<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
NO. 1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
-----------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number 1-8707
PEC Israel Economic Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maine 13-1143528
- ------------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
511 Fifth Avenue, New York, New York 10017
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 687-2400
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which Registered
- ---------------------------------------- -----------------------
Common Stock (Par Value $1.00 Per Share) New York Stock Exchange
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
<PAGE>
The aggregate market value of the outstanding Common Stock of the
registrant held by non-affiliates on March 24, 1997 was approximately
$100,288,000. Such aggregate market value was computed on the basis of the
closing price of the Common Stock of the registrant on the New York Stock
Exchange on that date. See Part II, Item 5, "Market for the Registrant's Common
Stock and Related Stockholder Matters."
As of March 24, 1997, 18,508,388 shares of Common Stock were
outstanding.
<PAGE>
The Registrant, PEC Israel Economic Corporation ("PEC" or the
"Company"), hereby (i) amends (A) Item 8 of Part II of PEC's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K") by adding
thereto the financial statements of Scitex Corporation Ltd. as at and for the
year ended December 31, 1996, which begins on the next page and (B) Items
14(a)(2)(c) and 14(a)(2)(d) of Part IV of the 1996 Form 10-K by renumbering such
Items as Items 14(a)(2)(d) and 14(a)(2)(e), respectively, and (ii) inserts the
following as Item 14(a)(2)(c) of Part IV of the 1996 Form 10-K between Item
14(a)(2)(b) and Item 14(a)(2)(d) (as renumbered) of Part IV of the 1996 Form
10-K:
(a)(2)(c) Financial statement schedules filed in response to Item 14(d)
pursuant to Rule 3-09 of Regulation S-X:
Scitex Corporation Ltd. and Subsidiaries:
Report of Independent Auditors.
Consolidated Balance Sheets as at December 31, 1996 and 1995.
Consolidated Statements of Income (Loss) for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.
Notes to the Consolidated Financial Statements.
<PAGE>
SCITEX CORPORATION LTD.
(An Israeli Corporation)
1996 CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
SCITEX CORPORATION LTD.
(An Israeli Corporation)
1996 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 3
Statements of income (loss) 4
Statements of changes in shareholders' equity 5
Statements of cash flows 6-7
Notes to financial statements 8-31
</TABLE>
The amounts are stated in U.S. dollars ($) in thousands.
---------------
-------------------------
---------------
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders of
SCITEX CORPORATION LTD.
We have audited the consolidated balance sheets of Scitex Corporation Ltd. (the
"Company") and its subsidiaries at December 31, 1996 and 1995 and the related
consolidated statements of income (loss), changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's Board of
Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.
Our audits were performed in accordance with generally accepted auditing
standards, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance that the financial statements are free
of material misstatement, whether caused by an error in the financial statements
or by misleading information included therein. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's Board of Directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a fair basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries at December 31, 1996 and 1995 and the results of their operations,
the changes in shareholders' equity and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel Kesselman & Kesselman
Certified Public Accountants (Isr.)
February 13, 1997
(except for notes 9b(2) and (3), as to
which the date is March 11)
2
<PAGE>
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995
------- -------
U. S. dollars in thousands
--------------------------
<S> <C> <C>
Assets
CURRENT ASSETS (note 14):
Cash and cash equivalents 90,050 92,326
Short-term investments 45,103 62,480
------- -------
T o t a l cash and short-term investments 135,153 154,806
Trade receivables (net of allowance
for doubtful accounts of $ 52,252,000 at
December 31, 1996 and $ 45,900,000 at
December 31, 1995) 155,493 298,974
Other receivables 34,783 33,403
Inventories:
Systems and components (note 3) 118,826 121,716
Spare parts and supplies 57,577 58,706
Prepaid expenses 5,993 4,883
Deferred income taxes (note 12d) 15,763 30,542
------- -------
T o t a l current assets 523,588 703,030
INVESTMENTS AND OTHER NON-CURRENT
ASSETS (notes 4 and 14) 15,114 17,892
PROPERTY, PLANT AND EQUIPMENT (note 5):
Cost 256,040 250,412
L e s s - accumulated depreciation and amortization 170,118 152,042
------- -------
85,922 98,370
GOODWILL AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization (note 6) 80,110 101,539
------- -------
704,734 920,831
------- -------
------- -------
</TABLE>
s/ D. TADMOR ) Chairman of the Board
----------------------- ) of Directors
Dov Tadmor
s/ Y. CHELOUCHE ) President, Chief Executive
----------------------- ) Officer and Director
Yoav Z. Chelouche
3
<PAGE>
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995
-------- --------
U. S. dollars in thousands
--------------------------
<S> <C> <C>
Liabilities and shareholders' equity
CURRENT LIABILITIES (note 14):
Short-term bank credit and current maturities
of long-term liabilities 826 2,386
Trade payables 50,457 61,452
Accrued liabilities and other (note 7) 152,228 155,588
-------- --------
T o t a l current liabilities 203,511 219,426
LONG-TERM LIABILITIES, net of current maturities (note 14) 496 424
-------- --------
T o t a l liabilities 204,007 219,850
COMMITMENTS AND CONTINGENT LIABILITIES (note 9)
SHAREHOLDERS' EQUITY (note 10):
Ordinary shares of NIS 0.12 par value
(authorized - December 31, 1996 and 1995 -
48,000,000 shares; issued and outstanding -
December 31, 1996 and 1995 - 42,808,518 shares) 6,187 6,187
Capital surplus 359,577 360,891
Currency translation adjustments 1,130 888
Unrealized loss on marketable securities
available for sale (note 4(b)) (10,061) (5,853)
Retained earnings 143,894 338,868
-------- --------
T o t a l shareholders' equity 500,727 700,981
-------- --------
704,734 920,831
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
U.S. dollars in thousands
(except per share data)
--------------------------------
<S> <C> <C> <C>
REVENUES (note 15a):
Sales 520,264 576,410 576,475
Service 123,434 117,745 103,398
Supplies 51,350 36,132 24,265
-------- -------- --------
T o t a l revenues 695,048 730,287 704,138
COST OF REVENUES:
Cost of sales 316,769 306,681 252,527
Cost of service 123,795 98,785 72,294
Cost of supplies 23,383 16,548 11,319
-------- -------- --------
T o t a l cost of revenues 463,947 422,014 336,140
-------- -------- --------
GROSS PROFIT 231,101 308,273 367,998
RESEARCH AND DEVELOPMENT COSTS -
net (note 15b) 72,795 73,662 73,258
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (note 15c) 270,562 254,570 214,205
AMORTIZATION OF GOODWILL AND OTHER
INTANGIBLE ASSETS) 16,221 12,347 9,454
RESTRUCTURING COSTS (note 11) 56,100 22,000
-------- -------- --------
OPERATING INCOME (LOSS) (184,577) (54,306) 71,081
FINANCIAL INCOME - net (note 15d) 4,683 9,929 5,465
OTHER INCOME (EXPENSES) - net (239) (2,475) 2,774
-------- -------- --------
INCOME (LOSS) BEFORE TAXES ON INCOME (180,133) (46,852) 79,320
TAXES ON INCOME (TAX BENEFIT) (note 12) (1,700) (13,464) 11,736
SHARE IN INCOME (LOSSES) OF EQUITY
INVESTMENTS - net (note 4) 154 (1,123) (3,834)
-------- -------- --------
NET INCOME (LOSS) (178,279) (34,511) 63,750
-------- -------- --------
-------- -------- --------
EARNINGS (LOSS) PER SHARE (note 1n) $ (4.16) $ (0.81) $ 1.49
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - IN THOUSANDS (note 1n) 42,809 42,800 42,762
