable in equal quarterly installments totaling
$324,940 per year, over a period of five years commencing January 1,
2000.
The outstanding principal balance and accrued interest on the note as
of December 31, 2000 was $1,147,959 and $83,444, respectively.
By the end of calendar year 2001, the advances payable were $3,509,574
and the balance of the note payable was $953,017, for a total of
$4,462,592. Effective December 31, 2001, the Parent Company made an
election to convert $3,200,000 of the debt (plus the $83,444 accrued
interest) into common stock, and to subordinate the balance of the loan
($1,262,592) to any subsequent third party financing obtained by the
Company. Pursuant to this conversion, the Parent Company increased its
investment in the Company at a fair value which approximated book value
on the date of conversion. This conversion was treated for accounting
purposes first as a charge against retained earnings to the full extent
of such retained earnings ($3,037,348); and the balance of $246,096 was
then charged against additional paid-in capital.
Inventories are generally purchased from the Parent Company at 55% of
the Company's retail sales price. The Parent Company provides a right
of return for damaged inventory items and extends a warranty on the
products sold to the Company's customers. As part of its demonstration
of continued financial support, the Parent Company reduced its
inventory transfer pricing by 8% in calendar year 2001.
A summarized roll-forward of the 2001 and 2000 activity between the
Company and the Parent Company is as follows:
2001 2000
Balance at beginning of year $ 3,250,014 $ 2,742,831
Net advances (to) by the Parent Company (1,138,979) (1,441,929)
Purchases of inventories for resale and demo inventories 1,858,043 2,300,943
Reimbursed expenses from the Parent Company (459,504) (351,831)
----------- -----------
3,509,574 3,250,014
Conversion to common stock (2,246,983) -
----------- -----------
Balance at end of year $ 1,262,591 $ 3,250,014
=========== ===========
Note 4. Inventories
Inventories consisted of the following:
2001 2000
Raw material $144,810 $ 82,567
Work in process 25,202 -
Finished goods 531,928 87,471
-------- --------
$701,940 $170,038
======== ========
16
NOTES TO FINANCIAL STATEMENTS
Note 5.
Major classifications of property and equipment are summarized below:
Cost Accumulated Net Book
Or Basis Depreciation Value
---------------------- ---------------------- -------------------
At December 31, 2001:
Leasehold improvements $ 75,220 $ 41,919 $ 33,301
Furniture and equipment 162,271 40,605 121,666
---------------------- ---------------------- -------------------
Total $ 237,491 $ 82,524 $ 154,967
====================== ====================== ===================
Cost Accumulated Net Book
Or Basis Depreciation Value
---------------------- ---------------------- -------------------
At December 31, 2000:
Leasehold improvements $ 74,926 $ 26,888 $ 48,038
Furniture and equipment 154,344 30,169 124,175
---------------------- ---------------------- -------------------
Total $ 229,270 $ 57,057 $ 172,213
====================== ====================== ===================
Note 6.
Operating Leases:
The Company leases its office space under a non-cancelable operating
lease. The lease provides for monthly rental payments, including real
estate taxes and other operating costs. The lease provides standard
rent escalation and renewal options. The aggregate future minimum lease
commitments are as follows for years ending December 31:
2002 $ 96,231
2003 100,681
2004 110,694
2005 86,775
----------------------
$ 394,381
======================
The Company also leases a copier under the terms of a non-cancelable
operating lease. The lease calls for minimum monthly payments of $335
for a set minimum usage and expires in October 2003. Additional monthly
rent is required on usage over the minimum levels as defined in the
lease agreement. Rent expense for the year ended December 31, 2001 and
2000 was approximately $125,577 and $77,090, respectively.
17
NOTES TO FINANCIAL STATEMENTS
Note 6.
Capital Leases:
During 2000, the Company entered into three capital lease agreements to
acquire office equipment. The cost of the equipment acquired was
$33,250. Depreciation expense of $5,167 and $2,226 was taken on this
equipment during the years ended December 31, 2001 and 2000,
respectively. The present value of minimum capital leases payments are
as follows for years ended December 31:
2002 $ 9,130
2003 7,178
2004 3,594
-----------------------
Total minimum lease payments 19,902
Less current portion 9,130
-----------------------
$ 10,772
=======================
Note 7. Employee Benefit Plan
Effective January 1, 1999, the Company adopted a Savings Incentive
Match Plan for Employees (SIMPLE), which covers substantially all
employees. Contributions to the plan are fixed at 3%. The amounts
funded are based on the employees elective deferrals. The Company
contributed approximately $13,309 and $7,874 to the plan for the years
ending December 31, 2001 and 2000, respectively.
Note 8. Common Stock Options
During January 1999, the Company's Board of Directors approved the
adoption of the 1998 Stock Option Plan (the "Plan"). The Plan, as
adopted, provides for the reservation of 200,000 shares of the
Company's common stock for issuance pursuant to the Plan. Under the
Plan, the Company may grant options to purchase common stock to
employees, directors and consultants of the Company. Generally, the
options vest and may be exercised, as to 1/3 (one-third) of the total
options granted one year from the date of grant. Thereafter, the
remaining options vest and may be exercised as to 1/12 (one-twelfth) of
the shares subject to the option grant for each full quarter completed.
The stock options are granted at fair market value on the date of
grant, expire ten years from that date and are nontransferable.
18
NOTES TO FINANCIAL STATEMENTS
During 1999, the Company granted 27,200 options to purchase shares of
its common stock at $1.18 expiring on April 1, 2009. There were no
options granted or exercised during the year ended December 31, 2001
and 2000.