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized loss on
Ordinary Capital Currency marketable Retained Total
shares surplus translation securities available earnings shareholders'
adjustments for sale (note 10c) equity
-------- ------- ----------- -------------------- ---------- -------------
U. S. dollars in thousands
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 6,181 355,598 341 354,139 716,259
CHANGES DURING 1994:
Net income 63,750 63,750
Employee stock options exercised and paid 6 *640 646
Surplus arising from employee stock options 1,427 1,427
Currency translation adjustments 194 194
Unrealized loss on marketable securities
available for sale (10,289) (10,289)
Dividend ($ 0.52 per share) (22,252) (22,252)
------ ------- ----- ------- ------- -------
BALANCE AT DECEMBER 31, 1994 6,187 357,665 535 (10,289) 395,637 749,735
CHANGES DURING 1995:
Loss (34,511) (34,511)
Employee stock options exercised and paid *366 366
Surplus arising from employee stock options 2,860 2,860
Currency translation adjustments 353 353
Unrealized gain on marketable securities
available for sale 4,436 4,436
Dividend ($ 0.52 per share) (22,258) (22,258)
------ ------- ----- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 6,187 360,891 888 (5,853) 338,868 700,981
CHANGES DURING 1996:
Loss (178,279) (178,279)
Elimination of surplus in respect of
employee stock options due to forfeiture,
net of surplus arising from employee stock
options (1,314) (1,314)
Currency translation adjustments 242 242
Unrealized loss on marketable securities
available for sale (4,208) (4,208)
Dividend ($ 0.39 per share) (16,695) (16,695)
------ ------- ----- ------- ------- -------
BALANCE AT DECEMBER 31, 1996 6,187 359,577 1,130 (10,061) 143,894 500,727
------ ------- ----- ------- ------- -------
------ ------- ----- ------- ------- -------
</TABLE>
* Net of share issuance expenses.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
(Continued - 1)
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------
1996 1995 1994
-------- -------- --------
U.S dollars in thousands
---------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (178,279) (34,511) 63,750
Adjustments to reconcile net income or loss to net
cash provided by or used in operating activities:
Share in losses (income) and write off of equity
investments - net (155) 5,387 3,834
Depreciation and amortization 49,196 43,359 34,500
Acquired in-process research and development 7,766
Gain on sale of equity investments (3,103)
Compensation expense (income) resulting from
employee stock options (1,314) 663 1,427
Gain on sale and increase in value of short-term
investments - net (893) (5,279) (1,088)
Deferred income taxes - net 12,882 (12,810) (4,747)
Loss on disposal of fixed assets 8,424
Provision for impairment of intangible assets 18,200
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables
(including non-current portion) 145,976 (27,662) (24,280)
Decrease (increase) in other receivables (1,380) (16,043) 5,482
Increase (decrease) in trade payables (10,995) 2,461 (3,438)
Increase (decrease) in accrued liabilities and (1,495) 17,902 17,522
other
Decrease (increase) in inventories 2,077 (7,078) (33,098)
Decrease (increase) in prepaid expenses (1,110) 830 (709)
Other items - net 753 486 (228)
-------- -------- --------
Net cash provided by (used in) operating activities 41,887 (32,295) 63,590
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of consolidated subsidiaries * (50,737) (21,374)
Additional amount paid in respect of acquisition of
consolidated subsidiary (7,000) (7,000) (7,000)
Purchase of property, plant and equipment (31,176) (39,515) (36,515)
Proceeds from sale of fixed assets 2,224 3,254 2,566
Purchase of intangible assets (6) (146) (219)
Equity and other investments (2,815) (4,806)
Sale of equity investments 4,187
Purchase of short-term investments (27,431) (396,678) (367,488)
Sale of short-term investments 45,701 470,078 365,422
-------- -------- --------
Net cash used in investing activities (20,503) (20,744) (65,227)
-------- -------- --------
Subtotal - forward 21,384 (53,039) (1,637)
</TABLE>
6
<PAGE>
(Concluded - 2)
SCITEX CORPORATION LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1996 1995 1994
-------- -------- --------
U.S dollars in thousands
----------------------------------
<S> <C> <C> <C>
Subtotal - brought forward 21,384 (53,039) (1,637)
CASH FLOWS FROM FINANCING ACTIVITIES:
Employee stock options exercised and paid 366 646
Increase in long-term liabilities 627 70
Discharge of long-term liabilities (347) (40) (105)
Increase (decrease) in short-term bank credit (1,679) 1,551 (308)
Dividends paid (22,261) (22,256) (22,239)
-------- -------- --------
Net cash used in financing activities (23,660) (20,309) (22,006)
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,276) (73,348) (23,643)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 92,326 165,674 189,317
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 90,050 92,326 165,674
-------- -------- --------
-------- -------- --------
* Acquisition of consolidated subsidiaries:
Working capital (excluding cash and cash equivalents) 3,370 2,378
Property, plant and equipment - net 3,667 916
Goodwill and other intangible assets - net 42,977 10,314
Investments and other non-current assets 723
Acquired in-process research and development 7,766
-------- --------
50,737 21,374
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - cash paid during the year for:
Interest 2,271 3,883 2,724
-------- -------- --------
-------- -------- --------
Income taxes 7,795 12,497 17,277
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
SCITEX CORPORATION LTD.
(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies, applied on a consistent basis, are
as follows:
a. General:
1) Nature of Operations
Scitex Corporation Ltd. (the "Company") is an Israeli
corporation which designs, manufactures and markets digital
visual information communication systems for the graphic
arts, printing and video markets.
2) Functional currency
The currency of the primary economic environment in which the
operations of the Company and most of its subsidiaries are
conducted is the U.S. dollar ("dollar"); thus, the dollar is
the functional currency of the Company and most of its
subsidiaries.
For the Company and its subsidiaries whose functional
currency is the dollar, transactions and balances denominated
in dollars are presented at their original amounts. Gains and
losses arising from non-dollar transactions and balances are
included in the determination of net income or loss.
The financial statements of certain subsidiaries and an
entity in which the Company has an equity investments, whose
functional currency is their local currency, are translated
into dollars in accordance with the principles set forth in
Statement No. 52 of the Financial Accounting Standards Board
of the United States ("FASB") - "Foreign Currency
Translation". Assets and liabilities are translated using
year end rate of exchange; results of operations are
translated at average exchange rates. The resulting aggregate
translation adjustments are reported as a component of
shareholders' equity.
Condensed nominal Israeli currency data are presented in note
17.
8
<PAGE>
3) Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenue and
expenses during the reporting years. However, the Company
participates in highly competitive markets that are
characterized by aggressive pricing practices, downward
pressures on gross margins, short product life cycles, rapid
technological advances, variable demand patterns on the part
of consumers, and changes in the creditworthiness of the
Company's customer base. As a result of the dynamic nature of
the Company's principal markets, it is at least reasonably
possible that the estimates used by the Company to determine
its various reserves will be materially different from the
actual amounts or results, which could have a materially
adverse effect on the Company's results of operations and
financial condition in the near term.
4) Accounting principles
The financial statements are prepared in accordance with US
GAAP.
b. Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned.
Intercompany balances and transactions have been eliminated.
c. Cash equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Bank deposits with a maturity of more than three months but less
than one year are included in short-term investments.
d. Investments in marketable securities
Marketable securities classified as "trading securities" are
stated at market value. The change in market value of these
securities is included in financial income or expenses.
An investment in quoted shares of a company, classified as
"available for sale securities" is stated at market value. The
difference between the market value of the shares and their cost
is recorded as a separate component of shareholders' equity.
9
<PAGE>
e. Inventories
Inventories are valued at the lower of cost or market. Cost is
determined as follows: components and supplies - on the moving
average basis; labor and overhead - on the basis of actual
manufacturing costs.
f. Equity investments
These investments are accounted for by the equity method.
g. Property, plant and equipment
These assets are stated at cost and are depreciated by the
straight-line method over their estimated useful life.
Annual rates of depreciation are as follows:
<TABLE>
<CAPTION>
%
-----
<S> <C>
Machinery and equipment 10-33 (mainly 20)
Building 4
Office furniture and equipment 6-20 (mainly 20)
Motor vehicles 15-25 (mainly 15)
</TABLE>
Leasehold improvements are amortized by the straight-line method
over the term of the lease or the estimated useful life of the
improvements, whichever is shorter.
h. Goodwill and other intangible assets
Goodwill, representing the difference between the cost of the
investment in consolidated subsidiaries and the fair value of
their underlying net assets at the time of acquisition, and
acquired goodwill are amortized by the straight-line method over a
period of 5-15 years (mainly 7-10 years).
Acquired technology and other intangible assets are amortized by
the straight-line method over a period of 3-13 years (mainly 3-5
years).
The Company examines the realizability of goodwill and other
intangible assets and the appropriateness of their amortization
periods, based on the estimated future undiscounted cash flows
derived from those assets. Any impairment loss is recognized in
the income statement.
i. Recognition of revenue:
1) Sale of systems
The Company recognizes revenue from sale of its products upon
shipment. Cost of sales includes an estimate of costs
associated with installation, warranty and training.
10
<PAGE>
2) Service revenue
Service revenue is recognized ratably over the contractual
period or as services are performed.
3) Sale of supplies
The Company recognizes revenue from sale of supplies upon
shipment.
j. Research and development
Research and development costs are charged to income as incurred.
Participation received for development of approved projects is
recognized as a reduction of expenses as the related cost is
incurred (see also note 9a(1)).
k. Allowance for doubtful accounts
The allowance is partly determined for specific accounts doubtful
of collection and partly based on statistical analysis of past
experience.
l. Income taxes
Deferred income taxes are provided for temporary differences
between the assets and liabilities as measured in the financial
statements and for tax purposes, at the tax rates expected to be
in effect when these differences reverse.
The Company may incur an additional tax liability in the event of
an intercompany dividend distribution; no additional tax has been
provided, since it is the Company's policy not to distribute
dividends which would result in additional tax liability.
Taxes which would apply in the event of disposal of investments in
subsidiaries and other investees have not been taken into account
in computing the deferred taxes, as it is the Company's policy to
hold these investments for the long term.
m. Derivatives
Gains and losses on hedges of existing assets or liabilities are
recognized in income commensurate with the results from those
assets or liabilities. Gains and losses related to qualifying
hedges of firm commitments or anticipated transactions are
deferred and included as part of the measurement of the results of
the underlying hedged transactions.
n. Earnings (loss) per share
Earnings (loss) per share are computed based on the weighted
average number of shares outstanding during each year. Stock
options under key employee share incentive and stock option plans
have been excluded from the computation because the dilutive
effect of such options is immaterial.
11
<PAGE>
o. Reclassification
Certain prior years' amounts have been reclassified to conform
with the 1996 presentation.
NOTE 2 - ACQUISITIONS:
One. In September 1995, the Company acquired all of the shares of Abekas
Video Systems, Inc., a U.S. corporation, and substantially all of the
assets and certain liabilities of Abekas Video Systems Ltd., a U.K.
corporation (hereafter collectively - Abekas) for an aggregate
consideration of $ 51,432,000 in cash (including $ 1,432,000 - costs
related to the acquisition).
An amount of $ 42,977,000 out of the total acquisition cost was attributed to
goodwill and other intangible assets and is being amortized over their estimated
useful lives.
In October 1995, Abekas (which develops, manufactures and markets video
manipulation devices used in high-end video postproduction and broadcast
applications) was merged into Scitex Digital Video, Inc. (hereafter -SDV) - a
wholly-owned subsidiary in the U.S., formerly known as ImMIX, Inc. (see b.
below).
Two. In September 1994, the Company acquired all of the operations of the
ImMIX division of a U.S. corporation (which consist of the development,
manufacturing and marketing of non-linear digital video editing
systems) in consideration of $ 21,607,000 in cash (including
$607,000-costs related to the acquisition).
An amount of $ 7,766,000 out of the total acquisition cost was attributed to
in-process research and development. Upon acquisition, the technological
feasibility of the in-process research and development had not yet been
established and the technology being developed had no alternative future use.
Therefore, the amount was charged to research and development costs. An amount
of $10,314,000 was attributed to goodwill and other intangible assets and is
being amortized over their estimated useful lives.
NOTE 3 - INVENTORIES - SYSTEMS AND COMPONENTS:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
------- -------
$ in thousands
-------------------
<S> <C> <C>
Components for manufacturing of systems 53,932 44,320
Work in process 14,553 21,826
Finished products 50,341 55,570
------- -------
118,826 121,716
------- -------
------- -------
</TABLE>
12
<PAGE>
NOTE 4 - INVESTMENTS AND OTHER NON-CURRENT ASSETS:
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
------ ------
$ in thousands
------------------
<S> <C> <C>
Equity investments:
Joint venture company (a) 3,442 3,799
Other 1,709
Available for sale investment (b) 4,778 8,986
Non-current receivables 1,095 3,933
Deferred income taxes (note 12d) 2,035 225
Limited partnership - related party - at cost 650
Shares at cost and other 2,055 299
------ ------
15,114 17,892
------ ------
------ ------
</TABLE>
(a) Joint venture company:
1) This item represents an investment in a 50%-owned joint
venture company in Japan, composed as follows:
<TABLE>
<CAPTION>
December 31
----------------
1996 1995
----- -----
$ in thousands
----------------
<S> <C> <C>
Cost 1,922 1,922
Cumulative currency translation
adjustments 1,892 2,404
Cumulative share in losses - net (372) (527)
----- -----
3,442 3,799
----- -----
----- -----
</TABLE>
2) The Company has provided guarantees for bank credit received
by the joint venture company - $ 13.5 million at December 31,
1996 and 1995.
(b) Available for sale investment
The Company owns shares in Truevision, Inc. (hereafter-
Truevision), a U.S. corporation, purchased in a private placement
and through a market transaction for a total consideration of
$14,839,000. The shares are traded in the United States. The
investment, stated at market value, represents approximately 14%
and 15% of Truevision's ordinary share capital at December 31,
1996 and 1995, respectively.