Note 8. Common Stock Options (continued) The activity under the
Company's Plan is set forth below:
Outstanding Options
------------------------------------------------------------------
Aggregate Weighted Average
Number of Range Exercise Exercise Price
Options Per Share Price Per Share
Balance, January 1, 2000 23,800 $ 1.18 $ 28,084 $ 1.18
Options granted
Options canceled (3,400) 1.18 (4,012) 1.18
Options repurchased
Options exercised
---------------- ----------------
Balance, December 31, 2000 20,400 1.18 24,072 1.18
Options granted
Options canceled
Options repurchased
Options exercised
---------------- ----------------
Balance, December 31, 2001 20,400 $ 1.18 $ 24,072 $ 1.18
================ ================
The weighted average fair value of options granted during 1999 was
$1.18 per share. The Company adopted the provisions of SFAS No. 123,
Accounting for Stock Based Compensation, effective for year 1999 for
all issuances of stock options to non employees of the Company. The
Company will continue to apply Accounting Principles Board Opinion No.
25,Accounting for Stock Issued to Employees, for all issuances of stock
to its employees. Generally, all stock options issued to the Company's
employees, pursuant to the Plan, are non-compensatory. No compensation
cost has been recognized to date. Generally, stock options granted
during 1999 will not begin to vest until April 2000. There were no
options granted during year 2001 and 2000, and the Company canceled
3,400 option shared due to employee terminations.
19
Item 7(a)(ii)
-------------
I. E. S. ELECTRONICS INDUSTRIES
U.S.A., INC.
(A Wholly-owned Subsidiary of
I.E.S Interactive Training, Ltd.)
FINANCIAL STATEMENTS
JUNE 30, 2002 and 2001
C O N T E N T S
Page
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of changes in stockholder's equity 4
Statements of cash flows 5
Notes to financial statements 6-14
20
I. E. S. ELECTRONICS INDUSTRIES U. S. A., INC.
(A Wholly-owned Subsidiary of I.E.S Interactive Training, Ltd.)
BALANCE SHEETS
June 30, 2002 and 2001
ASSETS 2002 2001
CURRENT ASSETS
Cash $ 41,917 $ 257,621
Certificates of deposit due within one year, including
$222,930 restricted collateral deposits at June 30, 2002 232,001 8,798
Accounts receivable, net of allowance for doubtful
accounts 2002 - $19,000; 2001 - $58,915 2,023,299 891,769
Inventories, net of reserves (Note 4) 284,341 207,384
Prepaid expenses and other assets 101,547 56,229
----------------------- ----------------------
Total current assets 2,683,105 1,421,801
PROPERTY AND EQUIPMENT, net (Note 5) 141,521 158,647
OTHER ASSETS
Restricted collateral deposits 107,815 -
Demo inventory, net of reserves 255,255 148,300
----------------------- ----------------------
Total assets $ 3,187,696 $ 1,728,748
======================= ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital lease obligation (Note 6) $ 8,730 $ 9,130
Accounts payable and accrued expenses 1,010,649 250,471
Advances payable to Israeli parent company (Note 3) - 2,852,307
Current portion of note payable to Israeli parent company,
including accrued interest (Note 3) - 345,326
Deferred warranty revenue 260,609 364,541
----------------------- ----------------------
Total current liabilities 1,279,988 3,821,775
----------------------- ----------------------
LONG-TERM CAPITAL LEASE OBLIGATION, net
of current portion (Note 6) 6,796 14,802
----------------------- ----------------------
LONG TERM DEBT, net of current portion (Note 3) - 757,086
----------------------- ----------------------
SUBORDINATED DEBT to Israeli parent (Note 3) 1,804,735 -
----------------------- ----------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 1, 3 and 8)
Common stock, $.01 par value; authorized 1,700,000 shares,
issued and outstanding 1,500,000 shares 15,000 15,000
Additional paid-in capital 261,096 15,000
Retained earnings (deficit) (179,919) (2,894,915)
----------------------- ----------------------
Total stockholders' equity 96,177 (2,864,915)
----------------------- ----------------------
Total liabilities and stockholders' equity $ 3,187,696 $ 1,728,748
======================= ======================
See accompanying notes and accountants' report.
21
I. E. S. ELECTRONICS INDUSTRIES U. S. A., INC.
(A Wholly-owned Subsidiary of I.E.S Interactive Training, Ltd.)
STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2002 and 2001
2002 2001
REVENUES $ 2,961,854 $ 1,578,477
COSTS OF REVENUES 1,852,696 872,161
------------------- --------------------
Gross Profit 1,109,158 706,316
------------------- --------------------
RESEARCH AND DEVELOPMENT EXPENSES 136,049 37,636
SALES AND MARKETING EXPENSES 629,817 792,187
GENERAL AND ADMINISTRATIVE EXPENSES 525,414 488,275
------------------- --------------------
1,291,280 1,318,098
------------------- --------------------
Income (loss) from operations (182,122) (611,782)
OTHER INCOME(EXPENSE):
Interest income 349 10,759
Interest charged by Israeli parent company - (35,520)
Other 1,854 (17,887)
------------------- --------------------
Net income (loss) $ (179,919) $ (654,430)
=================== ====================
See accompanying notes and accountants' report.