13
<PAGE>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Grouped by major classifications, the assets are composed as follows:
<TABLE>
<CAPTION>
Accumulated depreciation and
C o s t amortization
----------------- ----------------------------
December 31 December 31
----------------- ----------------------------
1996 1995 1996 1995
------- ------- ------- -------
$ in thousands $ in thousands
----------------- ----------------------------
<S> <C> <C> <C> <C>
Machinery and equipment 185,284 187,732 126,658 115,196
Building (including land) 8,755 8,755 1,364 1,086
Leasehold improvements 27,160 24,977 22,369 19,705
Office furniture and equipment 30,140 23,988 17,248 13,559
Motor vehicles 4,701 4,960 2,479 2,496
------- ------- ------- -------
256,040 250,412 170,118 152,042
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Depreciation and amortization of property, plant and equipment totaled
$ 32,975,000, $ 30,433,000 and $ 24,308,000 in 1996, 1995 and 1994,
respectively.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
December 31
-----------------
1996 1995
------- -------
$ in thousands
-----------------
<S> <C> <C>
Original amount:
Goodwill in consolidated subsidiaries and
acquired goodwill *98,704 112,709
Acquired technology and other intangible
assets 20,509 26,010
------- -------
119,213 138,719
L e s s - accumulated amortization:
Goodwill in consolidated subsidiaries and
acquired goodwill *30,109 31,432
Acquired technology and other intangible
assets 8,994 5,748
------- -------
39,103 37,180
------- -------
80,110 101,539
------- -------
------- -------
</TABLE>
* In 1996, an amount of $ 18,200,000 - representing the amortized balance of
goodwill arising from the acquisition of a subsidiary - was written off (see
also note 1m). The amount of write-off was included among restructuring
costs as detailed in note 11.
14
<PAGE>
NOTE 7 - ACCRUED LIABILITIES AND OTHER:
<TABLE>
<CAPTION>
December 31
----------------
1996 1995
------- -------
$ in thousands
----------------
<S> <C> <C>
Employees and related liabilities 27,766 32,999
Taxes on income, net of advances 7,296 20,675
Advances from customers 11,285 13,132
Allowance in respect of sales financed
by third parties (see note 9b(1)) 20,933 12,604
Accrued restructuring costs (see note 11) 23,124 12,182
Other accrued expenses and sundry 61,824 63,996
------- -------
152,228 155,588
------- -------
------- -------
</TABLE>
NOTE 8 - EMPLOYEE RIGHTS UPON RETIREMENT:
One. Virtually the entire liability for severance pay for Israeli employees,
pursuant to Israeli law and employment agreements, is funded with
severance pay and pension funds and with policies issued by insurance
companies (principally with an affiliate of two of the major
shareholders of the Company) for which the Company makes monthly
payments. Since the control and management of these funds is
independent of the Company, the amounts funded are not reflected in the
balance sheets. The amounts not funded as above are included among
accrued liabilities.
Two. The U.S. subsidiaries offer a 401(k) matching plan to all eligible
employees. The U.S. subsidiaries' matching contribution ranges from 50%
to 200% of a participant's contribution, depending upon years of
service, up to a maximum of 3% of a participant's qualifying earnings.
Three. Substantially all of the European subsidiaries make contributions to
pension plans administered by insurance companies. Since the control
and management of these funds are independent of the European
subsidiaries, the amounts funded are not included in the balance
sheets. The amounts not funded are included among accrued liabilities.
Four. Severance pay, pension and defined contribution plan expenses totaled
$ 16,414,000, $ 18,130,000 and $ 17,090,000 in 1996, 1995 and 1994,
respectively. In addition, employee termination benefits in the amounts
of $ 18,000,000 and $ 17,000,000 in 1996 and 1995, respectively, were
included in restructuring costs (see note 11).
15
<PAGE>
NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES:
One. Commitments:
1) Royalty commitments:
(a) The Company is committed to pay royalties to the Government
of Israel on proceeds from sale of products in the research
and development of which the Government participates by way
of grants, up to the amount of the grants received (in
dollar terms); for certain projects, which were approved
prior to January 1, 1994, the limit is up to 150% of the
grants received. At the time the participations were
received, successful development of the related projects was
not assured. Through December 31, 1995, royalty rates varied
from 2% to 3%. As from January 1, 1996, under the Research
and Development Encouragement Regulations which were
published in June 1996, the royalty rates were changed to
3%-6%.
At December 31, 1996, the maximum contingent royalty payable
is $43 million.
(b) The Company is obligated to pay royalties to certain parties,
based on agreements which allow it to use technologies
developed by these parties. Such royalties are based on the
revenues from sales of products which incorporate these
technologies or on quantities of such products sold.
2) Lease commitments
Most of the premises occupied by the Company and its subsidiaries
are rented under various lease agreements. Most of the premises in
Israel are leased from an affiliate of two of the major
shareholders of the Company.
Minimum lease commitments of the Company and its subsidiaries
under the above leases (net of amounts provided in "accrued
restructuring costs") at rates in effect in December 1996,
are as follows:
<TABLE>
<CAPTION>
$ in thousands
-------------------
<S> <C> <C>
Year ending December 31:
1997 13,262
1998 10,059
1999 8,244
2000 7,345
2001 7,342
2002 and thereafter 34,716
</TABLE>
The rental payments for the premises in Israel, which
constitute approximately 26% of the above amounts, are
payable in Israeli currency linked partially to the Israeli
consumer price index (hereafter - the Israeli CPI), and
partially to the dollar.
16
<PAGE>
Rental expense totaled $ 16,523,000, $ 14,499,000 and $
13,436,000 in 1996, 1995 and 1994, respectively; in 1996, an
additional amount of $ 9,600,000 is included in restructuring
costs (see Note 11).
Two. Contingent liabilities:
1) Certain subsidiaries of the Company have entered into agreements
with third-party financing companies (hereafter - the agreements)
under which long-term financing (generally five years) is provided
to customers in connection with the purchase of the Company's
equipment.
Under the terms of the agreements, the third-party financing
companies have recourse against the subsidiaries in an amount
equal to either a fixed amount established at the time of
financing or a percentage of the outstanding balance,
including interest, owed by the customers to the financing
company. Commencing 1996, the Company provides letters of
credit to the major financing company in amounts equivalent
to 30% of the original amount of the transactions.
During the years ended December 31, 1996, 1995 and 1994,
approximately $ 90,500,000, $ 113,200,000 and $ 148,800,000,
respectively, of revenues were financed under these
agreements. At December 31, 1996, the subsidiaries were
contingently liable to the financing companies for
approximately 16%-20% of the outstanding balance of $ 247
million, subject to estimated default rates, remarketing
proceeds and other factors, as described in the agreements.
The subsidiaries have established provisions ($ 20,933,000
and $ 12,604,000 at December 31, 1996 and 1995, respectively)
for potential losses which may be incurred in the event of
default under the agreements. The level of provisions is
determined based upon an analysis of the individual
transactions and past experience.
2) The Company and certain of its present and former officers and
directors are defendants in a class action lawsuit, filed in
December 1995 in the United States, alleging violations of certain
provisions of federal securities law with respect to certain
reports of the Company's results of operations during the period
May 1994 to November 1995. The Company has and continues to
believe that the claims asserted have no merit.
In March 1997, the Company entered into a settlement, subject
to court approval, a substantial portion of which would be
covered by its insurance carrier. The settlement, net of
insurance coverage, is not material and has been accrued in
the accompanying financial statements.