22
I. E. S. ELECTRONICS INDUSTRIES U. S. A., INC.
(A Wholly-owned Subsidiary of I.E.S Interactive Training, Ltd.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Retained
-------------------------- Additional Earnings
Shares Amount Paid-in Capital (Deficit) Total
------------- ------------ --------------- -------------- --------------
BALANCE AT JANUARY 1, 2001 1,500,000 $ 15,000 $ 15,000 $ (2,240,486) $ (2,210,486)
Comprehensive income
Net loss for six months (654,430) (654,430)
------------- ------------ --------------- -------------- --------------
BALANCE AT JUNE 30, 2001 1,500,000 15,000 15,000 (2,894,916) (2,864,916)
Comprehensive income
Net loss for six months - - (142,432) (142,432)
Conversion of loans from Israeli parent
into corporate stock and related
corporate readjustment (audited) - - 246,096 3,037,348 3,283,444
------------- ------------ --------------- -------------- --------------
BALANCE AT DECEMBER 31, 2001 1,500,000 15,000 261,096 - 276,096
Comprehensive income
Net income for six months (179,919) (179,919)
------------- ------------ --------------- -------------- --------------
BALANCE AT JUNE 30, 2002 1,500,000 $ 15,000 $ 261,096 $ (179,919) $ 96,177
============= ============ =============== ============== ==============
23
I. E. S. ELECTRONICS INDUSTRIES U. S. A., INC.
(a Wholly-owned Subsidiary of Interactive Millennium, Ltd.)
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
2002 2001
Cash Flows From Operating Activities
Net income (loss) $ (179,919) $ (654,430)
Adjustments to Reconcile Net Loss to Net Cash
Provided By Operating Activities:
Depreciation and amortization 17,068 17,509
Allowance for bad debts and sales returns - (87,100)
(Increase) decrease in accounts receivable (1,570,457) 1,160,808
(Increase) decrease in inventories, net 417,599 (37,346)
(Increase) decrease in prepaid expenses and other assets (16,234) 9,908
Increase (decrease) in accounts payable and accrued expenses 675,487 (44,605)
Increase (decrease) in deferred warranty revenue (149,231) 36,764
------------------ -----------------
Net cash provided by operating activities (805,687) 401,508
------------------ -----------------
Cash Flows From Investing Activities
Certificates of deposit (96) (193)
Purchase of demo inventories, net (33,390) -
Property and equipment purchases, net (3,622) (3,943)
------------------ -----------------
Net cash provided by (used in) investing activities (37,108) (4,136)
------------------ -----------------
Cash Flows From Financing Activities
Payment on capital lease obligations (4,376) (3,710)
Payment on long-term debt - (128,991)
Advances and accrued interest from Israeli parent company 542,143 (397,707)
Conversion of loans from Israeli parent into corporate stock - -
------------------ -----------------
Net cash provided by financing activities 537,767 (530,408)
------------------ -----------------
Net increase in cash and cash equivalents (305,028) (133,036)
Cash and cash equivalents, beginning of year 346,945 390,657
------------------ -----------------
Cash and cash equivalents, end of year $ 41,917 $ 257,621
================== =================
Supplemental cash flow information:
Interest paid $ 1,816 $ 35,520
================== =================
Income taxes paid $ - $ -
================== =================
See accompanying notes and accountants' report.
24
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Operations and Basis of Presentation
Organization and Nature of Operations:
I. E. S. Electronics Industries U. S. A., Inc. ("the Company")
originally, was a wholly-owned subsidiary of I. E. S. Electronics
Industries, Ltd., an Israeli company. During calendar year 2000, I. E.
S. Electronics Industries, Ltd., formed a new wholly-owned subsidiary,
Interactive Millennium, Ltd. ("Interactive"). Subsequent to the
formation of Interactive, I. E. S. Electronics Industries, Ltd.,
transferred its ownership interest in the Company to Interactive (the
"Parent Company"). During 2002, Interactive changed its name from
Interactive Millennium, Ltd. to IES. Interactive Training, Ltd. The
Company, which was incorporated in Delaware on November 9, 1995, sells
and services state-of-the-art interactive simulation training systems
to law enforcement agencies that are predominately based in the United
States. The systems are manufactured by the Parent Company and exported
to the Company for resale. The Company is economically dependent on the
Parent Company to provide the systems, which to date have comprised the
majority of the Company's sales.
Basis of Presentation:
The accompanying interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial statements. Certain information and footnote disclosures,
normally included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or
omitted. In the opinion of the Company, the unaudited financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the
interim periods presented. These financial statements and notes should
be read in conjunction with the Company's audited financial statements
and notes thereto. Operating revenues and expenses for any interim
period are not necessarily indicative of results for a full year.
As more fully described in Note 3, the Parent Company made an election
to convert debt into common stock, and effect a quasi reorganization
whereby, effective December 31, 2001, its balance sheet amounts are
carried at fair value, and the readjustment allows for an offset to
retained earnings to the full extent of the balance of retained
earnings (deficit). Consequently, retained earnings at December 31,
2001 are zero, the additional capital injection made by the Parent
Company is reflected as additional paid-in capital, and the accounting
in the future will be similar to that appropriate for a new enterprise.
Management's plans also include generating future profitable operations
through increased revenue, resulting from the growing acceptance of the
Company's products, and decreased expenses, particularly as a result of
the movement of production to the U. S. from Israel.
25
NOTES TO FINANCIAL STATEMENTS
During the period from June 30, 2001 to June 30, 2002, the Company's
total current liabilities decreased from $3,821,775 to $1,279,988, and
its total assets increased from $1,728,748 to $3,187,696. The primary
reason for the significant decrease in liabilities and increase in
assets was a quasi reorganization accomplished effective December 31
2001, pursuant to which a total of $3,283,444 in debt to the Parent
Company was converted into common stock at a fair value which
approximates book value on the date of conversion.
Note 2. Summary of Significant Accounting and Reporting Policies
Revenue Recognition:
--------------------
In 2001, the Company adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin 101. Accordingly, revenue from
product sales to end-users is now recognized when title passes, which
for shipments to certain foreign countries is subsequent to product
shipment. Title for these shipments ordinarily passes within a week of
shipment. This accounting change did not materially impact the
Company's results of operations for 2001. The Company recognizes
extended warranty revenue under the straight-line method over the term
of the Post Contract Support (PCS) agreement based upon historical
evidence. Training revenue is recognized as services are performed.