17
<PAGE>
3) In April and May of 1996, four lawsuits with similar allegations
(which purport to be class actions) were filed against the
Company, a number of the Company's current and former directors
and certain other individuals. The suits generally allege that the
defendants breached fiduciary duties to the Company's shareholders
in responding to a purported offer to buy the Company. The Company
has and continues to believe that the claims asserted have no
merit.
In March 1997, the Company entered into a settlement, subject
to court approval, for the payment of the plaintiffs' legal
fees and expenses, a substantial portion of which would be
covered by its insurance carrier, as well as agreement to
certain other conditions regarding the composition of the
Board of Directors and committees thereof. The settlement,
net of insurance coverage, is not material and has been
accrued in the accompanying financial statements.
4) Lawsuits have been lodged against the Company in the ordinary
course of business. The Company intends to defend itself
vigorously against those lawsuits. Management does not expect that
the Company will incur substantial expenses in respect thereof;
therefore, no provision has been made for the lawsuits.
NOTE 10 - SHAREHOLDERS' EQUITY:
One. Authorized, issued and outstanding shares:
1) The Company's shares are traded in the United States on The Nasdaq
Stock Market under the symbol SCIXF.
2) The number of shares stated as issued and outstanding (42,808,518
ordinary shares at December 31, 1996 and 1995) does not include
unpaid 43,950 ordinary shares - which were allotted to a trustee
in the implementation of a share option plan. These shares, until
paid, have no voting rights or rights to cash dividends and
accordingly are not treated as outstanding for accounting
purposes.
Two. Share incentive and stock option plans:
1) The Company has two current share incentive and stock option plans
- the Scitex Israel Key Employee Share Incentive Plan 1991, mainly
for officers and other key employees of the Company, and the
Scitex International Key Employee Stock Option Plan 1991 (As
Amended, 1995), mainly for officers and other key employees of
non-Israeli subsidiaries. Option awards may be granted under the
Plans up to September 2001. The maximum term of an option may not
exceed ten years.
The exercise price per share under each plan is determined by
a committee, which consists of members of the Board of
Directors, subject to guidelines determined by the Board.
18
<PAGE>
The difference, if any, between the quoted market price of
the shares on the date of the award of the options and the
exercise price of such options is charged to income over the
expected service periods (usually - four years). The amount
of the difference is correspondingly credited to capital
surplus.
2) The Company accounts for its share incentive and stock option
plans (the "plans") using the treatment prescribed by Accounting
Principles Board Opinion No. 25 - "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, compensation cost for
employee stock option plans is measured using the intrinsic value
based method of accounting.
In October 1995, the FASB issued Statement No. 123 -
"Accounting for Stock-Based Compensation" ("SFAS 123"). This
Statement, effective as of the 1996 financial statements,
established a fair value based method of accounting for an
employee stock option or similar equity instrument, and
encourages adoption of such method of accounting for stock
compensation plans. However, it also allows companies to
continue to account for those plans using the accounting
treatment prescribed by APB 25.
The Company has elected to continue applying the provisions
of APB 25 and has accordingly complied with the disclosure
requirements set forth in SFAS 123 for companies electing to
apply APB 25.
Had compensation cost for the Company's plans been determined
based on the fair value at the grant dates for awards granted
during 1996 (in 1995 no awards were granted) under the plans
consistent with the method of SFAS 123, the Company's loss
and loss per share for 1996 would have increased to the
pro-forma amounts indicated below:
<TABLE>
<CAPTION>
As reported Pro-forma
----------- ---------
<S> <C> <C>
Loss - in thousands of dollars (178,279) (180,124)
----------- ---------
----------- ---------
Loss per share - in dollars (4.16) (4.21)
----------- ---------
----------- ---------
</TABLE>
3) The total number of options authorized under the plans is as
follows:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1995
--------- ---------
Number of options
---------------------
<S> <C> <C>
Available for future awards 1,299,750 1,972,525
Granted 2,389,350 1,716,575
Exercised and paid 60,900 60,900
--------- ---------
3,750,000 3,750,000
--------- ---------
--------- ---------
</TABLE>
19
<PAGE>
The options granted are exercisable in purchase of shares as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995
--------- ---------
Number of shares
----------------------
<S> <C> <C>
At balance sheet date 907,261 902,649
During first year thereafter 691,100 461,398
During second year thereafter 179,864 289,228
During third year thereafter 502,311 63,300
During fourth year thereafter 108,814
--------- ---------
2,389,350 1,716,575
--------- ---------
--------- ---------
</TABLE>
The rights to exercise options are generally conditional upon
continuous employment by the Company.
4) A summary of the status of the Company's plans at December 31,
1996, 1995 and 1994, and changes during the years ended on those
dates, is presented below:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------------
1996 1995 1994
-------------------- ------------------ --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Number price Number price Number price
---------- --------- --------- --------- --------- ---------
$ $ $
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,716,575 20.75 1,970,975 20.75 1,873,800 21.53
Changes during the year:
Granted 1,596,250 14.72 500,250 18.31
Exercised (19,000) 19.75
Forfeited (923,475) 18.86 (235,400) 20.83 (403,075) 21.31
--------- ------ --------- ------ --------- ------
Options outstanding at end
of year 2,389,350 17.46 1,716,575 20.75 1,970,975 20.75
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
Options exercisable at end
of year 907,261 20.84 902,649 21.89 325,390 23.05
--------- ------ --------- ------ --------- ------
--------- ------ --------- ------ --------- ------
</TABLE>
The weighted average fair value of options granted during
1996 is $ 3.22
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: dividend yield of
$ 0.39 per share for all years (based on the actual 1996
dividend); expected volatility of 14.44%; risk-free interest
rates of 5.5%; and expected lives of 2.17 years.
20
<PAGE>
5) The following table summarizes information about options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------- ------------------------
Range of Number Weighted Weighted Number Weighted
exercise outstanding at average remaining average exercisable at average
prices December 31, contractual life exercise December 31, exercise
1996 price 1996 price
- --------------- --------------- ----------------- --------- -------------- ---------
$ years $ $
<S> <C> <C> <C> <C> <C>
14 to 15 1,269,250 9.1 14.72 23,500 14.38
17 to 20 885,150 7.2 19.18 648,811 19.30
25 to 26 234,950 5.1 25.73 234,950 25.73
--------- -------
2,389,350 8.0 17.46 907,261 20.84
--------- -------
--------- -------
</TABLE>
Three. Retained earnings
The distribution of cash dividends in the amount of approximately
$ 126,000,000 out of retained earnings of $ 143,894,000 as of December
31, 1996 would subject the Company to payment of 15% or 20% tax on the
amount distributed, effectively reducing the dividend distribution by
the amount of the tax (see note 12a(1)).
NOTE 11 - RESTRUCTURING COSTS
In 1996 and 1995, the Company recorded restructuring charges of $ 56.1
million and $ 22.0 million, respectively. The restructuring consisted
of a series of planned actions within the Graphic Arts Group (the
"Group") to address changes in market conditions and were aimed at
restoring the Group to profitability. The 1995 restructuring charge
primarily involved a workforce reduction of approximately 250
employees. The 1996 charge consists of a planned workforce reduction of
approximately 400 employees (mainly in the U.S., Europe and Israel),
the closing of certain facilities in the U.S. and Europe and the
disposition of assets that are no longer required due to changes in
plans. In addition, goodwill impairment was recognized for the effect
of decisions regarding certain product lines. Most of the restructuring
activities are expected to be completed during 1997.
The components of the 1996 and 1995 restructuring charges are as
follows:
<TABLE>
<CAPTION>
Year ended
December 31
----------------
1996 1995
------ ------
$ in thousands
----------------
<S> <C> <C>
Employee termination benefits 18,000 17,000
Facility closure and excess
purchase commitments 12,200
Goodwill impairment 18,200
Other asset write downs 7,700 5,000
------ ------
56,100 22,000
------ ------
------ ------
</TABLE>
21
<PAGE>
Movement in accrued restructuring costs during 1995 and 1996 was as
follows:
<TABLE>
<CAPTION>
Employee Facility
termination closure
benefits and other Total
----------- --------- -------
$ in thousands
----------------------------------
<S> <C> <C> <C>
1995:
Restructuring charges 17,000 17,000
Payments during 1995 (4,818) (4,818)
------- -------
Balance at December 31, 1995 12,182 12,182
1996:
Restructuring charges 18,000 12,200 30,200
Payments during 1996 (16,740) (1,118) (17,858)
Adjustments (1,400) (1,400)
------- ------ -------
Balance at December 31, 1996 13,442 9,682 23,124
------- ------ -------
------- ------ -------
</TABLE>
Although the Company believes that the restructuring activities were
necessary, no assurance can be given that these restructuring actions
will be successful or that similar actions will not be required in the
future.
NOTE 12 - TAXES ON INCOME:
One. The Company and its Israeli subsidiaries:
1) Tax benefits under the Law for the Encouragement of Capital
Investments, 1959
The Company's production facilities in Israel have been
granted "approved enterprise" status under the above law. The
main benefit arising from such status is the reduction in tax
rates on income derived from "approved enterprises". The
Company is also a "foreign investors' company" as defined by
that law and as such is entitled to a ten-year period of
benefits and to an additional reduction in tax rates to 15%
or 20% (based on the percentage of foreign shareholding in
each tax year).
For "approved enterprises", income derived therefrom is tax
exempt for a period of four years out of the ten-year period
of benefits. Based on the percentage of foreign shareholding
in the Company, income derived during the remaining six years
of benefits is taxable at the rate of 15% or 20% (as
described above). The period of benefits relating to the
"approved enterprises" will expire in the years 1997 through
2001.
22
<PAGE>
In the event of distribution of cash dividends from income
which was tax exempt as above, the Company would have to pay
the 15% or 20% tax in respect of the amount distributed.
The approved portion of production facilities of the Company
approximates 74% in 1996, 76% in 1995, and 89% in 1994.
The entitlement to the above benefits is conditional upon the
Company's fulfilling the conditions stipulated by the above
law, regulations published thereunder and the instruments of
approval for the specific investments in "approved
enterprises". In the event of failure to comply with these
conditions, the benefits may be cancelled and the Company may
be required to refund the amount of the benefits, in whole or
in part, with the addition of interest.
2) Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985 (hereafter - the Inflationary
Adjustments Law)
Under this law, results for tax purposes are measured in real
terms, in accordance with the changes in the Israeli CPI, or
in the exchange rate of the dollar for a "foreign investment
company". The Company and its Israeli subsidiaries elected to
measure their results on the basis of the changes in the
Israeli CPI.
3) Tax benefits under the Law for the Encouragement of Industry
(Taxes), 1969
The Company is an "industrial company" as defined by this law
and as such is entitled to certain tax benefits, mainly
accelerated depreciation of machinery and equipment as
prescribed by regulations published under the Inflationary
Adjustments Law, the right to claim public issuance expenses
and amortization of patents and other intangible property
rights as a deduction for tax purposes.
4) Tax rates applicable to income from other sources in Israel
Income not eligible for "approved enterprise" benefits
mentioned in (1) above is taxed at the regular rate: 1996 and
thereafter - 36%; 1995 - 37%; 1994 - 38%.
Two. Non-Israeli subsidiaries:
1) Non-Israeli subsidiaries are taxed based upon tax laws in their
countries of residence.
2) The U.S. subsidiaries file a consolidated tax return in the United
States. Therefore, the tax provision is calculated on a
consolidated tax return basis.
Three. Carryforward tax losses and deductions
Carryforward tax losses and deductions of the Company and its
subsidiaries approximated $ 197 million at December 31, 1996.
Substantially all of the carryforward amounts have no
expiration date.
23
<PAGE>
Four. Deferred income taxes:
<TABLE>
<CAPTION>
December 31
----------------
1996 1995
------ ------
$ in thousands
----------------
<S> <C> <C> <C>
1) Provided in respect of the following:
Allowance for doubtful accounts 20,647 18,013
Carryforward tax losses 32,974 9,918
Inventories 7,696 4,091
Accrued liabilities and deferred income 8,785 7,424
Other 3,971 2,311
------ ------
74,073 41,757
L e s s - valuation allowance 56,398 11,200
------ ------
17,675 30,557
------ ------
------ ------
2) Deferred taxes are included in the
balance sheets as follows:
Current assets 15,763 30,542
Non-current assets 2,035 225
Long-term liabilities (123) (210)
------ ------
17,675 30,557
------ ------
------ ------
</TABLE>
3) As stated in a(1) above, most of the Company's income is tax
exempt due to the approved enterprise status granted to the
Company's production facilities. The Company has decided to
permanently reinvest the amount of the said tax exempt income, and
not to distribute such income as dividends. Accordingly, no
deferred income taxes have been provided in respect of the said
tax exempt income.
Five. Taxes on income (tax benefit) included in the income statements:
1) As follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------
1996 1995 1994
------- ------- -------
$ in thousands
-----------------------------
<S> <C> <C> <C>
Current:
Israeli 3,353 (3,894) 4,865
Non-Israeli (17,935) 3,240 11,618
------- ------- -------
(14,582) (654) 16,483
Deferred, see d. above:
Israeli 42 (4,877) 263
Non-Israeli 12,840 (7,933) (5,010)
------- ------- -------
12,882 (12,810) (4,747)
------- ------- -------
(1,700) (13,464) 11,736
------- ------- -------
------- ------- -------
</TABLE>
24
<PAGE>
2) Following is a reconciliation of the theoretical tax expense
(benefit), assuming all income is taxed at the regular tax rate
applicable to Israeli corporations (see a(4) above) and the actual
tax expense:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1996 1995 1994
-------- ------- -------
$ in thousands
------------------------------
<S> <C> <C> <C>
Income (loss) before taxes on income (180,133) (46,852) 79,320
-------- ------- -------
-------- ------- -------
Theoretical tax (tax benefit) on the
above amount (64,848) (17,335) 30,142
L e s s - effect of lower tax rate for
"approved enterprises" 22,127 9,057 (5,522)
-------- ------- -------
(42,721) (8,278) 24,620
Increase (decrease) in taxes resulting
from different tax rates - net (2,608) (855) 1,433
Increase in taxes resulting from
permanent differences - primarily
non-deductible amortization and
other expenses 3,141 4,808 3,347
Reversal of prior years' income tax
provisions (1,600) (14,748)
Change in valuation allowance 45,198 7,129 493
Decrease in taxes arising from
differences between non-dollar
currencies income and dollar
income - net* (3,110) (1,520) (18,157)
-------- ------- -------
Actual tax expense (benefit) (1,700) (13,464) 11,736
-------- ------- -------
-------- ------- -------
Per share effect of "approved $ (0.52) $ (0.21) $ 0.13
enterprise" benefits -------- ------- -------
-------- ------- -------
</TABLE>
* Resulting mainly from the difference between the changes in the Israeli CPI
(the basis for computation of taxable income of the Company and its Israeli
subsidiaries, see a(2) above) and the changes in the exchange rate of the
Israeli currency relative to the dollar.