Revenues from products are recognized when the following criteria are
met: persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price to the buyer is fixed or determinable, no
further obligation remains and collectibility is reasonably assured.
The Company does not grant a right of return to its customers.
Long-Lived Assets:
------------------
The Company evaluates the potential impairment of long-lived assets and
long-lived assets to be disposed of in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. As of June 30, 2002 and 2001, management believes there
was no impairment of the Company's long-lived assets.
Use of Estimates:
-----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Differences from those
estimates are recorded in the period they become known.
26
NOTES TO FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting and Reporting Policies
(continued)
Cash and Cash Equivalents:
--------------------------
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three
months or less to be cash equivalents.
Restricted Collateral Deposits:
-------------------------------
Restricted collateral deposits are invested in certificates of deposit
and are used as security for a sales contract the Company signed with
the Royal Thai Army on September 28, 2001. One $222,930 certificate of
deposit matures in August, 2002 and the other two totaling $107,815
mature in August, 2003.
Concentrations of Credit Risk:
------------------------------
The Company periodically maintains cash balances at a commercial bank
in excess of the Federal Deposit Insurance Corporation insurance limit
of $100,000.
The Company sells its products to various customers consisting
primarily of law enforcement agencies located throughout the United
States, in Europe and Asia. Consistent with industry practices, the
Company generally does not require collateral when it establishes
credit with its customers. Reserves are provided for estimated amounts
of accounts receivable that may not be collected.
In each of 2002 and 2001, approximately 46% and 13% of the Company's
gross sales revenue resulted from one major customer, respectively.
Summary geographic sales information follows:
2002 2001
North America $ 1,300,808 $ 1,527,727
Europe 172,694 50,750
Thailand 1,488,352 -
--------------------- ---------------------
$ 2,961,854 $ 1,578,477
===================== =====================
Concentrations of Other Risks:
------------------------------
The Company's financial results are affected by a wide variety of
factors, including rapid technological change, competitive pricing pressures and
general economic conditions. The Company is exposed to the risk of obsolescence
of its inventory depending on the mix of future business.
27
NOTES TO FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting and Reporting Policies
(continued)
Advertising Costs:
------------------
The Company expenses advertising costs as incurred. Advertising and
promotional costs charged to operations for the six month periods ended
June 30, 2002 and 2001 were $10,306 and $9,633, respectively.
Inventories:
------------
Inventories for resale are stated at the lower of cost or market based
on the specific identification method. At June 30, 2002 and 2001, there
was no reserve for potentially slow-moving and obsolete inventory; the
net carrying value of its resale inventory was $284,341 and $207,384
respectively.
Demo Inventory:
---------------
Demo inventory, which is stated at cost based on the specific
identification method, is utilized by the Company to solicit new
business through site demonstrations and equipment loans to prospective
customers. These assets are not depreciated or amortized. Management
believes the net carrying value of such assets is fully recoverable,
principally through exchanges with the Parent Company or sales to
independent third parties. At June 30, 2002 and 2001, the Company
recognized a reserve of $-0- and $20,000 resulting in a net carrying
value of its demo inventories at $255,255 and $148,300, respectively.
Property and Equipment:
-----------------------
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
underlying assets. Costs of repairs and maintenance are expensed as
incurred. Leasehold improvements are generally amortized on a
straight-line basis over the life of the lease. Depreciation and
amortization expense for the six month periods ended June 30, 2002 and
2001 was $17,072 and $17,509, respectively.
Research and Development Costs:
-------------------------------
The Company expenses research and development costs as incurred.
Income Taxes:
-------------
The Company provides for income taxes pursuant to the
liability method as prescribed in SFAS No. 109, Accounting for Income
Taxes. The liability method requires recognition of deferred income
taxes based on temporary differences between the financial reporting
and income tax bases of assets and liabilities, using the enacted rates
in effect in the years in which the differences are expected to
reverse.
28
NOTES TO FINANCIAL STATEMENTS
Note 2. Summary of Significant Accounting and Reporting Policies
(continued)
Income Taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The only significant component of the Company's deferred tax
assets and liabilities is the deferred tax asset attributable to its
net operating losses. The Company's net operating losses of
approximately $2,500,000 for income tax purposes, will expire in years
2011 through 2014. A full valuation allowance has been recognized by
the Company at June 30, 2002 and 2001. Currently there is no objective
measurement of the Company's ability to generate sufficient future
taxable income of the appropriate nature and character to provide
reasonable assurance that the net deferred tax asset will be
recoverable in a timely fashion.
Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, and other long-term
liabilities approximates fair value at June 30, 2002 and 2001. The
carrying value of all other financial instruments potentially subject
to valuation risk, principally consisting of accounts receivable, were
used to estimate the fair value of financial instruments.
New Accounting Standards:
In August 2001 the Company adopted Securities and Exchange Commission
Staff Accounting Bulletin 101, (SAB 101), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the application of generally
accepted accounting principles to revenue recognition in financial
statements. The adoption of this standard did not have a material
effect on the Company's financial position or results of operations.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, (FAS 144),
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses the financial accounting and reporting for the impairment of
long-lived assets. This statement supersedes Statement of Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" and the accounting and
reporting provisions for the disposal of a segment of a business of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The
Company does not believe that the required adoption of FAS 144 in 2002
will have a material effect on its financial position or results of
operations.
Note 3. Related Party Transactions
At December 31, 2000, the Company had uncollateralized advances payable
of $3,250,014 to the Parent Company, which did not bear interest.
29
NOTES TO FINANCIAL STATEMENTS
Note 3. Related Party Transactions (continued)
The Company also had a promissory note for $1,394,700 payable to the
Parent Company, the terms of which provided for payments of principal
and 6% interest, payable in equal quarterly installments totaling
$324,940 per year, over a period of five years commencing January 1,
2000. The outstanding principal balance and accrued interest on the
note as of December 31, 2000 was $1,147,959 and $83,444, respectively.