Six. Income (loss) before taxes on income:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------
1996 1995 1994
-------- ------- ------
$ in thousands
-----------------------------
<S> <C> <C> <C>
Israeli (83,058) (33,546) 77,705
Non-Israeli (97,075) (13,306) 1,615
-------- ------- ------
(180,133) (46,852) 79,320
-------- ------- ------
-------- ------- ------
</TABLE>
Seven. Tax assessments
The Company has received final tax assessments through the 1990
tax year.
The tax returns of the U.S. subsidiaries and the main European
subsidiary have been audited by the tax authorities through the
1991 tax year.
25
<PAGE>
NOTE 13 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
One. General
The Company operates internationally, which gives rise to
significant exposure to market risks, mainly from changes in
foreign exchange rates. Derivative financial instruments
(hereafter - derivatives) are utilized by the Company to reduce
these risks. The Company does not hold or issue financial
instruments for trading purposes.
The Company is exposed to losses in the event of non-performance
by counterparties to financial instruments, but it does not expect
any counterparties to fail to meet their obligations, since the
counterparties are major Israeli and European banks and major U.S.
brokers. The Company does not require or place collaterals for
these financial instruments.
Two. Foreign exchange risk management
The Company enters into forward exchange contracts and purchases
currency options to hedge existing non-dollar assets and
liabilities as well as certain firm sale and purchase
commitments.The Company also purchases currency options to hedge
anticipated sales planned for the coming year, which are expected
to be denominated in non-dollar currencies. The Company writes
currency options as part of its hedging policy. The terms of all
of these currency derivatives are shorter than one year.
The net premiums paid for currency options are presented in the
balance sheets among prepaid expenses and charged to financial
expenses over the terms of the options.
The amounts relating to foreign currency derivatives are as
follows:
<TABLE>
<CAPTION>
Notional amount
-----------------
December 31
-----------------
1996 1995
------- -------
$ in millions
-----------------
S> <C> <C>
Forward contracts - for conversion of non-dollar
currencies into dollars 86 149
------- -------
------- -------
Options purchased -,- 32
------- -------
------- -------
Options written -,- 36
------- -------
------- -------
</TABLE>
Three. Concentrations of credit risk
At December 31, 1996 and 1995, the Company held cash and cash
equivalents in the total amount of $ 90,050,000 and $ 92,326,000,
respectively, most of which were deposited with major Israeli,
European and U.S. banks. Most of the marketable securities held by
the Company are debt securities of the U.S. Treasury, the
Government of Israel and highly rated corporations. Therefore, the
Company does not anticipate any credit losses in respect of these
items.
26
<PAGE>
Most of the Company's sales are made in the United States and in
Europe, to a large number of customers. Consequently, the exposure
to concentrations of credit risks relating to individual customer
receivables is limited. The Company performs ongoing credit
evaluations of its customers and generally does not require
collateral from its customers in Europe and in the United States.
In respect of certain sales to customers in emerging economies,
the Company requires letters of credit.
Four. Fair value of financial instruments
The financial instruments of the Company and its subsidiaries
consist mainly of non-derivative assets: cash and cash
equivalents, short and long-term investments, current and
non-current accounts receivable, and non-derivative liabilities:
short-term bank credit, accounts payable and accrued liabilities
and long-term liabilities.
In view of their nature, the fair value of the financial
instruments included in working capital of the Company is usually
identical or close to their carrying amount. The fair value of
non-current receivables and long-term liabilities also
approximates their carrying value, since they bear interest at
rates close to the prevailing market rates.
The fair value and the carrying amount of derivatives at December
31, 1996 and 1995 was approximately $(1.0) million and $1.2
million, respectively. The fair value of the derivatives generally
reflects the estimated amounts that the Company would receive or
pay upon termination of the contracts at the reporting dates.
NOTE 14 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------- ----------------------
Assets Liabilities Assets Liabilities
-------- ------------ ------- ------------
$ in thousands $ in thousands
---------------------- ----------------------
<S> <C> <C> <C> <C>
Israeli currency (a):
Unlinked 10,939 15,583 9,749 20,533
------- ------ ------- ------
------- ------ ------- ------
Linked (b) 1,057 72
------- -------
------- -------
Other non-dollar currencies (c) 116,797 50,566 196,030 50,698
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
(a) The above does not include balances in Israeli currency linked to
the dollar.
(b) To the Israeli CPI.
(c) As to hedging transactions entered into by the Company in order to
maintain the dollar value of net assets in non-dollar currencies -
see note 13.
27
<PAGE>
NOTE 15 - SELECTED INCOME STATEMENT DATA:
One. Revenues:
1) Geographic area segment data
The following data present revenues and operating income
(loss) according to the geographic location in which the
revenues and operating income (loss) were generated.
Unaffiliated customers are customers outside the Company and
its consolidated subsidiaries.
Identifiable assets are those assets employed in, or
associated with, generating those revenues.
<TABLE>
<CAPTION>
Total
Israel and other United States Europe Eliminations consolidated
---------------- ------------- ------ ------------ ------------
$ In thousands
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Revenues from unaffiliated
customers *103,049 **276,662 177,465 557,176
Inter-area revenues from
unaffiliated customers 15,590 122,200 82 137,872
-------- --------- ------- --------
T o t a l revenues from 118,639 398,862 177,547 695,048
unaffiliated customers
Intercompany revenues
between geographical areas 115,503 45,808 709 (162,020)
-------- --------- ------- -------- --------
234,142 444,670 178,256 (162,020) 695,048
-------- --------- ------- -------- --------
-------- --------- ------- -------- --------
Operating income (loss) (97,531) (69,167) (23,214) 5,335 (184,577)
-------- --------- ------- -------- --------
-------- --------- ------- -------- --------
Year ended December 31, 1995:
Revenues from unaffiliated
customers *105,595 **302,564 257,028 665,187
Inter-area revenues from
unaffiliated customers 627 64,065 408 65,100
-------- --------- ------- --------
T o t a l revenues from
unaffiliated customers 106,222 366,629 257,436 730,287
Intercompany revenues
between geographical areas 206,640 57,700 117 (264,457)
-------- --------- ------- -------- --------
312,862 424,329 257,553 (264,457) 730,287
-------- --------- ------- -------- --------
-------- --------- ------- -------- --------
Operating income (loss) (61,376) 4,670 (4,347) 6,747 (54,306)
-------- --------- ------- -------- --------
-------- --------- ------- -------- --------
Year ended December 31, 1994:
Revenues from unaffiliated
customers *93,373 **354,010 223,803 671,186
Inter-area revenues from
unaffiliated customers 2,607 30,345 32,952
-------- --------- ------- --------
T o t a l revenues from
unaffiliated customers 95,980 384,355 223,803 704,138
Intercompany revenues
between geographical areas 219,727 28,344 345 (248,416)
-------- --------- ------- -------- --------
315,707 412,699 224,148 (248,416) 704,138
Operating income (loss) 54,575 (1,374) 5,209 12,671 71,081
-------- --------- ------- -------- --------
-------- --------- ------- -------- --------
</TABLE>
28
<PAGE>
* Mainly export sales to a 50%-owned joint venture company in Japan
aggregating $ 56,604,000, $ 57,725,000 and $ 52,665,000 in 1996, 1995 and
1994.