By the end of calendar year 2001, the advances payable were $3,509,574
and the balance of the note payable was $953,017, for a total of
$4,462,592. Effective December 31, 2001, the Parent Company made an
election to convert $3,200,000 of the debt (plus the $83,444 accrued
interest) into common stock, and to subordinate the balance of the loan
($1,262,592) to any subsequent third party financing obtained by the
Company.
Inventories are generally purchased from the Parent Company at 55% of
the Company's retail sales price. The Parent Company provides a right
of return for damaged inventory items and extends a warranty on the
products sold to the Company's customers. As part of its demonstration
of continued financial support, the Parent Company reduced its
inventory transfer pricing by 8% in calendar year 2001.
A summarized roll-forward of the 2002 and 2001 activity between the
Company and the Parent Company is as follows:
2002 2001
Balance at beginning of year $ 1,262,591 $ 3,250,014
Net advances (to) by the Parent Company 225,000 (1,235,000)
Purchases of inventories for resale and demo inventories 326,725 837,293
Reimbursed expenses from the Parent Company (9,581) -
------------------------------ -----------------------
Balance at June 30 $ 1,804,735 $ 2,852,307
============================== =======================
Note 4. Inventories
Inventories consisted of the following:
2002 2001
Raw material $ - $ -
Work in process - -
Finished goods 284,341 207,384
---------------------- -------------------
$ 284,341 $ 207,384
====================== ===================
30
NOTES TO FINANCIAL STATEMENTS
Note 5. Property and Equipment
Major classifications of property and equipment are summarized below:
Cost Accumulated Net Book
Or Basis Depreciation Value
------------------------ -------------------------- -----------------------
At June 30, 2002:
Leasehold improvements $ 75,220 $ 49,442 $ 25,778
Furniture and equipment 161,892 46,149 115,743
------------------------ -------------------------- -----------------------
Total $ 237,112 $ 95,591 $ 141,521
======================== ========================== =======================
Cost Accumulated Net Book
Or Basis Depreciation Value
------------------------ -------------------------- -----------------------
At June 30, 2001:
Leasehold improvements $ 83,210 $ 34,400 $ 48,810
Furniture and equipment 142,291 32,454 109,837
------------------------ -------------------------- -----------------------
Total $ 225,501 $ 66,854 $ 158,647
======================== ========================== =======================
Note 6. Commitments
Operating Leases:
The Company leases its office space under a non-cancelable
operating lease. The lease provides for monthly rental payments,
including real estate taxes and other operating costs. The lease
provides standard rent escalation and renewal options. The aggregate
future minimum lease commitments are as follows for years ending
December 31:
2002 $ 96,231
2003 100,681
2004 110,694
2005 86,775
----------------------
$ 394,381
======================
The Company also leases a copier under the terms of a non-cancelable
operating lease. The lease calls for minimum monthly payments of $335
for a set minimum usage and expires in October 2003. Additional monthly
rent is required on usage over the minimum levels as defined in the
lease agreement. Rent expense for the six month periods ended June 30,
2002 and 2001 was approximately $60,734 and $61,037, respectively.
31
NOTES TO FINANCIAL STATEMENTS
Note 6. Commitments (continued)
Capital Leases:
During 2000, the Company entered into three capital lease agreements to
acquire office equipment. The cost of the equipment acquired was
$33,250. Depreciation expense of $2,583 was taken on this equipment
during each of the six month periods ended June 30, 2002 and 2001.
The present value of minimum capital leases payments are as follows:
2002 $ 8,730
2003 3,589
2004 3,207
---------------
Total minimum lease payments 15,526
Less current portion 8,730
---------------
$ 6,796
===============
Note 7. Employee Benefit Plan
Effective January 1, 1999, the Company adopted a Savings Incentive
Match Plan for Employees (SIMPLE), which covers substantially all employees.
Contributions to the plan are fixed at 3%. The amounts funded are based on the
employees elective deferrals. The Company contributed approximately $1,339 and
$792 to the plan for the six month periods ending June 30, 2002 and 2001,
respectively.
Note 8. Common Stock Options
During January 1999, the Company's Board of Directors approved the
adoption of the 1998 Stock Option Plan (the "Plan"). The Plan, as adopted,
provides for the reservation of 200,000 shares of the Company's common stock for
issuance pursuant to the Plan. Under the Plan, the Company may grant options to
purchase common stock to employees, directors and consultants of the Company.
Generally, the options vest and may be exercised, as to 1/3 (one-third) of the
total options granted one year from the date of grant. Thereafter, the remaining
options vest and may be exercised as to 1/12 (one-twelfth) of the shares subject
to the option grant for each full quarter completed. The stock options are
granted at fair market value on the date of grant, expire ten years from that
date and are nontransferable. During 1999, the Company granted 27,200 options to
purchase shares of its common stock at $1.18 expiring on April 1, 2009. There
were no options granted or exercised during the six month periods ended June 30,
2002 and 2001.