** Including sales to a 50%-owned joint venture company in Japan aggregating $
5,661,000, $ 2,681,000 and $ 1,581,000 in 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
December 31
-----------------
1996 1995
------- -------
$ in thousands
-----------------
<S> <C> <C>
Identifiable assets:
Israel and other 236,893 230,910
United States 334,230 457,993
Europe 133,611 231,928
------- -------
704,734 920,831
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
--------------------------
1996 1995 1994
------- ------- -------
$ in thousands
--------------------------
<S> <C> <C> <C>
2) Revenues by destination:
United States 284,143 302,992 356,467
Europe 238,679 296,269 243,540
Japan 110,211 71,504 60,849
Other 62,015 59,522 43,282
------- ------- -------
695,048 730,287 704,138
------- ------- -------
------- ------- -------
Two. Research and development costs - net:
Expenses incurred* 84,344 83,545 82,551
L e s s - royalty-bearing
participations from the
Government of Israel
(note 9a(1)(a)) 11,549 9,883 9,293
------- ------- -------
72,795 73,662 73,258
------- ------- -------
------- ------- -------
* Including acquired in-process
research and development 7,766
-------
-------
Three. Selling, general and administrative
expenses:
Selling 124,182 135,821 141,674
General and administrative* 146,380 118,749 72,531
------- ------- -------
270,562 254,570 214,205
------- ------- -------
------- ------- -------
* Including net change in
allowance for doubtful
accounts and direct
write-off of bad debts 70,235 46,800 8,600
------- ------- -------
------- ------- -------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1996 1995 1994
----- ------ ------
$ in thousands
----------------------
<S> <C> <C> <C>
Four. Financial income - net:
Income:
Interest 6,648 11,074 11,032
Realized and unrealized gain on
trading marketable securities -
net 893 3,741 601
Non-dollar currency gains and
losses - net 1,071
----- ------ ------
8,612 14,815 11,633
Expenses:
Interest 1,846 3,079 2,550
Bank charges 1,012 935 948
Cost of hedging transactions 1,071 352 2,373
Non-dollar currency gains and
losses - net 520 297
----- ------ ------
3,929 4,886 6,168
----- ------ ------
4,683 9,929 5,465
----- ------ ------
----- ------ ------
</TABLE>
NOTE 16 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES:
One. The Company and its subsidiaries have concluded financial transactions
with related parties, mainly banks, in the ordinary course of business.
Two. The Company has conducted foreign currency transactions with an
affiliate of two of its shareholders.
Three. The Company has purchased certain insurance policies from insurance
companies which are affiliates of two of the Company's major
shareholders. The insurance premium paid was $ 2,500,000 in each of the
years 1996, 1995 and 1994.
Four. Sales to related parties (not including a 50%-owned joint venture
company in Japan) in 1996, 1995 and 1994 aggregated $ 1,404,000,
$ 7,200,000 and $ 2,400,000, respectively.
Five. The Company had trade receivables from a 50%-owned joint venture
company in Japan totalling $ 15,659,000 and $ 24,258,000 at December
31, 1996 and 1995, respectively.
Six. See also notes 8, 9a(2) and 15a.
30
<PAGE>
NOTE 17 - NOMINAL DATA OF THE COMPANY
a. Balance sheet data
<TABLE>
<CAPTION>
Nominal NIS in thousands
------------------------
December 31
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents 90,336 103,278
Short-term investments 122,690 168,462
--------- ---------
T o t a l cash and short-term
investments 213,026 271,740
Accounts receivable:
Trade 60,688 101,999
Consolidated Companies 1,474,683 1,445,783
Government of Israel 15,421 42,094
Other receivables 28,727 35,022
Inventories 122,832 117,910
Prepaid expenses 2,532 3,038
--------- ---------
1,917,909 2,017,586
Investment and other non-current assets:
Investment in consolidated companies 619,455 846,063
Investment in associated companies and in
limited partnership 14,152 6,059
Other investment 47,253 42,988
Deferred income taxes 719 706
Long-term receivables 48
--------- ---------
681,579 895,864
Property, plant and equipment:
Cost 220,952 203,323
L e s s - accumulated depreciation and
amortization 144,508 119,448
--------- ---------
76,444 83,875
Goodwill and other intangible assets, net of
accumulated amortization 23,972 30,967
--------- ---------
2,699,904 3,028,292
--------- ---------
--------- ---------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Nominal NIS in thousands
------------------------
December 31
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Short-term bank credit and current
maturities of long-term liabilities 2,209 3,389
Accounts payable and accruals:
Trade 52,748 77,877
Consolidated companies 828,142 557,463
Other 230,422 273,017
--------- ---------
1,113,521 911,746
Capital note 410 410
--------- ---------
T o t a l - commitments 1,113,931 912,156
Shareholders' equity 1,585,973 2,116,136
--------- ---------
2,699,904 3,028,292
--------- ---------
--------- ---------
</TABLE>
b. Statement of operations data:
<TABLE>
<CAPTION>
Nominal NIS in thousands
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Revenues from sales and service 659,859 1,024,592
Cost of sales and service 597,699 645,395
--------- ---------
Gross profit 62,160 379,197
Research and development costs - net 141,488 156,655
--------- ---------
(79,328) 222,542
Selling, general and administrative
expenses 167,221 304,064
--------- ---------
Operating loss (246,549) (81,522)
Financial income - net 56,941 34,263
Other expenses -net (19,159) (4,487)
--------- ---------
Loss before taxes on income (208,767) (51,746)
Taxes on income 152 (10,726)
--------- ---------
Loss from operations of
the company (208,919) (41,020)
Share in income (losses) of equity
investments - net (267,432) 9,785
--------- ---------
Net income (loss) - nominal (476,351) (31,235)
--------- ---------
--------- ---------
</TABLE>
32
<PAGE>
c. Changes in shareholders' equity:
<TABLE>
<CAPTION>
Nominal NIS in thousands
-----------------------------------------
Share Capital Retained
capital surplus earnings Total
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 5,135 640,665 1,561,514 2,207,314
Changes during 1995:
Net income (loss) (31,235) (31,235)
Employee stock options exercised
and paid 2 7,987 7,989
Dividend (68,110) (68,110)
Exchange difference in value of
dividend declared in 1994 178 178
------- ------- --------- ---------
Balance at December 31, 1995 5,137 648,652 1,462,347 2,116,136
Changes during 1996:
Net income (loss) (476,351) (476,351)
Dividend (54,062) (54,062)
Exchange differences in value of
dividend declared in 1995 250 250
------- ------- --------- ---------
Balance at December 31, 1996 5,137 648,652 932,184 1,585,973
------- ------- --------- ---------
------- ------- --------- ---------
</TABLE>
---------------
--------------------
---------------
33
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEC Israel Economic Corporation
By: s/ JAMES I. EDELSON
--------------------------------
DATE: July 30, 1999 James I. Edelson
EXECUTIVE VICE PRESIDENT AND
SECRETARY