32
NOTES TO FINANCIAL STATEMENTS
Note 8. Common Stock Options (continued)
The activity under the Company's Plan is set forth below:
Outstanding Options
-----------------------------------------------------------------------------------------
Aggregate Weighted Average
Number of Range Exercise Exercise Price
Options Per Share Price Per Share
Balance, January 1, 2002 20,400 $ 1.18 $ 24,072 $ 1.18
Options granted
Options canceled
Options repurchased
Options exercised
------------------------- -------------------
Balance, June 30, 2002 20,400 1.18 24,072 1.18
Balance, January 1, 2001 20,400 1.18 24,072 1.18
Options granted
Options canceled
Options repurchased
Options exercised
------------------------- -------------------
Balance, June 30, 2001 20,400 $ 1.18 $ 24,072 $ 1.18
========================= ===================
The weighted average fair value of options granted during 1999 was
$1.18 per share. The Company adopted the provisions of SFAS No. 123, Accounting
for Stock Based Compensation, effective for year 1999 for all issuances of stock
options to non employees of the Company. The Company will continue to apply
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, for all issuances of stock to its employees. Generally, all stock
options issued to the Company's employees, pursuant to the Plan, are
non-compensatory. No compensation cost has been recognized to date. Generally,
stock options granted during 1999 will not begin to vest until April 2000. There
were no options granted during year 2001 and 2000, and the Company canceled
3,400 option shared due to employee terminations.
33
Item 7(b)(i), (ii) and (iii)
----------------------------
ELECTRIC FUEL CORPORATION
AND I.E.S. ELECTRONIC INDUSTRIES U.S.A., INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements have been prepared to give effect to the acquisition of Electric Fuel
Corporation of substantially all the assets of I.E.S. Electronic Industries
U.S.A., Inc. (I.E.S.) under the purchase method of accounting after giving
effect to the pro forma adjustments described in the accompanying notes.
The following unaudited pro forma condensed combined balance sheet as
of June 30, 2002 gives effect to the acquisition of substantially all the assets
of I.E.S. as if it had occurred on such date, and reflects the allocation of the
purchase price to the I.E.S. assets acquired based on their estimated fair
values at the date of acquisition. The excess of the consideration paid by
Electric Fuel in the acquisition over the fair value of I.E.S. identifiable
assets and liabilities has been recorded as goodwill.
The following unaudited pro forma condensed combined statements of
operations combine the historical statements of operations of Electric Fuel and
I.E.S. The unaudited pro forma condensed combined statements of operations for
the six months ended June 30, 2002 and for the year ended December 31, 2001,
give effect to the acquisition as if it had occurred on January 1, 2002 and
January 1, 2001, respectively, and combine the historical unaudited statements
of operations of Electric Fuel and I.E.S. for such period. Integration costs are
not included in the accompanying unaudited pro forma condensed combined
financial statements. This pro forma information should be read in conjunction
with the respective consolidated historical financial statements (including
notes thereto) of Electric Fuel and I.E.S., for the year ended December 31, 2001
and for the six month period ended June 30, 2002, appearing elsewhere herein.
Unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the acquisition occurred at the beginning of the periods presented,
nor is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma condensed combined financial statements
are based upon the respective historical financial statements of Electric Fuel
and I.E.S. and do not incorporate, nor do they assume, any benefits from cost
savings or synergies of the combined company. The pro forma adjustments are
based on available financial information and certain estimates and assumptions
that Electric Fuel believes are reasonable and that are set forth in the notes
to the unaudited pro forma condensed combined financial statements.
34
PRO FORMA FINANCIAL INFORMATION
ELECTRIC FUEL CORPORATION AND I.E.S. ELECTRONICS INDUSTRIES U.S.A., INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002
U.S. DOLLARS
Electric
Fuel I.E.S. Pro forma References Combined
---------------- --------------- --------------- -------------- ----------------
CURRENT ASSETS:
Cash and cash equivalent $ 10,452,924 $ 41,917 $ (3,000,000) A $ 7,494,841
Certificates of deposit due within one year - 339,816 (330,745) O 9,071
Trade receivables 981,131 2,023,299 - 3,004,430
Other receivables 957,212 101,547 - 1,058,759
Inventory 3,374,934 284,341 - 3,659,275
---------------- --------------- --------------- ----------------
Total current assets 15,766,201 2,790,920 (3,330,745) 15,226,376
---------------- --------------- --------------- ----------------
SEVERANCE PAY FUND 1,084,977 - - 1,084,977
---------------- --------------- --------------- ----------------
PROPERTY AND EQUIPMENT, NET 6,575,041 141,521 - 6,716,562
---------------- --------------- --------------- ----------------
OTHER ASSETS:
Demo inventories, net of reserves - 255,255 - 255,255
Intangible assets, net - - 2,626,000 D 2,626,000
Goodwill - - 4,068,726 E 4,068,726
---------------- --------------- --------------- ----------------
Total assets 23,426,219 3,187,696 3,663,981 29,977,896
================ =============== =============== ================
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligation - 8,730 - 8,730
Deferred warranty revenue - 260,609 (100,000) F 160,609
Accounts payable and accrued expenses 2,350,230 1,010,649 50,000 B 3,410,879
---------------- --------------- --------------- ----------------
Total current liabilities 2,350,230 1,279,988 (50,000) 3,580,218
---------------- --------------- --------------- ----------------
LONG-TERM LIABILITIES:
Long-term capital lease obligation, net of - 6,796 - 6,796
current portion
Accrued severance pay 3,685,099 - - 3,685,099
Promissory notes - - 1,686,964 C 1,686,964
Subordinated debt to the parent company - 1,804,735 (1,804,735) L -
---------------- --------------- --------------- ----------------
Total long-term liabilities 3,685,099 1,811,531 (117,771) 5,378,859
---------------- --------------- --------------- ----------------
SHAREHOLDERS' EQUITY:
Common stock 315,972 15,000 17,500 G, H $ 348,472
Additional paid-in capital 108,297,346 261,096 3,360,333 G, I 111,918,775
Deferred compensation (18,000) - - (18,000)
Accumulative deficit (86,710,494) (179,919) 153,919 J, K (86,736,494)
Treasury stock (3,537,106) - - (3,537,106)
Notes receivable from stockholders (956,828) - - (956,828)
---------------- --------------- --------------- ----------------
Total shareholders' equity 17,390,890 96,177 3,531,752 21,018,819
---------------- --------------- --------------- ----------------
Total liabilities and shareholders' equity $23,426,219 $ 4,019,762 $ 2,232,986 $ 29,977,896
================ =============== =============== ================
35
PRO FORMA FINANCIAL INFORMATION
ELECTRIC FUEL CORPORATION AND I.E.S. ELECTRONICS INDUSTRIES U.S.A., INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
U.S. DOLLARS
Electric Pro forma
Fuel Corp. I.E.S. Combined
June 30, June 30, Pro forma June 30,
2002 2002 Adjustment Reference 2002
--------------- --------------- ---------------- -------------- ---------------
Statement of Operations Data:
Revenue 1,550,615 2,961,854 - 4,512,469
Cost of revenue 2,184,580 1,414,617 4,122,237
--------------- --------------- ---------------- ---------------
-
Gross profit (loss) (633,965) 1,024,197 390,232
-
Operating expenses:
Research and development, net 1,109,074 64,209 - 1,173,283
Sales and marketing 2,099,609 629,817 - 2,729,426
General and administrative 2,248,104 512,266 - 2,760,370
Amortization of purchased intangible assets - - 525,043 N 525,043
--------------- --------------- ---------------- ---------------
5,456,787 1,206,292 525,043 7,188,122
Income (loss) from operations (6,090,752) (182,095) (525,043) (6,797,890)
Financial income (expenses), net 116,719 2,203 (76,250) M 42,672
--------------- --------------- ---------------- ---------------
Income (loss) before adjustments (5,974,033) (179,892) (601,293) (6,755,218)
--------------- --------------- ---------------- ---------------
Net income (loss) (5,974,033) (179,892) (601,293) (6,755,218)
--------------- --------------- ---------------- ---------------
Basic and diluted net loss per share (0.20) (0.20)
=============== ===============
Weighted average number of shares of
Common Stock used in computation of
basic net loss per share 30,570,107 33,820,107
=============== ===============
36
PRO FORMA FINANCIAL INFORMATION
ELECTRIC FUEL CORPORATION AND I.E.S. ELECTRONICS INDUSTRIES U.S.A., INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
U.S. DOLLARS
Electric Pro forma Pro forma
Fuel Corp. I.E.S. Adjustment References Combined
--------------- --------------- --------------- ------------- ----------------
Statement of Operations Data:
Revenue 4,032,888 3,514,054 - 7,546,942
Cost of revenue 7,053,602 1,832,272 - 8,885,874
--------------- --------------- --------------- ----------------
Gross profit (loss) (3,020,714) 1,681,782 - (1,338,932)
Operating expenses:
Research and development, net 3,512,084 73,919 - 3,586,003
Sales and marketing 6,255,703 1,430,549 - 7,686,252
General and administrative 4,760,866 918,324 - 5,679,190
Amortization of purchased intangible assets - - 1,050,086 N 1,050,086
--------------- --------------- --------------- ----------------
14,528,653 2,422,792 1,050,086 18,001,531
Income (loss) from operations (17,549,367) (741,010) (1,050,086) (19,340,463)
Financial income (expenses), net 262,579 13,561 (152,500) M 123,640
Interest charged by Israeli parent company - (53,430) - (53,430)
Other expense - (15,983) - (15,983)
--------------- --------------- --------------- ----------------
262,579 (55,852) (152,500) 54,227
--------------- --------------- --------------- ----------------
Net loss (17,286,788) (796,862) (1,202,586) (19,286,236)
=============== =============== =============== ================
Basic and diluted net loss per share (0.71) (0.70)
=============== ================
Weighted average number of shares
of Common Stock used in computation
of basic net loss per share 24,200,184 27,450,184
=============== ================
37
ELECTRIC FUEL CORPORATION AND I.E.S. ELECTRONICS INDUSTRIES U.S.A., INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
U.S. DOLLARS
NOTE 1: -
The unaudited pro forma condensed combined financial statements reflect
the purchase of assets and liabilities of I.E.S. Electronics Industries U.S.A.,
Inc. The total purchase price consisted of $3,000,000 in cash, $1,800,000 in
promissory notes (which was recorded at its fair value in amount of $1,686,954)
and $3,653,929 in shares, which represented the market value of 3,250,000 shares
of Electric Fuel's common stock at the date of the closing date. The purchase
price also included $50,000 of transaction costs. The transaction has been
accounted for using the purchase method of accounting, and accordingly, the
purchase price has been allocated to the assets acquired and liabilities assumed
based upon their fair values at the date the acquisition was completed.
The purchase consideration was estimated as follows:
Common Stock (1) $ 3,653,929
Cash consideration 3,000,000
Present value of promissory note 1,686,954
Estimated transaction expenses 50,000
--------------
Total consideration (2) $ 8,390,893
==============
(1) The value of the 3,250,000 shares of EFC's common stock issued upon
the consummation of the acquisition was calculated based on the average
of.closing date.
(2) Based upon a valuation of tangible and intangible assets acquired,
Electric Fuel has allocated the total cost of the acquisition to I.E.S.'s assets
as follows (This allocation is for pro forma purposes only. Actual fair values
will be based on the fair value of the net assets purchased as of July 1, 2002):
June 30,
2002
------------------
Tangible assets acquired $ 2,856,951
Intangible assets
Technology 1,515,000
Existing contracts 46,000
Covenants not to compete 99,000
In process research and development 26,000
Customer list 527,000
Trademarks 439,000
Goodwill 4,068,726
Liabilities assumed (1,186,784)
------------------
Total consideration $ 8,390,893
==================
38
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill arising from acquisitions will not be amortized. In lieu of
amortization, EFC is required to perform an annual and interim impairment
review. If EFC determines, through the impairment review process, that goodwill
has been impaired, it will record the impairment charge in its statement of
operations. EFC will also assess the impairment of goodwill whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. The value of the values assigned to the tangible, intangibles
assets and liabilities was determined as following:
1. To determine the value of the Company's net current assets, net fixed
assets and net liabilities, the Cost Approach was used, which requires
that the assets and liabilities in question be restated to their market
values. Per estimation made, the book values for the current assets and
liabilities were reasonable proxies for their market values.
2. The amount of the excess cost attributable to technology of Range 2000,
3000 and A2Z Systems is $1,515,000 and was determined using the Income
Approach.
3. The value assigned to purchased in-process technology relates to two
projects ("Black Box" and A2Z trainer) valued at $200,000, and $20,000
respectively. The estimated fair value of the acquired in-process
research and development platforms that had not yet reached
technological feasibility and had no alternative future use amounted to
$26,000. Technological feasibility or commercial viability of these
projects was established at the acquisition date. These products were
considered to have no alternative future use other than the
technological indications for which they were in development.
Accordingly, these amounts were immediately expensed in the
consolidated statement of operations on the acquisition date in
accordance with FASB Interpretation No. 4, "Applicability of FASB
Statement No. 2 to Business Combinations Accounted for by the Purchase
Method." The estimated fair values of these platforms were determined
using discounted cash flow models. Projects were estimated to be 4%
complete; estimated costs to completion of these platforms were
approximately $200,000 and $25,000, respectively, and discount rate of
25% was used.
4. The value assigned to the customer list is amounted to $527,000.
Management states that its customers have generally been very loyal to
the Company's products; most present customers will purchase add-ons or
up-grades to their IES simulator systems in the future, and some will
purchase additional warranties for the systems they possess. The
Company's customer list was valued using the Income Approach.
5. The value assigned to the trademarks amounted to $439,000 and was
determined based on the Cost Approach. In doing so, it is assumed that
historical expenditures for advertising are a reasonable proxy for the
future benefits expected from the Trademarks and Trade names.
6. Value of IES's Covenant Not to Compete (CNC) was valued at the amount
of $99,000. One of IES's intangible assets is its covenant not to
compete. Asset Purchase Agreement precludes the former parent company,
and its principals and key employees from competing with IES for five
years from the Valuation Date. According to management, among the
individuals covered by the CNC are the original developers of the Range
2000 and A2Z systems. Estimated CNC's value was determined using the
Income Approach. The estimated value of the CNC is the sum of the
present value of the cash flows that would be lost if the CNC was not
in place. Specifically, the value of the CNC is calculated as the
difference between the projected cash flows if the former parent
company or its principals were to start competing immediately and the
projected cash flows if those parties start competing after five years,
when the CNC expires.
NOTE 2: -
The pro forma condensed combined balance sheet includes the adjustments
necessary to give effect to the acquisition as if it had occurred on June 30,
2002 and to reflect the allocation of the acquisition cost to the fair value of
tangible and intangible assets acquired as noted above, including the
elimination of I.E.S.'s equity account.
39
ELECTRIC FUEL CORPORATION AND I.E.S. ELECTRONICS INDUSTRIES U.S.A., INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
U.S. DOLLARS
The amount of excess cost attributable to in-process research and
development of I.E.S. is estimated to be in the sum of $26,000. This amount will
be recorded as research and development cost during the fiscal quarter in which
the acquisition is consummated. This expense has not been included in the pro
forma combined condensed statements of operations as it does not represent a
continuing expense.
Adjustments included in the pro forma condensed combined balance sheet are
summarized as follows:
(A) Cash consideration paid for I.E.S at the amount of $3,000,000.
(B) Accrued transaction costs at the amount of $50,000.
(C) Issuance of promissory notes to the shareholders of I.E.S., as
part of the consideration presented at the present value at
the amount of $1,686,964.
(D) Valuation of IES' intangible assets allocated to technology,
customer list, existing contracts and covenants not to compete
of $2,652,000.
(E) Valuation of IES' intangible assets allocated to goodwill of
$4,068,726.
(F) Fair value adjustment to I.E.S. deferred revenues.
(G) Issuance of 3,250,000 shares of Common Stock with fair market
value of $3,654,000, $32,500 out of which is allocated to
Common Stock and the remaining amount of $3,621,500 to
Additional paid-in-capital.
(H) Elimination of the I.E.S. Common Stock at the amount of
$15,000.
(I) Elimination of the I.E.S. Additional paid-in-capital at the
amount of $261,096.
(J) Elimination of the I.E.S. Accumulated deficit at the amount of
$179,919
(K) Write-off of acquired in-process research and development at
the amount of $26,000.
(L) Elimination of subordinated debt to the former parent company
of the acquiree, in the amount of $1,804,735.
(M) Interest expenses related to the $3 million acquisition cost
amounted of $76,250 for the six-month period ended June 30,
2002 and $152,500 for the year ended December 31, 2001.
(N) Amortization of intangible assets of $525,043 for the
six-month period ended June 30, 2002 and $1,050,086 for the
year ended December 31, 2001.
(O) Elimination of certificates are not purchased as part of the
agreement at the amount of $330,745.
Pro forma weighted average number of shares used in computing basic and diluted
net loss per share excludes employee stock options outstanding in each period
because they are anti-dilutive.
40
ELECTRIC FUEL CORPORATION AND I.E.S. ELECTRONICS INDUSTRIES U.S.A., INC.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
U.S. DOLLARS
NOTE 3
Amortization of acquired intangible assets is calculated using the
following estimated useful lives:
Years
-----------------
Technology 3.75
Existing contracts 1
Customer list 6
Trademarks and trade names Indefinite
Covenant not to compete 5
Goodwill Not amortized
- - - - - - - - -
41